This is an older article that I am transferring over.

Rook Protocol is an open settlement protocol that reduces bad transaction settlement. By acting as a coordination engine, Rook incentivizes the bad guys (who would’ve cost the user in gas, fees and MEV) to coordinate with users to ensure users’ transactions are executed optimally, for a percentage of the profits.

When a user sends their transaction into the protocol, it’s packed into a bundle (a set of transactions that generate surplus value). These bundles are proposed by Keepers, bots which can find the optimal bundle. Keepers find and execute the ideal settlement for the user, and split the surplus value of the bundle in exchange.

The Rook protocol is built on the idea that if Keepers were not coordinating/partaking in the Rook system, they would be costing users MEV, gas, fees etc. on the consensus layer and capturing the full value.

Keepers are just bots built by profit seeking teams/individuals that seek instantaneous profit. They will seek this profit either on the consensus layer, costing the users MEV, gas and fees while capturing the full value, or on Rook’s settlement layer.

Rook incentivizes Keepers to seek this profit on the settlement layer and to help users execute their transactions in the most efficient manner possible, by allowing Keepers to keep part of the value that they save the user. Keepers also get the added benefit of not having to deal with the inefficiencies caused by competing against other bots on the consensus layer.

By letting users and smart contracts send transactions through the Rook settlement layer, Rook also reduces the total MEV available at the consensus layer, which reduces the value extracted from markets in general and protocols by miners and validators.

1. Keepers buy and stake ROOK in the Coordinator.

2. Keepers use their staked ROOK to place bids with the Coordinator and compete against each other to be greenlit - i.e. have the right to execute a trade.

   • Keepers’ reputation score, which depends on their actions as part of the network, is taken into account while selecting who has the right to execute.

   • Bids are kept at a fair value by upwards and downwards pressure through the auction process. The higher the bid the more likely it is for the Keeper to be greenlit, adding upward pressure. However, Keepers don’t necessarily need to be the highest bidder to win the auction, which applies downward pressure and ensures that Keepers take profit and prevents them from grim triggering (i.e. defecting forever as soon as another Keeper defects).

3. The Coordinator greenlights the Keeper that wins the auction, and lets them collect the surplus value that they discovered by facilitating the users trade.

4. When the transaction is executed, the bid of the winning Keeper is distributed to ROOK stakers (10%), Rook Treasury (6%), Users and MMs (80%) and burned (4%).

5. If the Keeper is unable to execute the trade or is able to only partially fill it, another Keeper can bid to fully execute it.

ROOK is the governance and utility token of the Rook Protocol. Aside from being able to vote on the actions of the DAO, treasury, Keepers etc., ROOK is principally used by Keepers to bid on auctions.

After execution of the transaction, the bid that the winning Keeper paid to win the auction is distributed to ROOK stakers (10%), Rook Treasury (6%), Users and MMs (80%) and burned (4%).

There are no new ROOK emissions anymore, and Keepers need to consistently buy and stake ROOK to bid on auctions, meaning that every execution of a trade leads to ROOK being burned, making it deflationary.

ROOK can be staked to receive corresponding amount of xROOK. 10% of the ROOK bid by the Keeper that executes a trade is distributed to xROOK holders.

• Note: The staking system is meant to be a short/medium term solution for liquidity and is supposed to be improved/modified in 2022.

Primitive’s first product “RMM-01”, is a replicating market maker (RMM) that offers covered call replicated payoffs and a decentralized spot exchange.

An RMM is a CFMM (constant function market maker) with a trading function that can match its portfolio value to a desired payoff. Different CFMMs have different trading functions, depending on their use cases.

For example, CPMs (Constant Product Market Makers) (i.e. Uniswap V1 and V2: two token markets) has the function:

(R + γr)(Q - q) = k (could be simplified to xy = k)

Where R and Q are reserves of each asset, γ is the transaction fee, r is the amount that a buyer/trader wants to trade in to receive q tokens. Trading any amount of these assets must change the reserves in a way that, when the fee is zero, the product remains equal to the constant k.

**G3Ms (**Geometric Mean Market Makers) (i.e. Balancer) function is a generalization of a CPM trading function:

Where B is the reserve of each asset, W is the weight of each asset and V is the constant. In the absence of fees, this function allows for the weighted geometric mean of the reserves to remain constant, which allows for more than two assets and weights outside of 50:50 (unlike CPMs which have two token markets and the token reserves have equal market value at all times).

The RMM-01 trading function is:

The trading function replicates the price of a covered call through the Black-Scholes-Merton model. The curve mimics a covered call as it experiences “Liquidity Compression”: the RMM-01 concentrates liquidity around the strike price of a given option, and as time progresses towards expiration, the concentration of liquidity moves closer to the strike price. In simple terms, the RMM-01 is a covered call CFMM.

