
### Introduction

Liquidity providers (LPs) can use the Primitive RMM-01 protocol to create portfolios that express directional views with respect to asset prices.  Setting an out of the money (OTM) strike implies an expectation of positive market movement while setting an in the money (ITM) strike implies expectation of negative market movement. Implied volatility (IV) and time to maturity parameters describe the dynamic behavior of concentrated liquidity. 

The key insight is that the directional view that LPs can derive from their parameter selections can also be used to provide dynamic concentrated liquidity that adapts to market conditions. In contrast, Uniswap LPs cannot specify a market direction due to the symmetric behavior of the pricing function. While RMM-01 pools have dynamic concentrated liquidity based on the initial Black-Scholes parameter selection, Uniswap V3 concentrated liquidity is static and does not adjust to changing market conditions.

This article analyzes the performance for a recent ETH/USDC pool created on July 5, 2022 and expired July 10, 2022. Pool profitability hinges on setting parameters that accurately describe the direction and behavior of the market. The efficacy of dynamically concentrated liquidity distributions are analyzed by the statistical kernel density estimate (KDE) tool. Code can be found in [this jupyter notebook](https://github.com/primitivefinance/pool-analytics/blob/main/RMM_Swaps_Stats_v3.ipynb), and can be easily modified to analyze any other RMM-01 pool.

### Pool Parameters
The parameters set by a recently expired ETH/USDC pool were defined as:
- Strike price: 1255 USDC
- Implied volatility: 77%
- Time to maturity: 5 days
- Initial reported price: 1107 USDC

By selecting a 1255 USDC strike price, which is higher than the initial reported price, we can discern that the liquidity was provided to this pool with the expectation of a positive price movement.  Setting the IV and time to maturity parameters tell the Black-Scholes equation how much volatility should be priced in and what the underlying volatility of the pool composition will be. Ideally, a pool composition that oscillates around a 50/50 split is the most ideal outcome and is the most effective if liquidity can be dynamically concentrated around this split. 

### Directional LP Performance

We compared performance to a static portfolio equal to the composition of pooled assets at creation. While the static portfolio (orange line, figure 1) appreciated 12.249%, the RMM-01 replicating portfolio (blue line, figure 1) appreciated 12.596%, outperforming the static portfolio by over .3%. Unlike Uniswap pools, there is no impermanent loss from the upside gains of specifying an accurate liquidity direction on RMM-01.

![](/rmm-analysis-1/theoretical-comparison.png)

We calculated realized volatility based on the ETH reported price (red line, figure 2). The first half of the pool duration had an average volatility of 79% and swap volume of 541,472 USDC. In the second half, average volatility fell to 18% while swap volume increased to 783,097 USDC. Realized volatility followed IV more closely in the first half compared to the second half.

![](/rmm-analysis-1/rv.png)

There were a total of 44 swaps routed through the pool that accounted for a total swap volume of 1,324,570 USDC. Total swap fees collected were 6,224 USDC and 5.8594 ETH for a total value of 13,548 USDC. Swaps on this pool represent 36% of all time swap volume and 12.6% of total swaps across all RMM-01 pools. Comparing volume with IV, more swap volume occurred when realized volatility was lower than IV. This means that the liquidity depth from the concentrated liquidity was thicker at the end of the pool than at the beginning because it facilitated more swap volume with less realized volatility, but less dynamic because the IV parameter wasn’t accurately describing realized volatility.

The figure below shows how the replicating portfolio composition shifted from the original 690 ETH and 79,623 USDC to 756 ETH and 41.83 USDC. Although the pool composition shifted almost entirely to ETH, since the payoff function is being replicated by Black-Scholes, the riskiness of the different pool compositions remains the same.

![](/rmm-analysis-1/vol-vs-swap.png)

As the reported price converged towards the strike price, the replicating portfolio composition approached a 50/50 split. However, the reported price ultimately did not end above the strike price, so the replicating portfolio composition shifted towards nearly 100% ETH. If the reported price had ended above the strike price, the replicating portfolio composition would have shifted towards 100% USDC.

![](/rmm-analysis-1/portfolio-composition.png)

### Analysis of Dynamically Concentrated Liquidity Distributions

To measure dynamically concentrated liquidity, we use a KDE to estimate various liquidity distributions and illustrate how liquidity dynamically concentrates over time. By observing the peaks in the figure below, we can see that liquidity was most concentrated when the pool was composed of 15% USDC and 80% ETH. There was not a large overlap where ETH/USDC reserves oscillated around 50/50. This implies liquidity could have been better dynamically concentrated.

![](/rmm-analysis-1/kde-reserves.png)

Creating another KDE on the swap distributions, we can see that swapping USDC to ETH had a very tight range compared to swapping ETH to USDC. If the terminal-reported price ended above the strike price, this would have made the portfolio composition more USDC heavy and alloweda larger dynamic range for the USDC liquidity to be deployed. 

![](/rmm-analysis-1/kde-swaps.png)

The liquidity efficiency measures the percent of the portfolio reserve used for market making. ETH swaps to USDC saw levels of usage at around 5% of USDC reserves. USDC to ETH had a much larger usage, around 10-20% of ETH reserves. This means that liquidity was more dynamically concentrated around ETH reserves.

![](/rmm-analysis-1/kde-efficiency.png)

### Conclusion
In conclusion, we visually analyzed how this RMM-01 pool behaved. We saw how RMM-01 pools could be used for directional LPing and analyzed the results of having dynamically concentrated liquidity distributions. This pool was initialized with parameters that roughly predicted the direction of the market. However, the implied volatility parameter caused looser concentrated liquidity ranges, decreasing the efficacy of the dynamically concentrated liquidity. Further research will explore optimization of the IV parameter behavior on liquidity depth and the effect dynamically concentrated liquidity has on concentrated liquidity bounds in general.



