Own Protocol 101
Last updated
Last updated
At the heart of Own Protocol is a Total Return Swap (TRS) mechanism which is, permissionless, and fully collateralized.
A Total Return Swap is a financial contract between two parties:
Party A (the total return payer) transfers the full economic return of an asset (e.g., a stock), to
Party B (the total return receiver) in exchange for periodic payments, typically a floating interest rate.
In Own Protocol:
Liquidity Providers (LPs) act as Party A, offering asset exposure.
Users act as Party B, gaining synthetic exposure to asset performance by paying interest.
This swap is implemented as a rebalancing mechanism in the protocol.
Rebalancing is the core mechanism that mirrors a perpetual TRS and happens every market day when the underlying asset's market is open. It is split into two parts:
1. Off-Chain Rebalancing (During Market Hours)
During live market hours, LPs who wish to stay delta-neutral adjust their real-world asset positions based on:
Their share of the pool
Net deposit/redemption requests from the previous cycle
This off-chain period allows LPs to hedge before locking in the swap terms.
2. On-Chain Rebalancing (After Market Close)
Once markets close:
On-chain rebalancing begins, for a defined duration (rebalanceLength).
LPs “settle” the swap by executing a rebalance at a reference price called the rebalance price.
If the asset's price increased since the last cycle, LPs pay the return to the pool.
If the price decreased, LPs receive the loss amount from the pool.
LPs also receive accrued interest for offering the exposure.
The rebalance price is validated using oracle-sourced OHLC data to prevent manipulation or deviation from real-world asset prices.
Between rebalancing periods, the pool is in an active state:
Users can submit deposit or redemption requests.
These requests are processed in the next rebalance cycle.
Once a deposit request is processed during a rebalancing cycle, the user can claim the synthetic asset (called xToken), which is minted at the rebalance price.
The minted xToken is a standard ERC20 token, meaning it can be freely transferred, traded, or used across DeFi protocols.
To exit the position, the user submits a redemption request by depositing their xTokens into the pool.
After the next rebalancing cycle, the corresponding amount of reserve tokens (e.g., USDC) can be claimed back, based on the latest rebalance price.
The protocol’s interest rate structure ensures that users pay a fair fee for synthetic exposure:
Formula: Protocol Base Interest Rate = Onchain Risk Free Rate (eg: Aave’s USDC deposit rate) + 3%
This design means that the net effective cost to users remains approximately 3% annually, since reserve tokens (e.g., aUSDC) typically earn comparable yield to offset the protocol interest rate. This aligns user costs with market conditions while providing sustainable returns to Liquidity Providers.
Own Protocol continuously rebalances positions on every market day, effectively simulating a perpetual total return swap onchain.
Users gain synthetic exposure to asset performance via xTokens without owning the underlying asset.
LPs provide that exposure and earn floating interest plus market-making opportunities, all while remaining delta-neutral if desired.
