Exercise Swaps
How to Swap reference assets for collateral assets using Cork Swap Tokens
Cork Swap Tokens provide protection against credit and duration risks.
Swap reference asset into collateral asset, by exercising your Cork Swap Token (cST) against a Cork Pool.
This "Swap / Exercise" operation on Cork:
Exercises an amount of your Cork Swap Token (i.e. reduces the token's circulating supply)
Releases an equivalent amount of Collateral Asset from one of many Cork Pools
This amount is 1:1 as the Cork Swap Token exercised, minus a nominal swap fee.
Locks up "some fair amount" of your Reference Asset in exchange.
This amount is determined by the Exchange or Swap Rate, which is a dynamic rate based on the current relative valuation between the Reference Asset and Collateral Asset.
Swap Rate
The Swap Rate is a dynamic exchange rate that applies to each Cork Pool, based on the current relative valuation between its Reference Asset and Collateral Asset. This dynamic Swap Rate is driven by a Rate Oracle, that ensures its liveliness.
If either asset is backed by underlying assets, the Rate Oracle is configured to reference the value of the underlying assets as reported by each asset’s fundamental oracle, which is typically operated by the asset issuer.
Price Feeds (market-based) operated by Chainlink Oracles, are then applied to determine the prevailing relative valuation between the Reference Asset and Collateral Asset to obtain the incoming Swap Rate.
As this Swap Rate can vary greatly, depending on what's reported by 3rd-party oracles operating outside of Cork's control, an upper and lower limit is applied by the Cork Protocol to ensure that the Swap Rate is range-bound or constrained.
The upper limit (i.e. ceiling) is referred to as the Max-Swap-Rate, while the lower limit (i.e. floor) is referred to as the Min-Swap-Rate.
Learn more about rate limits here.
How Swap Amounts are specified
When exercising your cover, you may choose to specify either the:
amount of Reference Asset to swap/spend, or the
amount of Swap Token to exercise/spend, or the
net amount of Collateral Asset to receive (after fees).
Either way, you will need to account for the Variation Margin, which is caused by the difference between the last observed Swap Rate, and the final Swap Rate during settlement (i.e. at the transaction confirmation block height).
Continue reading below to learn more, or jump straight to the individual guides (sub-pages) tailored to each scenario.
Variation Margin
The Swap Rate of each Cork Pool is dynamic and driven by a Rate Oracle.
If the Reference Asset has lost its relative value against the Collateral Asset, the Swap Rate decreases/falls.
As a result, exercising each Swap Token—including those operations pending in the mempool—would consume or spend a greater amount of the Reference Asset per token exercised.
Conversely, due to the inverse relationship, swapping each Reference Asset—including those operations pending in the mempool—would consume or spend a smaller amount of the Swap Token, per asset exercised.
If the Reference Asset has improved in its relative value against the Collateral Asset, the Swap Rate increases/rises.
As a result, swapping each Reference Asset —including those operations pending in the mempool—would consume or spend a greater amount of the Cork Swap Token, per asset swapped.
Conversely, due to the inverse relationship, exercising each Swap Token—including those operations pending in the mempool—would consume or spend a smaller amount of the Reference Asset per token exercised.
Changes in the Swap Rate between the time an operation is submitted (or at the last observed block height) and at the time it is settled (i.e., the transaction confirmation block height) can lead to differences in the final settlement amounts.
We refer to the difference between the preview amount and the actual settlement amount as the Variation Margin. Because this margin is determined by the prevailing Swap Rate at each transaction's execution block height, it is inherently influenced by each transaction's priority-gas fees and prevailing network conditions.
How this matters
As there is a chance that a greater spending amount is required for each swap / exercise operation to succeed, users must provision an additional amount, called the Spare Allowance, within each submitted transaction.
This Spare Allowance Requirement applies when submitting either via:
a multisig wallet like safe.global
an EoA wallet or MPC wallet
a smart contract (including vaults and wrappers) while specifying a fixed amount.
The Spare Allowance amount recommended depends on each use-case:
If you are trying to ensure that your swap Reference Asset operation is confirmed within the near future,
Take the Current-Swap-Rate minus the Current-Rate-Change-Balance, and multiply this by the amount of Reference Asset, to determine the total amount of Swap Token that must be provisioned within each submitted transaction.
If you are trying to ensure that your exercise Swap Token operation is confirmed within the near future,
Take the amount of Swap Token, and divide this by Current-Swap-Rate plus the Current-Rate-Change-Balance, to determine the total amount of Swap Token that must be provisioned within each submitted transaction.
If you are trying to fully hedge against a vault's position in the Reference Asset,
Take the Min-Swap-Rate and multiply this by the amount of Reference Asset, to determine the gross amount of Swap Token that must be held.
To obtain a more precise net amount, you also have to consider the Decaying Swap Fee in the next section.
If you are applying a partial hedge, meaning allowing a haircut on your vault's position in the Reference Asset, and exercising swaps automatically by operating a bot,
Take the Current-Swap-Rate minus the Max-Rate-Change-Capacity, and multiply this by the amount of Reference Asset, to determine the approximate worst-case swap value of your position, denominated in Collateral Asset.
To obtain a more precise amount, you also have to consider the Decaying Swap Fee in the next section.
If you are applying a partial hedge, meaning allowing a haircut on your vault's position in the Reference Asset, but exercising swaps manually,
Take the Current-Swap-Rate minus the Max-Rate-Change-Capacity, minus the Max-Rate-Change-Per-Day for every 24 hours of delay (in exercising your swaps), and multiply this by the amount of Reference Asset, to determine the approximate worst-case swap value of your position, denominated in Collateral Asset.
To obtain a more precise amount, you also have to consider the Decaying Swap Fee in the next section.
Last updated