RMM-01 Performance - Dynamically Concentrated Liquidity


In April, [Primitive](https://primitive.xyz/) launched its first product, [RMM-01](https://primitive.mirror.xyz/Audtl29HY_rnhN4E2LwnP7-zjDcDGAyXZ4h3QpDeajg), a decentralized finance (DeFi) protocol that allows users to earn trading fees from automated trading. When the protocol reached nearly 1000 cumulative users, we analyzed the accounts to determine their authenticity.

On the RMM-01 protocol, nearly 80% of users were identified as suspects in Sybil attacks. In response, Primitive developed a straightforward method for detecting and filtering these users. While Primitive uses this tool to remove noise that Sybil attacks impose on user data, other DeFi protocols can expand the open-source code to suit a large array of their own needs.

### What is a Sybil attack?

DeFi protocols commonly use airdrops as a method to launch tokens. This method rewards early users of the protocol by "airdropping," or giving, the users free tokens. Sybil attacks can be initiated to exploit airdrops in DeFi protocols.

The term "Sybil attack" originates from the main character in ["Sybil"](<https://en.wikipedia.org/wiki/Sybil_(Schreiber_book)>) by Flora Rheta Schreiber. The book details a case study of a young girl who is thought to have Dissociative Identity Disorder. It was later revealed that the entire story was a ruse and Shirley Mason, the woman who inspired the character of Sybil, fabricated the different identities. In a Sybil attack, an entity generates a large quantity of pseudo-anonymous identities, akin to Sybil's multiple personalities in the book, to obtain a large influence over a network.

A common example of a Sybil attack is when a user, in anticipation of an airdrop, generates a large number of addresses, then deposits and removes tiny amounts of value from a DeFi protocol. This is referred to as "airdrop farming," and is often facilitated algorithmically. Protocol developers look down upon airdrop farming because their goal is to reward engaged and authentic users; not bots.

### Sybil attacks on the RMM-01 protocol

Upon launching the RMM-01 protocol, the Primitive team set up a monitoring infrastructure to notify us when users add and remove liquidity. As the Total Value Locked (TVL) grew, we noticed a large quantity of the notifications were for very small amounts of liquidity that were almost immediately removed after they were added. The large volume of small transactions indicated that Liquidity Providers (LPs) were Sybil-ing the protocol in anticipation of an airdrop.

The noise from the Sybil attacks made it difficult to analyze the authentic user activity on the RMM-01 protocol. We realized the need to filter accounts that orchestrated Sybil attacks so that we could gain a more accurate understanding of the value that users derived from the protocol. After the accounts associated with Sybil attacks were filtered out, our data better reflected the activity of our unique users.

![](/sybil/sybil-graph.png)

The script that we built in response to Sybil attacks serves as a tool for more accurately quantifying authentic users. At Primitive, we use the information derived from this process to better inform data-driven decisions and improve the RMM-01 protocol experience for our users. The script is fairly agnostic, so it can benefit other DeFi protocols in the same ways that it does RMM-01, or it can be extended to fit a wide array of needs for protocol developers.

### Open-source method to filter Sybil attackers

In response to Sybil attacks on the RMM-01 protocol, the Primitive team has identified a straightforward methodology for compiling lists of addresses associated with Sybil attacks. Once this list is generated, the associated addresses can be blacklisted and disregarded.

The methodology and the corresponding detection scripts are open-source and can be found [here](https://github.com/primitivefinance/sybil-detection). This approach is ideal because anyone can use a small script on relevant contracts for their benefit. The script is configured by entering your `ETHERSCAN_API` key and `CONTRACT_TO_LOOK_AT` in a `.env` file.

The script queries a contract's transactions using the Etherscan API and compiles a list of addresses that interacted with the configured contract. Then, the script filters out transactions where no value was exchanged (such as token approvals). After this, the cost of the transaction is checked by multiplying the user's `cumulativeGasUsed` by `gasPrice`. If the cost of the transaction is greater than the `value` of the transaction, the script adds this address to an array of Sybil suspects.

### Future work

There are many ways to make this script more robust. One approach is to query all transactions from the Sybil suspects and check if they are a collection of deposits with the same `value`. This is a clear indication that the Sybil suspect's address is farming airdrops.

\*Disclaimer: Primitive does not have a token or plans to release a token.

Written by [0xJepsen](https://twitter.com/0xjepsen)


Primitive introduces a straightforward method for detecting and eliminating Sybil attacks on DeFi protocols.

Sybil detection on DeFi protocols


Providing users with a supreme user experience is a high priority of ours. We recently implemented new design features on the Primitive Interface to add clarity and confidence when it comes to providing liquidity.

# Release Notes

## New Highlighted Card

![](/minor-release/hp-card.png)

On the dashboard, the highlighted pool card is updated to provide price and expiry time details at a glance. The interface also offers details including status (active/inactive), highlighted pool (true/false), swap fee, probability in the money, pool price and time of the most recent swap.

## New Liquidity Details

![](/minor-release/lp-details.png)
A short explanation of RMM-01 and the risks involved are clearly displayed below the trading interface. A feed at the bottom of the page makes previous pool performance apparent, and external links to data dashboards are available to help liquidity providers make educated decisions about their positions.

# Send Feedback

We always strive to do better. If you would like to provide feedback about the Primitive Interface, contact us at feedback@primitive.xyz.


Updates to the Primitive app designed to simplify the experience.

Earn fees with freshly updated Primitive UI


Primitive is grateful to have Designer Royce Moroch on the team. Moroch&#39;s goal is to provide crypto users with the best user experience (UX) possible, no matter the platform. For Moroch, each project is an opportunity to set a high expectation for the work that follows.

“I believe many platforms in the space are saturated with confusing data and information, and most of these projects don&#39;t hire experienced UX designers to help with ease of access,” Moroch said. “I want other projects to use my work as guidance on how micro-transactions within the crypto space should behave.”

# Who is Royce Moroch?

Moroch started in graphic design. He created merch, cover art and other media for hip-hop artists. Eventually, Moroch realized that he didn&#39;t enjoy graphic design, so he dropped out of college and taught himself user interface (UI) and UX design. Moroch has designed for Web2 and Web3, and now describes himself as a “never Web2 designer.”

