As liquid protection, the protocol adds a price floor of 85% of the peak market price to crTOKENs. This means that even if the market were to crash by 60% of the peak price in the future, you could still redeem your crTOKENs for 85% of the peak market price, giving you an edge of 25% against the rest of the market. Since all these crTOKENs have the same price floor, they can be fungible and further utilizable. Liquid protection implies that liquid markets can be created for these crTOKENs across other DeFi protocols. Since crTOKENs are price protected versions of assets, protected by a price floor, several novel utilities can be unlocked for them as a hedged asset class.
The price floor is dynamic and adjusts to market movements in real-time using a mechanism similar to trailing stop orders. When the market follows an upward trend, the price floor moves with it to readjust to 85% of the new high, but it sticks when the markets start falling. This ensures that the price floor only readjusts if the price moves favorably. Once it sticks to lock in a new peak value, it does not move back in the other direction.
Protection enforced in crTOKENs with a price floor equal to 85% of the peak market price
- A protection taker stakes 1 ETH (at a market price of $2700) in the protocol to receive 1 crETH with $2550 as the price floor
- The taker uses their crETH on a protocol like Compound to borrow USDT against their crETH without worrying about liquidation since their crETH never falls below $2550
- While the interest remains positive, their ETH interest covers the costs of hedging their stake so that no explicit costs are incurred for their position
- After 2 months, when the market is trading ETH at $2,340, the taker can close their position (or a portion of it) which will burn their crTOKENs (or a portion of them) and send 2,550 USDC to their account