The RMM-01 can be thought of as a tool that can do exactly what other CFMMs do, but in a more specialized manner. Yes, much like other CFMMs, it’s oracle-free, it offers a two token pool, where you deposit and mint liquidity tokens in return, the assets that back these liquidity tokens are used as spot liquidity to be exchanged for one another (until expiration date of pool), the liquidity tokens are redeemable at any time and can be used as collateral and so on.

What makes the RMM-01 distinct to other CFMMs is that it offers a different payoff. The minted liquidity tokens replicate the payoff of a covered call by capturing theta decay through trading fees generated as pools get closer to expiration τ. Through offering a different payoff, the RMM-01 allows liquidity providers to use more complex/nuanced strategies by picking strike prices, implied volatility and time while providing liquidity.

So while LPs are limited to mean reversion strategies (where it’s desirable that token pairs in pools are correlated and revert back to original ratio) while LP’ing other CFMMs, the RMM-01 allows LPs to take directional bets. For example, liquidity providers can be bullish and choose a strike price greater than the market price for the underlying asset and provide liquidity and capture theta decay, as long as the underlying asset price doesn’t surpass their chosen strike price.

Choosing a strike price allows LPs to choose the point their impermanent loss begins. The strike price is the amount at which the underlying asset can be bought or sold for - which also ensures that the pools are rebalanced such that each liquidity token is worth the strike price of the underlying asset.

As mentioned before, LPs can also decide on the implied volatility (σ) of the underlying asset while depositing. This can be beneficial, especially if the market is in a heightened volatility period. Through the RMM-01 liquidity providers can maintain positions in the underlying asset (if chosen strike price is high enough) while also benefiting from higher fees that come with higher volatility periods.

However, if implied volatility is higher than realized volatility, liquidity providers may receive less trading fees. This is because pools with higher implied volatility have higher priced underlying assets, compared to those with lower implied volatility, meaning that there must be larger profit opportunity for arbitrageurs to arbitrage, and since there is less arbitrage and trades, lower fees are earned by liquidity providers.

Liquidity providers can also use the RMM-01 to hedge other positions. Since long options have positive gamma, they must be hedged with a negative gamma position. Changes in the price of the underlying asset have 0 gamma, since gamma represents the rate of change of delta when the price of the underlying asset changes (i.e. if gamma is 0.04 and delta is 0.16 and price of underlying asset changes by 1, the delta will increase by 0.04 and become 0.20). RMM-01 has negative gamma so it can be used to hedge long options.

NFA/I don’t know anything, I just look into stuff I find interesting. Tell me how I got something wrong - @bigboyboccaccio.

This is an older article that I am transferring over.

Rook Protocol is an open settlement protocol that reduces bad transaction settlement. By acting as a coordination engine, Rook incentivizes the bad guys (who would’ve cost the user in gas, fees and MEV) to coordinate with users to ensure users’ transactions are executed optimally, for a percentage of the profits.

When a user sends their transaction into the protocol, it’s packed into a bundle (a set of transactions that generate surplus value). These bundles are proposed by Keepers, bots which can find the optimal bundle. Keepers find and execute the ideal settlement for the user, and split the surplus value of the bundle in exchange.

The Rook protocol is built on the idea that if Keepers were not coordinating/partaking in the Rook system, they would be costing users MEV, gas, fees etc. on the consensus layer and capturing the full value.

Keepers are just bots built by profit seeking teams/individuals that seek instantaneous profit. They will seek this profit either on the consensus layer, costing the users MEV, gas and fees while capturing the full value, or on Rook’s settlement layer.

Rook incentivizes Keepers to seek this profit on the settlement layer and to help users execute their transactions in the most efficient manner possible, by allowing Keepers to keep part of the value that they save the user. Keepers also get the added benefit of not having to deal with the inefficiencies caused by competing against other bots on the consensus layer.

By letting users and smart contracts send transactions through the Rook settlement layer, Rook also reduces the total MEV available at the consensus layer, which reduces the value extracted from markets in general and protocols by miners and validators.

1. Keepers buy and stake ROOK in the Coordinator.

2. Keepers use their staked ROOK to place bids with the Coordinator and compete against each other to be greenlit - i.e. have the right to execute a trade.

   • Keepers’ reputation score, which depends on their actions as part of the network, is taken into account while selecting who has the right to execute.

   • Bids are kept at a fair value by upwards and downwards pressure through the auction process. The higher the bid the more likely it is for the Keeper to be greenlit, adding upward pressure. However, Keepers don’t necessarily need to be the highest bidder to win the auction, which applies downward pressure and ensures that Keepers take profit and prevents them from grim triggering (i.e. defecting forever as soon as another Keeper defects).

3. The Coordinator greenlights the Keeper that wins the auction, and lets them collect the surplus value that they discovered by facilitating the users trade.

4. When the transaction is executed, the bid of the winning Keeper is distributed to ROOK stakers (10%), Rook Treasury (6%), Users and MMs (80%) and burned (4%).

5. If the Keeper is unable to execute the trade or is able to only partially fill it, another Keeper can bid to fully execute it.