“I believe in the future of Web3 completely taking over the Web2 infrastructure. On a moral level, I respect the Web3 space much more than Web2 due to things like governance, tokens and DAOs,” Moroch said. “Web3 lends itself to a much more welcoming and community type of vibe compared to closed-gated communities in Web2.”

Moroch was first intrigued by Web3 in late 2016. He said he “had always been interested in things against the norm.” His first interaction with crypto was purchasing ETH and LTC through Coinbase. He saw them as alternatives to stocks and noted that “DeFi and NFTs were not nearly as big then as they are today.”

# Proudly building new DeFi experiences

His talent and passion make Moroch a top-tier designer. He previously worked on Token Foundry&#39;s Initial Coin Offering (ICO) process and helped create a platform for businesses and users to buy highly vetted tokens. The main goal of his work was to create a safe and straightforward process with great UX. Token Foundry gained a reputation as one of the best platforms for buying tokens, and the platform had processed tens of millions dollars worth of ETH.

“I am passionate about design, especially in the crypto space, and I seriously enjoy providing a seamless UX to users,” Moroch said. “Primitive makes it possible for me to design brand new, never-before-seen products with amazing UX for users.”

Moroch designed the Primitive app and created a design system for Primitive. One of Moroch&#39;s goals is to show users how Primitive is design-focused. “We are building a story here at Primitive. We have an art direction and a killer platform to go along with it,” Moroch said. “Nothing gets better than that.”

# Learn More

You can follow Moroch for updates on Twitter [@rollsmorr\_](https://twitter.com/rollsmorr_) and keep an eye out for new products from Moroch and the team at Primitive.


Royce designs Primitive's apps and user experiences.

Royce Moroch designs innovative products and sublime UX


## Highlighted Pool #9
05.31.2022 - 06.10.2022

-0.31% USDC Return

-12% ETH/USDC Return 


Highlighted Pool #9 (HP#9) was deployed on May 31st, 2022 with a 2,000 USDC Strike, 75% Implied Volatility, and June 10th Expiry. 

Recent ETH/USDC market activity has been less than favorable. In these challenging times, sharp declines in asset prices can result in unfavorable covered call replication and, even with successful replication, unfavorable covered call returns.

As discussed in our [previous update](https://primitive.xyz/blog/rmm-performance-hp-5) about mean reversion, sharp declines in price without mean reversion result in poor replication. Poor replication leads to lower cash-on-cash returns as highlighted by the large gap between the theoretical (+2.57%) and realized (-0.31%) returns of HP#9. 

![](https://docs.google.com/spreadsheets/d/e/2PACX-1vTZQlRWEdwCOJAHAuJUQchk_1Qb2Fb5QofH4vX-rK7qcgplcGYzJvIAB4fsBkyUKTHgOt-bX9VQ8fmB/pubchart?oid=1632559865&format=image)

## What can be done to improve RMM-01 performance during times of market turmoil? 

All previous HPs were deployed with a 1% swap fee. Although our simulations show that a 2-3% fee is optimal, we initially chose 1% as a default in the Primitive Interface to ensure swaps could occur even during times of tight spreads and sideways price action. While users can edit the swap fee parameter in the Primitive Interface, it is not recommended to experiment without rigorous testing. 

Now that the market is more bearish, it makes sense to transition to a higher default swap fee. In our initial tests, an increase in swap fees from 1% to 1.5% leads to a significant improvement in covered call replication under current market conditions. Our latest pool, Highlighted Pool #10 (HP#10), reflects this change, with a 1.5% swap fee. In the few hours that HP#10 has been live, it has accrued so many fees that it is fully replicating the return of a covered call! This is a first for RMM-01 on Ethereum mainnet, and confirms the results of our initial simulations.

## Learn More

To get started on the [Primitive Interface](https://app.primitive.xyz), read our [Quick Start Guide](https://primitive.xyz/blog/quick-start) and check out [Highlighted Pool #10 on the Primitive Interface](https://app.primitive.xyz/liquidity/add/1/ETH/0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48/1656028800/1500/8000/9850).


HP9 lost 0.31% in USDC while ETH/USDC lost over 12%.

RMM-01 Performance - Highlighted Pool 9


As our newest junior researcher, Evan Kim performs extensive literature reviews to build a solid background of relevant knowledge to the research project at hand. This responsibility requires a deep understanding of certain mathematics and contributes to Primitive&#39;s overall goal of building friendlier crypto products.

## Who is Evan Kim?

Kim has only been working with cryptocurrency for about a year. “At the height of the May 2021 bubble, I got into it for the degen experience but stayed for the emerging technology,” Kim said. He caught the tail end of cross-chain incentives and yield farming, participated in iron finance and said he “bought a bunch of bad NFT projects during the NFT bubble in the fall.” The emerging technologies that Kim is interested in are RMM-01, generative art and algorithmic stablecoins.

Kim has applied theory from algebraic geometry, Bayesian probability and computational geometry, and his theoretical research interests are in symplectic algebraic geometry, algebraic topology and homological algebra. “I want my work to be an example of how to apply pure math ideas to bring theoretical results into reality,” he said.

## Bringing Mathematics to Life

Earlier in his career, he was particularly proud of implementing an automatic geometric theorem prover, which computes a Gröbner basis. The Gröbner basis can be used to analyze and optimize oil production in offshore platforms. “My takeaway from that project was that there is a lot of knowledge in beautiful theory that can be used for real-world value,” Kim said.

At Primitive, Kim does just that by researching the best ways to build robust DeFi systems that can stand the test of time. He uses first principles thinking when designing DeFi primitives to ensure the system is robust. “I am stoked to build some awesome DeFi products alongside the rest of the team!” he said.

“There are a lot of beautiful ideas in modern mathematics that are difficult to access because there is a lot of prerequisite knowledge required,” Kim said, “However, giving direct application to these ideas can bypass the knowledge barrier and provide an intuitive understanding and appreciation for these ideas.”

