Ribbon Finance is a protocol that offers options-based structured wealth management products. It utilizes users' deposited assets as collateral to mint options contracts through a decentralized options trading platform on Ethereum. These contracts are then sold to specific buyers, such as market makers and bidders, to earn premiums for users. Currently, Ribbon offers two versions, V1 and V2, providing four types of structured products based on USDC, ETH, and WBTC, with annual return rates ranging from 30.96% to 53.7% (as of Oct 9, 2021).

V1

In V1, users' funds are treated as a unified position. Ribbon uses 90% of these funds as collateral to create ERC-20 options contract tokens (O-Tokens) on the Opyn platform. The options contracts have parameters set by Ribbon team members, are minted weekly, and expire after one week. The strike prices are deliberately set far from the current price to ensure low exercise probability (usually less than 10%) and stable premiums for users. Ribbon V1 utilizes whitelist market makers to reduce options sales risk. The options contract price is determined on-chain with the market maker, and a 1% withdrawal fee is charged. Users can withdraw funds until the 10% withdrawal reserve is insufficient, at which point withdrawals are temporarily closed.

V2

Ribbon Finance launched V2 in Sept 2021 as an improved version of V1, addressing issues of centralization, high withdrawal fees, and limited strategies.

• Decentralized solution: In V2, options contracts are minted by smart contracts and publicly auctioned through Gnosis Auction. Unlike V1, anyone can buy these options contracts.
• Cancellation of withdrawal fee: V2 eliminates the withdrawal fee but restricts cash withdrawals until after options expiration. Instead, Ribbon charges a 20% weekly earnings administrative fee.
• More revenue strategies: V1 only allows users to choose one product based on a single strategy implemented on Opyn. Ribbon plans to integrate additional products and expand support for decentralized trading platforms like Hegic, Lemma Finance, and 88mph.

Ribbon Finance is a platform that utilizes financial engineering to create structured products designed to deliver sustainable yield. The initial focus of Ribbon Finance is on yield generation through automated options strategies. Additionally, the protocol allows developers to create customized structured products by combining different DeFi derivatives.

Structured products are specially packaged financial instruments that employ a combination of derivatives to achieve specific risk-return objectives. These objectives may include speculating on volatility, enhancing yields, or providing principal protection.

One of Ribbon Finance's offerings is the Theta Vault, which implements an automated covered call strategy to earn a high yield on ETH. This vault executes a covered call strategy by regularly selling out-of-the-money call options, generating yield for depositors.

It is important to note that the primary risk associated with this strategy is the potential trade-off of upside potential for guaranteed yield. By selling a call option, users commit to selling the underlying asset at the strike price, even if its market price surpasses that level (also known as selling early). Consequently, if the price of the asset experiences a significant increase within a short timeframe, depositors may experience a "negative yield" on their ETH holdings.

However, it is essential to understand that this scenario only occurs if the ETH/USD price appreciates significantly. In terms of USD valuation, depositors will still maintain a positive return. Moreover, the Theta Vault predominantly sells call options that are far out of the money, reducing the likelihood of these options being exercised.