ROOK is the governance and utility token of the Rook Protocol. Aside from being able to vote on the actions of the DAO, treasury, Keepers etc., ROOK is principally used by Keepers to bid on auctions.

After execution of the transaction, the bid that the winning Keeper paid to win the auction is distributed to ROOK stakers (10%), Rook Treasury (6%), Users and MMs (80%) and burned (4%).

There are no new ROOK emissions anymore, and Keepers need to consistently buy and stake ROOK to bid on auctions, meaning that every execution of a trade leads to ROOK being burned, making it deflationary.

ROOK can be staked to receive corresponding amount of xROOK. 10% of the ROOK bid by the Keeper that executes a trade is distributed to xROOK holders.

• Note: The staking system is meant to be a short/medium term solution for liquidity and is supposed to be improved/modified in 2022.

Primitive’s first product “RMM-01”, is a replicating market maker (RMM) that offers covered call replicated payoffs and a decentralized spot exchange.

An RMM is a CFMM (constant function market maker) with a trading function that can match its portfolio value to a desired payoff. Different CFMMs have different trading functions, depending on their use cases.

For example, CPMs (Constant Product Market Makers) (i.e. Uniswap V1 and V2: two token markets) has the function:

(R + γr)(Q - q) = k (could be simplified to xy = k)

Where R and Q are reserves of each asset, γ is the transaction fee, r is the amount that a buyer/trader wants to trade in to receive q tokens. Trading any amount of these assets must change the reserves in a way that, when the fee is zero, the product remains equal to the constant k.

**G3Ms (**Geometric Mean Market Makers) (i.e. Balancer) function is a generalization of a CPM trading function:

Where B is the reserve of each asset, W is the weight of each asset and V is the constant. In the absence of fees, this function allows for the weighted geometric mean of the reserves to remain constant, which allows for more than two assets and weights outside of 50:50 (unlike CPMs which have two token markets and the token reserves have equal market value at all times).

The RMM-01 trading function is:

The trading function replicates the price of a covered call through the Black-Scholes-Merton model. The curve mimics a covered call as it experiences “Liquidity Compression”: the RMM-01 concentrates liquidity around the strike price of a given option, and as time progresses towards expiration, the concentration of liquidity moves closer to the strike price. In simple terms, the RMM-01 is a covered call CFMM.

The RMM-01 can be thought of as a tool that can do exactly what other CFMMs do, but in a more specialized manner. Yes, much like other CFMMs, it’s oracle-free, it offers a two token pool, where you deposit and mint liquidity tokens in return, the assets that back these liquidity tokens are used as spot liquidity to be exchanged for one another (until expiration date of pool), the liquidity tokens are redeemable at any time and can be used as collateral and so on.

What makes the RMM-01 distinct to other CFMMs is that it offers a different payoff. The minted liquidity tokens replicate the payoff of a covered call by capturing theta decay through trading fees generated as pools get closer to expiration τ. Through offering a different payoff, the RMM-01 allows liquidity providers to use more complex/nuanced strategies by picking strike prices, implied volatility and time while providing liquidity.

So while LPs are limited to mean reversion strategies (where it’s desirable that token pairs in pools are correlated and revert back to original ratio) while LP’ing other CFMMs, the RMM-01 allows LPs to take directional bets. For example, liquidity providers can be bullish and choose a strike price greater than the market price for the underlying asset and provide liquidity and capture theta decay, as long as the underlying asset price doesn’t surpass their chosen strike price.

Choosing a strike price allows LPs to choose the point their impermanent loss begins. The strike price is the amount at which the underlying asset can be bought or sold for - which also ensures that the pools are rebalanced such that each liquidity token is worth the strike price of the underlying asset.

As mentioned before, LPs can also decide on the implied volatility (σ) of the underlying asset while depositing. This can be beneficial, especially if the market is in a heightened volatility period. Through the RMM-01 liquidity providers can maintain positions in the underlying asset (if chosen strike price is high enough) while also benefiting from higher fees that come with higher volatility periods.

However, if implied volatility is higher than realized volatility, liquidity providers may receive less trading fees. This is because pools with higher implied volatility have higher priced underlying assets, compared to those with lower implied volatility, meaning that there must be larger profit opportunity for arbitrageurs to arbitrage, and since there is less arbitrage and trades, lower fees are earned by liquidity providers.

Liquidity providers can also use the RMM-01 to hedge other positions. Since long options have positive gamma, they must be hedged with a negative gamma position. Changes in the price of the underlying asset have 0 gamma, since gamma represents the rate of change of delta when the price of the underlying asset changes (i.e. if gamma is 0.04 and delta is 0.16 and price of underlying asset changes by 1, the delta will increase by 0.04 and become 0.20). RMM-01 has negative gamma so it can be used to hedge long options.

NFA/I don’t know anything, I just look into stuff I find interesting. Tell me how I got something wrong - @bigboyboccaccio.