## Learn more

You can follow Kim for updates on Twitter [@evandekim](https://twitter.com/evandekim) and keep an eye out for new research from Kim and the other researchers at [Primitive](/).


Welcoming Evan to the Primitive team as Junior Researcher.

Primitive Welcomes Evan Kim


## Highlighted Pool #5

05.17.2022 - 05.24.2022

-0.9% USDC Return

-5.8% ETH/USDC Return

In previous Highlighted Pool updates, we focused on the relationship between the expected payoff of a covered call and an RMM pool with a specific set of parameters: strike price, implied volatility (IV) and expiry date. We used these parameters to derive an expected payoff and then compared that to the realized value of an RMM-01 pool to determine the pool’s performance.

Over time, we learned that “replication accuracy,” or how well the value of a particular RMM-01 pool fits its theoretical value, is not an ideal baseline metric due to its highly complex nature. Moving forward, we will focus on realized payoff alone.

--

Highlighted Pool 5 (HP#5) was deployed on May 17, 2022 by an unknown whale with $1.2 million in liquidity. The parameters were set at 2450 USDC strike price, 120% IV and an expiry date of May 24, 2022. From the start, HP#5 diverged from the theoretical payoff due to a sharp decline in ETH/USDC prices.

![](https://website-metadata.s3.amazonaws.com/HP%235+Performance.png)

The divergence resulted in a set of large swaps against the pool; however, the swap frequency was low. Swap frequency is a critical metric for determining the profitability of a specific pool, and it is the most important metric in any Automated Market Maker (AMM) that attempts to rely on arbitrage to extract a payoff.

## Mean Reversion

Profitability providing liquidity on Constant Function Market Makers (CFMM) is predicated on understanding mean reversion. Mean reversion implies the price of a particular pair, like ETH/USDC, will experience a large change before reverting back to the mean, otherwise described as returning to the initial price. This creates an opportunity for Liquidity Providers (LPs) to collect swap fees without changing their portfolio composition. As is the case in all CFMMs, the core payoff illustrated by mean reversion applies to RMM-01.

Visualize the price of an asset as a sine wave: the y-axis represents drift from the LPs entry price and the x-axis represents time. Upon entering a position, the LP is at 0 drift from the entry price. The LP experiences drift over the course of one waveform but hopes to be back at 0 drift upon exiting the position at the end of the waveform. This drift is necessary to profitability for LPs because price fluctuations prompt swaps and LPs profit from the swap fees.

This is what makes swap frequency such an important metric in the context of AMMs. If it takes too long for arbitrageurs to see an opportunity for profitable arbitrage in either direction, mean reversion can occur, resulting in 0 fees for LPs. LPs in concentrated liquidity AMMs should optimize for exposure to drift through parameter selection.

In RMM-01, pools are deployed with liquidity concentrated at the starting price of the pool. As pools mature toward expiry, this liquidity slowly migrates to the selected strike price. Replicating Market Makers (RMMs) are an exercise in “dynamically concentrated liquidity” in which users take directional bets on price action without having to rebalance liquidity ranges.

RMM-01 does not use explicit ranges, but liquidity at different prices at any point in time can be derived using the state of a pool. The mean reversion methods previously described apply to these dynamic “ranges.” The price path is pivoted, meaning the optimal entry price does not have to be exact to the exit price; the exit price can be higher or lower than the entry price.

In summary, the key to achieving a positive return with RMM-01 is to choose a suitable price path and time preference. If you think the price will go up over a short period of time, choose a strike price out of the money, a short maturity date and an implied volatility negatively correlated with your level of confidence. The higher the IV, the wider the “range.”

## Learn More

We hope this helps curious users understand how RMM-01 pool performance is affected by concepts well understood in other CFMMs. To get started on the Primitive App, read our Quick Start Guide and [check out Highlighted Pool #8 on the Primitive Interface](https://app.primitive.xyz).


HP5 lost 0.9% in USDC while ETH/USDC lost 5.8%.

RMM-01 Performance - Highlighted Pool 5


Primitive is ecstatic to welcome Eren Arik to the team as our new artist-in-residence. We are excited to see how he creates visionary art to help propel Primitive&#39;s mission and presence.

## Who is Eren Arik?

Arik is a freelance concept artist for the entertainment industry, and focuses on visual development for the film and video game industries. The manner in which he moves between different styles in his art, such as photorealistic, painterly illustrated and 3D sculpted, is utterly impressive.

Since his childhood, Arik has been creating. He practiced traditional techniques, particularly oil painting, before transitioning into digital art spaces. “That is why my digital artworks have a painterly-like feel,” Arik said, “I also developed my speed painting over the years which helps get my visions onto canvas fast.” He began producing digital art more than 15 years ago.

Something of a creative genius himself, it is apparent that Arik&#39;s noted inspirations have a great deal of influence over his work. His art shows obvious hints of some of his favorite 19th-century artists like Ivan Aivazovsky and Jean-Léon Gérôme.

Arik&#39;s art is also heavily influenced by Swiss artist, Hans Ruedi Giger, and new digital era masters like Craig Mullin, Piotr Jablonski and Sergey Kolesov (whose influence is apparent in Arik&#39;s renderings of people in Primitive artworks). It is no surprise that such powerhouse science fiction artists are so influential to Arik, as his favorite art to produce is “almost anything that has freedom to create,” Arik said, “but science fiction will always be my favorite genre to work in.”

All of Arik&#39;s art has a dynamic feel to it. There is a strong element of storytelling, and each piece feels as if it is moving, even if it&#39;s a still frame. With so many different layers and elements in one piece, the speed at which Arik completes them is almost unfathomable. “Creation of a painting depends on a lot of things like your mood, details of the brief, the subject and more,” said Arik, “but normally I handle this kind of illustration [the hero image on the Primitive homepage] in around one week.”

## Primitive brings modern meaning to “artist-in-residence”

Traditionally, museums seek out artists to hire as artists-in-residence. The museum might require the artist to produce a specific project, and often offers the artist studio space to work in as well as living accommodations on occasion.

