CRΞ8R - Interview with Jack Sun - Community lead from Overlay Protocol
Primer: Ceazor interviews Jack Sun, community lead of Overlay protocol, who shares with us what Overlay protocol is all about. The elevator pitch for Overlay protocol is that it is a platform for trading any data streams using price oracles, with the profit and loss denominated in the native OVL token. Read more about it here, especially the part where Jack gives some actionable steps for people to ape early into the Overlay protocol.
Who is Jack Sun?
Jack Sun worked at TrustToken, who are the creators of TUSD
After TrustToken, he became a full-time yield farmer and had gone high up the rankings of atomic.blue Degenscore
That is how he got in touch with the guys from Overlay who then pitched the protocol to him as a DeFi degen's paradise where you could bet on anything and get paid in the governance token of the protocol
He got interested in it because Overlay combines aspects of protocols like Synthetix and also aspects of algo-stablecoin which he is familiar with through personal usage
"Any yield farmer that hasn't touched an algo-stablecoin is not quite any yield farmer. Right? You got to get in there a little bit. They're just too wild. You gotta be careful on those." - Ceazor
Overlay protocol
Introduction to Overlay
Overlay is a protocol for trading (long or short) nearly any data stream, with leverage, using price oracles and their native token OVL
In the Overlay exchange protocol, all profit and loss is denominated in the OVL token
This OVL token also serves as the native governance token of the protocol
Gives the ability to propose new markets
Decide on the leverage amount
Decide on different fee amounts per market
But all these governance issues will only be activated once the protocol is stable enough at a later stage
They will be transiting to a DAO after launch
If you are a successful trader, you can get more OVL tokens thus giving you more skin in the game
The interface of Overlay is a straightforward interface similar to Uniswap with opt-in complexity
Users can click a + button to pull in additional graphs or data but the default is bare bones
Backed by Polychain, 1kx, ParaFi, The LAO and MetaCartel
Has a core team of 6, mostly developers/engineers
James Foley is the lead Solidity developer, also the co-founder of Shell Protocol
In talks with people from Code4rena and also traditional auditors from Quantstamp and Trail of Bits
Ability to trade any assets
The underlying asset to trade has to have gradient values, not a binary yes or no type of value
Limited only by the price oracles used
Initially will be utilizing Uniswap V3 TWAPs (time-weighted average prices) and will be using mid-cap, DeFi tokens that have sufficient volume and TVL
Leverage
Initially anything from 1x to 5x
Eventually at the end stage, will be offering an unlimited amount of leverage depending on the market
Price oracles
Currently using Uniswap V3 for price oracles but had spoken to the team from Chainlink and some other niche oracle solutions like Upshot for NFT valuations like Beeple
The decision to pick an oracle solution is really important because if the oracle is feeding data that can be manipulated, then it will be catastrophic to the entire protocol
Initially, at launch, there will be measures like payoff caps and delays, similar to what Synthetix had done
This is to ensure that no one is able to manipulate the oracle and print a bunch of OVL tokens
OVL native tokens
OVL tokens as collateral
In other protocols, like Perpetual protocol, USDC can be put as collateral to lock them up and take on trades
The price of your positions is marked to the USDC collateral
For Overlay protocol, it is the same steps except that the OVL token is the collateral
However, OVL is not like a stablecoin so the collateral put up is more volatile, hence the protocol will have measures to enable users to hedge out the price risk of their collateral
An auto deleveraging feature is being implemented now so that the amount of collateral will go down in tandem with the amount of leverage instead of liquidation
OVL staking
Looking to direct most of the rewards towards OVL-ETH liquidity providers because the OVL-ETH liquidity is going to be the lifeline of the protocol
Needs OVL-ETH liquidity on an exchange like Uniswap in order to offer it as a price feed
Without OVL-ETH price feed, then the OVL price risk when taking other positions on other price feeds cannot be hedged out
Also going to push for something similar to Curve lock-ups for single asset OVL so that a user with locked up OVL can earn additional LP rewards and have additional voting and governance power
They will be launching with OVL-ETH, ETH-DAI, OVL-DAI pairs first like a triangle approach
This will enable them to hedge out the price of OVL and also bet on the price of ETH, with leverage
Similar to Bitmex, there will be a funding rate that incentivizes the balance between the outstanding longs and outstanding shorts on the exchange
Users will be able to earn a yield on their ETH, OVL and DAI initially by taking a position to earn that funding rate when the markets are out of balance
E.g. there are more longs than shorts so the pool is lopsided. If you go short, you will earn a bonus from the funding rate to incentivize you to do so
The team is going to introduce magic ERC-20 tokens, which is a quick and easy way for users to automate entering funding trade positions
If there are more users taking these trades through these magic tokenised contracts, it will bring more volume and stability to the system
Worked example of building and unwinding a position
To build a position, you lock up your OVL at the current rate, choose a leverage level, pay the gas fee and get an ERC-1155 NFT in return
The open positions have no maturity dates or expiration dates, similar to perpetual swaps
With this NFT, you can sell it on secondary marketplaces like OpenSea or peer to peer NFT trading tools to sell the Overlay position to others
If you have 1000 OVL tokens, you can lock it up and go 2x leverage on the price of ETH.
You'll get an ERC-1155 NFT in return
If the price of ETH goes up 25%, and you have a 2x leverage, it'll be 50% returns on your locked OVL
The system prints you 500 more OVL tokens and adds them to your balance
To unwind the position, you burn your ERC 1155 token to receive your 1500 OVL collateral back
If the price of ETH goes down by 10%, you will have 20% losses from the 2x leverage, so after unwinding the position, you'll get back 800 OVL tokens
Liquidity risk vs Inflation risk
OVL is the settlement currency of the protocol and the protocol is able to mint and burn OVL as needed, hence the OVL token has an elastic supply
This replaces the liquidity problem that many perpetual or prediction markets have with an inflation problem
If all traders are profitable and they keep winning, then there will be an inflation issue where the protocol will print too much OVL and people are going to dump that for ETH
In the long run, it will be balanced out because not all traders will be profitable
"So the difference between Overlay and a lot of these other protocols is basically taking this risk of inflation and then getting rid of the liquidity issue that the other protocols face. Because every passive OVL token holder that isn't trading or LP-ing is basically taking the other end of all trades occurring on the protocol." - Jack Sun
The team also discussed different mechanisms to act as insurance against the death spiral for the OVL token, such as performing certain on-chain or OTC actions to help with the price of the OVL token
Currently, they want to rely on just the natural market forces to see if the protocol can survive on its own by burning the tokens through fees
There will be a trading fee for building and unbuilding a position, as well as for taking profits, and these fees will be taken in OVL tokens and burned
How to get in early on the Overlay protocol?
A user can farm for OVL tokens by being a LP for the 3 pairs, OVL-ETH, OVL-DAI and ETH-DAI pairs
They are also working with PrimeDAO to potentially do a small public distribution before launch through the Balancer Liquidty Bootstrapping protocol (LBP) V2
Lastly, there is a Discord community where they have an open contributor program going on
Users can contribute anything, be it on the technical side, marketing aspects etc, and they will be granted an Overlay contributor NFT that can be redeemed for goodies later after launching
All information presented above is for educational purposes only and should not be taken as investment advice. Summaries are prepared by The Reading Ape. While reasonable efforts are made to provide accurate content, any errors in interpreting and summarizing the source material are ours alone. We disclaim any liability associated with the use of our content.