How It Works
Every loan on Stormbit is hedged with put options on the borrower's collateral. No loan exists without insurance. No lender is unprotected.
1. Lender deposits USDC
Lenders choose a market (e.g. WBTC/USDC, 75% max LTV, 7 days). Deposited USDC sits ready to fund loans. Idle funds earn base yield on Aave while waiting.
2. Borrower posts collateral and takes a loan
Borrower selects a market, posts BTC or ETH. The protocol calculates the LTV and quotes an APR. That rate includes the cost of hedging the loan — the borrower sees one number, not interest + premium separately. Higher LTV = more expensive hedge = higher rate.
3. Protocol hedges the loan instantly
The moment the loan is funded, the protocol buys put options on the borrower's collateral from options market makers. The hedge is structured using layered put spreads — cheaper than vanilla puts while still covering the lender's deposit down to the protection level.
The hedge expires on the nearest option expiry (typically a Friday), which may be a few days after the loan matures. This buffer is where the rebate comes from.
4. Loan is active — no liquidation
The borrower holds their USDC. Collateral is locked. No matter what happens to BTC or ETH price during the loan term, the borrower cannot be liquidated. The hedge is in place.
5a. Borrower repays
Borrower pays back principal + interest. Protocol sells the remaining hedge (which still has time value from the buffer days). The residual value goes to the borrower as a rebate — lowering their effective rate. Lenders receive principal + yield from the spread between the hedge cost embedded in the rate and the actual hedge expense.
The earlier the repayment, the more time value remains on the hedge, the bigger the rebate.
5b. Borrower defaults
If the borrower doesn't repay by maturity:
The hedge settles or is exercised — covering the lender's deposit
Collateral enters a Dutch auction in Deals — price drops over time until a buyer steps in
The protocol's insurance vault covers any remaining gap
The lender is not left holding the loss
Protection level — The price floor where the hedge fully covers the loan: Loan Amount / Collateral Units. An $80K loan with 2 BTC → $40,000/BTC. Above this level, collateral alone covers the loan. Below it, the hedge pays the difference. In extreme drops, the insurance vault provides additional backstop.
Rate pricing — Derived from real options market data. Three inputs drive the cost: LTV, duration, and implied volatility. The protocol monitors DVOL (Deribit's volatility index) and pauses new loans when volatility is extreme (DVOL > 80) to prevent overpriced originations.
Settlement — Lazy. Yield is recorded at repayment and distributed when lenders interact with the protocol (deposit, withdraw, or settle). Gas-efficient at scale.
Insurance vault — A reserve pool that absorbs losses when hedge payouts don't fully cover a default. Funded by a portion of protocol revenue. In backtesting across 10,000 Monte Carlo simulations, the vault never depleted.
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