Primitive is bringing a more modern meaning to “artist-in-residence.” Given that Arik&#39;s work for Primitive is digitally produced, and that Primitive doesn&#39;t necessarily have a studio space to offer, “artist-in-residence” is less about the physicality and more about the sentiment.

For Primitive, “artist-in-residence” is our way of saying that Arik is a staple part of our team, and that we want to give him the freedom to create visionary art. While Arik&#39;s artwork looks like it would feel right at home in a museum, Primitive is thrilled to incorporate it as part of the brand&#39;s overall look and feel. We are confident that Arik&#39;s work will leave lasting impressions and make Primitive more memorable and easily recognizable.

Any medium Arik touches radiates a story back at the observer. “We are currently working on worldbuilding,” Arik said, “I really enjoy working with the Primitive team and I look forward to telling this world&#39;s stories through my visual art.”

## Learn more

You can view more of Arik&#39;s work on his website at http://www.erenarik.com/, where he also offers tutorials and is open for private commissions, as well as on Twitter [@erenomoto](https://twitter.com/erenomoto). Keep an eye out for big things from Arik at [Primitive](/). Happy to have you on the team, Eren :)


Welcoming Eren to the Primitive team as Artist in Residence.

Primitive Welcomes Eren Arik


---

# Primitive Researchers Publish Exploratory Paper on RMM Derivatives

In October 2021, the Primitive research team, [Estelle](https://twitter.com/0xEstelle), [Jepsen](https://twitter.com/0xjepsen) and [Evan](https://twitter.com/EvanDeKim), published [“Primitive RMM-01,”](/whitepaper) in which they presented an implementation of a Replicating Market Makers (RMM) that approximates a Black-Scholes covered call. Unlike many other options protocols, RMM eliminates the need for third party oracles to determine pricing and offers permissionless access to traders using Liquidity Provider Tokens (LPT).

On May 20 2022, the Primitive research team was proud to publish an exploratory paper, [“Replicating Portfolios: Constructing Permissionless Derivatives,”](/rmm-derivatives.pdf) that builds upon their previous work. The new research details a variety of permissionless derivatives made possible by RMM-01.

“Now that we have a covered call on-chain, without the use of oracles, this paper answers the question of what other derivatives and structured products can we get from just playing around with the LPT?” Head of Research Estelle said.

## Concepts Explored

The paper goes over Black-Scholes priced long call and long put options on-chain without the use of oracles. Both long options are created by shorting the LPT, which results in the prospect of easily obtainable on-chain straddles.

Using the call and put options, the researchers describe an example of a liquidation-free lending market designed to fit over any decentralized lending market. The mechanism involves hedging debt assets with call options and hedging collateral assets with put options.

The researchers also explore the four classic binary options: the cash-or-nothing call, cash-or-nothing put, asset-or-nothing call and asset-or-nothing put. These options are made achievable by handling each reserve asset independently.

The paper also includes a qualitative summary of the behavior of Theta Vaults on RMM-01. In a future quantitative science paper, the team will expand on this summary and simulate the behavior of Theta Vaults in different market conditions.

Theta Vaults abstract the complexity of selling options, lowering the barrier to entry for new users. “The hope is that we will be able to shift the needle to make on-chain derivatives more popular and more easily accessible,” Junior Researcher Evan said.

## Learn More

“Our primary goal is to bridge innovation from the decentralized financial space with academia through peer reviewed quality research,” Quantitative Researcher Jepsen said. “This research contributes to that goal by working with the academic community in cryptocurrency to bring more credibility to the industry as a whole.”

**Want to learn more?** Join Jepsen for [Research Review: RMM Derivatives](https://twitter.com/i/spaces/1yNGaYvaPLgGj) for Noobs on the [@PrimitiveFi](https://twitter.com/PrimitiveFi) Twitter Space May 26, 2022 at 9:00 p.m. GMT.


Exploration of permissionless derivatives constructed using RMM-01.

Research Review - RMM Derivatives


## Highlighted Pool #3

05.06.2022 - 05.13.2022

### -5.12% Return

96.7% Replication Accuracy

\_

Since the previous RMM Performance Update, we have slightly simplified our pricing methodology. Replication accuracy no longer refers to the percent of the option premium that the RMM-01 pool was able to replicate. We are reverting to the original definition: the true value/theoretical value of an RMM-01 Liquidity Provider Token (LPT). Replication accuracy at expiry is a simple method of determining the usefulness of a particular pool.

\_

Highlighted Pool 3 (HP#3) was created on May 6, at what proved to be an inconvenient time. Upon deployment, the 2900 USDC strike price was intended to be At the Money (ATM). Implied Volatility (IV) was set to 65%. This pool regretfully marked the bottom of the ETH/USDC volatility market. Several hours after HP#3 was created the market saw a small decline in ETH/USDC prices, and IV skyrocketed. This left HP#3 woefully underpriced.

Like all RMM-01 pools, HP#3’s replication accuracy varied throughout the lifecycle of the pool. The chart below describes the prices of a single RMM-01 Liquidity Provider Token (LPT) from pool creation to expiry.

![](https://i.imgur.com/WSLKRvu.png)

To reiterate, all RMM-01 pools begin with perfect replication accuracy. As the pool’s internal price of ETH drifts from the market-wide price, replication accuracy declines. High liquidity helps offset this divergence. HP#3 LPT reached maturity ~90 USDC away from the Black-Scholes theoretical value of 2972 USDC, resulting in a -5.12% return (cash on cash). At 100% replication accuracy, the pool still would have resulted in a negative return due to the low price of volatility.

HP#3 represents a tough lesson in the world of RMM-01. These pools function best when the strike price is close to the market price at expiry. Due to the proceeding market crash and spike in volatility, not only was IV underpriced at 65%, but the 2900 USDC strike price resulted in extremely thin liquidity between the ETH prices of 2200-2000 USDC. ETH/USDC spent the most time in that range of thin liquidity during the lifespan of HP#3.

