Valuing SMART Tokens
TRP’s SMART Tokens will always consist of either the underlying cryptocurrency and options or a stable coin and options. RiskON/RiskOFF tokens have an investment period of 30 or 91 days. On day 1, TRP determines the structure of the tokens. Each token represents a claim on ½ of the cryptocurrency deposited with TRP. TRP sets the barrier put strike at 90% of the current market price of the underlying token (BTC or ETH) and records the price of this 91-day put. TRP then uses its pricing models to find the out-of-the-money 91-day call option strike with a price equal to the price of the barrier put. The RiskON token consists of the underlying cryptocurrency, a short 91-day 90% strike barrier put, and a long 91-day plain vanilla call. Since the price of the long call and the short put in the RiskON token are equal and RiskON tokens have positions with opposite signs, the initial price of a Risk On token will be ½ of the underlying cryptocurrency.
RiskOFF holds the other half of the deposited cryptocurrency plus the same options as the RiskON token, except that RiskOFF is short the call and long the barrier put. This means that RiskOFF will also have an initial price of ½ of the underlying cryptocurrency.
TRP’s goal is to facilitate a thriving, liquid secondary market for its tokens. Token market participants require accurate price data to determine whether to buy or sell TRP tokens. TRP believes that general interest in its tokens will be sufficient to ensure liquidity in the Automated Market Maker (AMM), so that live market prices of the tokens reflect their actual value. To aid in price discovery, TRP will also publish model-based estimates of the net token value (NTV) of each traded SMART Token, using its 2-component GARCH-GJR forecast, SABR, and option pricing models. These price estimates will be published on a second-by-second basis.
The procedure to provide estimated real-time, NTVs is as follows:
Generate an instantaneous volatility forecast for the underlying cryptocurrency for the period from the current time to the expiration date (rebalance date).
Use the SABR model to adjust this volatility forecast for stochastic volatility.
Use the SABR model to adjust the option implied volatility to account for the implied volatility skew.
Use these volatilities to price the options in TRP tokens.
Add up the values of the long and short positions in each token and publish the price.
On the rebalance date for the SMART Tokens, TRP will perform the following actions:
Retrieve the final price of the underlying cryptocurrency.
Since the options are expiring, all option values will be priced using the intrinsic value formulas:
Final call price = max(crypto final price - strike price, 0)
Final put price = max(strike price - crypto final price, 0)
Add the cryptocurrency value and the final option values in each token to generate a final NTV.
Use the procedure described in the first paragraph to determine the structure of the tokens for the next 91 days. This means that each RiskON and RiskOFF token will be priced at ½ of the final cryptocurrency price.
Reinvest the entire values from step 3 above to buy the new tokens using the rebalance formula described earlier.
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