In an optimal environment with low transaction fees, we expect users of RMM-01 to move liquidity to “market IV” pools, but high transaction fees on Ethereum mainnet restrict this movement. HP#3 served as a prime example of what happens when an underpriced pool replicates well. Remember, the higher the IV, the lower chance of replication. Low IV pools replicate very easily, however the payoff that they replicate is underpriced, therfore, suboptimal.

—

Users of RMM-01 may have realized that we did not release a performance update for Highlighted Pool 2 (HP#2). As we explained previously, HP#2 was an Out of the Money (OTM) pool. Replication performance was terrible due to lack of liquidity at market price. Since deploying HP#2, we have developed a much better empirical understanding of the circumstances of proper replication. Future Highlighted Pools will reflect this improved understanding.

—

One last note: those who [stalk the RMM-01 contracts on chain](https://etherscan.io/address/0xd3541ad19c9523c268ede8792310867c57be39e4) may have noticed a large pool recently deployed with 1.2M USDC in liquidity. This single deposit tripled Primitive’s Total Value Locked (TVL), and represents organic adoption by large whales unconcerned with high liquidity requirements on Ethereum mainnet. Today, authors of the Primitive Interface decided to label this pool as the new Highlighted Pool. Due to its high liquidity, we have a high level of confidence in HP#5’s ability to accurately replicate its expected payoff. Check out the pool [here](https://app.primitive.xyz/liquidity/add/1/ETH/0xa0b86991c6218b36c1d19d4a2e9eb0ce3606eb48/1653350400/2450/12000/9900).


HP3 lost 5.12% in one week with 96.7% Replication Accuracy.

RMM-01 Performance - Highlighted Pool 3


## Mainnet Soft Launch

Prior to launch, Primitive’s Replicating Market Maker (RMM-01) has silently live for several weeks on the Ethereum mainnet. In that time, our most engaged community members assisted us to optimize the RMM-01 user experience.

Since the initial soft launch of RMM-01, we have implemented two critical changes to the Primitive Interface. The first update fixed a bug in the ‘rmm-ethers’ library to repair liquidity scaling math. The second major update involves a new feature created for the purposes of reducing liquidity fragmentation and clicks-to-deposit. Liquidity providers (LPs) were wasting small amounts of USDC when adding liquidity due to this issue. No contract level functions were effected.

## Too Many Parameters

Replicating Market Makers (RMMs) inherit both the utility and complexity of Automated Market Makers (AMMs) and option markets. RMM-01 pools have many parameters and high liquidity requirements to function properly.

DeFi Option Vaults (DOVs) have experienced success through simplicity. RMM-01 pools are best understood as individual option vaults, each collecting Theta over time, at different rates, with different time preferences.

With dozens of pools to choose from at any given maturity date, it would be challenging for users of all levels of sophistication to gain any utility from the RMM-01 protocol. It became clear that users needed guidance to determine which pools have the best chance to properly accrue their expected payoff.

## Introduction to Highlighted Pools

RMM-01 is a covered call option RMM. Replication is a process that is not 100% accurate in every scenario. There are certain parameters that will make a pool more or less likely to accurately replicate selling a call option. Replicator "health" is defined as how far any given pool drifts from its intended payoff.

Highlighted Pools allow authors of the Primitive Interface to provide explicit pool recommendations to users of the RMM-01 protocol. These recommendations are not financial advice, but are examples of the most "healthy" pool at any current time. Probability of profitability is not equivalent to probability of replication.

## Learn More

With Highlighted Pools, any user who is willing to sell a call option with the recommended Pool parameters should expect to receive that payoff! To learn more about RMM-01, read the [RMM-01 Primer](https://primitive.mirror.xyz/Audtl29HY_rnhN4E2LwnP7-zjDcDGAyXZ4h3QpDeajg).


Introducing a new feature to the Primitive Interface, Highlighted Pools.

Introducing Highlighted Pools


## Highlighted Pool 1

04.22.2022 - 04.29.2022

The performance of Highlighted Pool 1 (HP#1) exceeded expectations.

Over its lifespan, HP#1 collected 80 ETH of liquidity, which is much higher than anticipated due to a lack of professional market making or liquidity incentives. RMM-01 was able to replicate at an accuracy of 41%, even with a liquidity pool as low as 80 ETH.

HP#1 was selected for being an At The Money (ATM) strike pool. ATM strikes perform best in RMM-01 as liquidity concentrates over time at the selected strike price. Deeper liquidity at or near the market price results in more frequent arbitrage, which leads to more fees and accurate covered call replication. Replication health is a metric we use to quantify the percentage difference between the theoretical value and the real value of a RMM-01 Liquidity Provider Token (LPT).

In the case of HP#1, replication health varied throughout the lifecycle of the pool. The chart below describes the prices of a single RMM-01 LPT from pool creation to expiry. As you can see, all RMM-01 pools begin with perfect replication. As the pool’s internal price of ETH drifts from the market-wide price, replication declines. Despite the limitations of Ethereum L1, HP#1 LPT reached maturity only ~57 USDC away from the Black-Scholes theoretical value of 3057 USDC. The realized premium was 41 USDC, resulting in 41% replication accuracy.

![](/rmm-performance/hp-1.png)

Keep in mind, this “option premium” was pulled from thin air, a sort of magic trick made possible by the power of arbitrage and mechanism design. Because the pool expired Out of the Money (OTM), liquidity providers made an approximate 1.4% cash-on-cash return in 7 days! Primitive pools work best when the strike price is ATM, providing much higher weekly returns than OTM covered call strategies.

--

A warning to our users, the May 6th Highlighted Pool (HP#2), was an OTM pool. Replication performance has been poor due to lack of liquidity at market price. We understand, empirically, that ATM strike pools have a much higher chance of proper replication. The most recent Highlighted Pool (HP#3) has more attractive parameters because it is an ATM strike pool.

These performance updates will be posted weekly from here on out.

Cheers!


Performance of Highlighted Pool 1 exceeded expectations.

RMM-01 Performance - Highlighted Pool 1


Depositing tokens and earning trading fees are easy with Primitive’s new app. This quick start guide assumes the reader has a basic understanding of providing tokens to AMM liquidity pools. Not quite there yet? See our [educational materials](https://primitive.xyz/learn) to build a better understanding of Primitive and the potential risks and rewards of using liquidity pools. Follow this step-by-step guide to get started on the app.

## 1. Click the “Use App” button on the http://primitive.xyz homepage

![](/quick-start/1.png)

## 2. Accept the Terms and Conditions

## 3. Connect your wallet (top right corner) with MetaMask or WalletConnect

## 4. Click the “+ Add Position” button or click the “Create your first position” button if you haven’t created any positions yet

![](/quick-start/2.png)

## 5. The position will automatically populate with the current Highlighted Pool’s parameters. You can use the parameters set by the Highlighted Pool, or change them to your own preference. You can change the Maturity Date, Strike Price and Implied Volatility.

## 6. Enter the amount of tokens you would like to deposit and then click the “Approve USDC” button

![](/quick-start/3.png)

## 7. After the USDC has approved, click the “Add Liquidity” button

![](/quick-start/4.png)

## 8. Congrats! You have created a new position and have landed on the “Manage Position” page for your new position. Here, you can view details about your position and can remove the position if you so choose.

![](/quick-start/5.png)

## 9. The new position can be viewed on the Primitive dashboard. As you create more positions, you can view all of them in one place on the dashboard.

![](/quick-start/6.png)

## 10. The dashboard will indicate when the position is expired, as well as offer new Highlighted Pools as time goes on.

![](/quick-start/7.png)

## 11. You can click on the position and remove your liquidity.

![](/quick-start/8.png)

## Learn how to maximize trading fees

The Primitive App is designed to give you more control over your time preferences, risk and reward when it comes to earning trading fees. To level up your understanding of Primitive and maximize fees earned, read the RMM Primer [here](https://primitive.xyz/primer).


An easy guide to get started providing liquidity to Primitive.

Primitive App Quick Start Guide.


It is with great pleasure that I can announce that I am joining Primitive as a [Quantitative Researcher](/people). I will be working with Primitive's [Head of Research](https://twitter.com/0xestelle) to formalize different market architectures. This work will be necessary to design a wide array of decentralized financial primitives.

With a degree in pure theoretical mathematics, my future was uncertain. There are few niche areas of work that employ mathematicians. I was interested in cyber security and frustrated with the exploitation of user data and the violation of user privacy in the digital world. Working as a cyber security intern for the university's CISO, I set out to deepen my understanding of applying different cryptographic primitives and mathematical models to study computer science in graduate school.

In graduate school, I had the fantastic opportunity to work with Dr. Partridge in testing the generator polynomials of cyclic codes for error detection and modeling discrete event systems with tropical algebra.

Towards the end of my MS, I began reading a collection of papers from Tarun Chitra and Guillermo Angeris, which formalized the design of decentralized financial mechanisms. With a deep love of cryptography, I was thrilled to discover the mathematical depth of market design principles in their papers. With growing admiration of their work, I worked with Dr. Alterweh on a formal investigation of MEV searcher strategies, cost of censorship, sequencer mechanisms, and the corresponding consensus implications. My admiration of the design of these permissionless systems continued to grow.

Permissionless systems are made possible by distributed computing environments and asymmetric cryptography. These systems will play an inaugural part in formulating fair and open cyberinfrastructure. The relevance of decentralized financial systems is a tremendous force. They liberate parties from the economic dependence on centralized entities, who maintain complete control and are kept in check by loose legislation.

The opportunity to work at Primitive presents support for my infinite curiosity and deep value alignment in building permissionless systems. Here at Primitive, I can satiate my intellectual curiosity while simultaneously working on designing highly impactful permissionless markets. With decentralized financial products at the forefront of the applications leveraging distributed ledgers, I am thrilled to work on such exciting problems with such exceptional individuals. I am excited to build a better future for everyone.


Joining the Primitive team as Quantitative Researcher.

Jepsen Joins Primitive.


We are excited to reveal the new Primitive brand today, along with a new [website](https://primitive.xyz). At its core, **Primitive is a mission** to make the friendliest products in crypto built on top of unstoppable decentralized financial infrastructure.
To reflect this mission, we are "Primitive" instead of "Primitive Finance". While finance is an integral piece of Primitive, mathematics, art, design, and writing all play a critical role in delivering these products to the world.

**The most important of these changes is moving the website to a new domain: https://primitive.xyz.**

Make sure when using Primitive that you are on the valid domain, because all .finance urls will redirect to the new .xyz domain.

Visit the [Brand](https://primitive.xyz/brand) page to download the Primitive brand assets.

## What is Primitive?

Primitive built the Replicating Market Maker ("RMM") protocol, an oracle-free solution to scalable and efficient on-chain derivatives.
RMM liquidity is an innovative financial vehicle that replicates derivative payoffs. Assets deposited into the protocol are productively used as spot liquidity, allowing swaps between the assets just like any other DEX.

## Why Primitive?

We exist to create a more sustainable & scalable future for DeFi by reducing systemic risk that’s powered by trust.
This evolution of the brand reflects Primitive's dedication to building resilient infrastructure while paying attention to the people who want to use these innovative financial tools.

## Made by Primitive

Our brand is designed and crafted by the Primitive team. Each of the protocols and products we build give access to complex financial tools through a friendly application, pushing the brand to be more gentle and simple to use.
A predictable, efficient, and secure protocol is embedded into the strength and simplicity of the brand's soul.

![PrimitiveGlyph](https://drive.google.com/uc?export=view&id=1CqTB44B5m1I3Q03Pq1IcXQXFLh9dY8dH)

When the Primitive glyph needs a little help getting our brand
across the full logo should be used.
Generally the full logo is for mainstream communication,
presentations, or when Primitive appears alongside other
word-based company logos.
The elements within the logo are fixed and must not be
re-proportioned, redrawn, or modified.

![PrimitiveLogo](https://drive.google.com/uc?export=view&id=1VkPzFkg0E-FgfnH2GhsaO0OJcCYciQOx)

Everything we build is crafted with attention to detail so you
can trust the products made by Primitive. We introduced the blue dot as a subtle reference to the Earth,
to represent Primitive as a global organization.
The blue dot should be used on header components, and anything
meant to stand out.

![MadeByPrimitive](https://drive.google.com/uc?export=view&id=1Tv2Xtm3SzEG9Nbko6AfWfxJEvi_fllvR)

## New App and Knowledge Base

In addition to the brand update, be sure to visit the new [app](https://app.primitive.xyz) to use the protocol and [knowledge base](https://primitive.xyz/learn) to learn more about Primitive.


Primitive Brand.


# Introducing Marmite: Hassle-free Solidity gas cost comparisons

Optimizing Solidity code allows users to pay less transaction fees when they are interacting with dApps, however mastering _gas golfing_ requires some tools and practice. Here comes Marmite: a Hardhat plugin helping developers perform gas cost comparisons among different Solidity code snippets.

## Overview

Around Christmas last year, [transmissions11](https://twitter.com/transmissions11) offered us one of the best gifts a team of Solidity developers could ever dream of: pull requests full of gas optimizations!

This kind of spawned in us a desire to gas golf our contracts even deeper, but we quickly realized that we didn't have a proper tool to help us test different Solidity implementations and compare the gas costs.

So after sending our smart-contracts to a final audit (performed by [Trail Of Bits](https://www.trailofbits.com/) team), we decided that it was time to build this new tool!

## What's the soup?

Marmite allows you to write different implementations of some Solidity code directly in your contracts, and then obtain a gas cost comparison among them.

These declarations are done using the tags `@start<Implementation-name>` and `@end`:

![Implementations](https://i.imgur.com/bL4HX8t.png)

_Note: Implementations are meant to be used during the process of gas optimization and should not be kept in final contracts._

Once you've done that, the next step is simply to run the `golf:contract` command:

![golf:contract](https://i.imgur.com/FwJBwyf.gif)

If you have a more complex setup (with multiple contracts deployed) or a specific environment, you can write a script using the Marmite context function:

![Script](https://i.imgur.com/nU8tnBg.png)

After that, you can use the `golf:script` task to execute the script:

![golf:script](https://i.imgur.com/hLeLEHD.gif)

## Conclusion

Marmite offers a simple and flexible way to compare gas costs directly in your contracts, and in case you were wondering: it supports any Solidity versions!

If you want to try it out, check out the [README](https://github.com/primitivefinance/hardhat-marmite) on GitHub for the installation and usage instructions.

Happy gas golfing!

## Learn more

Join us on: [Primitive Discord](https://discord.com/invite/gYDVGNPVz8).
Visit the website: [primitive.finance](https://primitive.finance).
Follow Primitive on twitter: [primitivefi](https://twitter.com/primitivefi).


Hassle-free Hardhat plugin for Solidity gas cost comparisons.

Introducing Marmite.


We are excited to open source the [RMM SDK](https://github.com/primitivefinance/rmm-sdk), a developer tool that makes it easier to build on top of the RMM protocol.

Interacting with any web3 protocol comes with hurdles: parsing on-chain data, modeling smart contract state, and displaying information in a clear way. This developer kit exposes several "entities", which are models of the smart contracts, and "managers" to help construct transactions (but not execute them!). Use the SDK to easily tap into the RMM protocol, derive useful information for users, and safely build transactions for them.

The Primitive team is using the SDK to **build an innovative liquidity product on top of RMMs**, and now anyone can do that with it being open source. The RMM protocol is designed to be **maximally composable** through its **oracle-less**, dependency minimized architecture. These are some of the straightforward use cases for the app layer of RMMs:

- Structured Products
- Vault Strategies
- Swapping

Tools like this will be used to increase adoption of these unique liquidity tokens for everyone using Primitive, from **liquidity staking** to **volatility harvesting vaults**. This SDK remains narrowly focused on the main smart contracts, while being powerful enough to build several products from it.

### Discord

We have an open server with specific channels for discussing products:

[Join here](https://discord.gg/primitive)

## For Developers

Comprehensive documentation is [here](https://github.com/primitivefinance/rmm-sdk/blob/main/docs/sdk/rmm-sdk.md).

### Entities

These products all need to tap into a property of the Primitive pool's underlying math, whether that is calculating amounts for swaps, or computing the deterministic pool ids that are dependent on curve parameters. There are three typescript classes which are used as models to make this easily accessible:

- Engine entity
- Calibration entity
- Pool entity

#### Engine Entity

The Engine entity is utilized to deterministically compute the address for pairs, the smart contract called "Primitive Engine". It needs the Primitive Factory address and the two token addresses to be instantiated, that's it!

#### Calibration Entity

Calibration extends the Engine, enabling a pool id to be deterministically computed based on the parameters:

- strike price (in wei)
- implied volatility (sigma)
- maturity (expiry date)
- gamma (100% - swap fee %)

These two entities are designed to be stateless, i.e. they are not instantiated with on-chain data, only the parameters, token addresses, and Primitive Factory address.

#### Pool Entity

The Pool goes further with extending the Calibration, but it can also be instantiated from on-chain data. This pool models the entire state of a pool: its reserves, invariant, and calibration parameters. Along with it, the model exposes useful functions to derive information for users, e.g. amount much liquidity they receive for when providing an amount of tokens.

#### Simulating Pools

A simulated pool model can be instantiated using `fromReferencePrice`. The user must pass in a `referencePrice` of the asset to infer what the reserves would be. This can be useful to determine the arguments for creating pools or allocating liquidity to a new pool based on its parameters, rather than on-chain state.

#### Creating Pools

If a user were to create a new pool, they should be asked for a reference price, which can then be used to instantiate the pool's theoretical reserves. From this, the optimal amounts of liquidity to add can be computed, and then the transaction could be constructed.

#### Creating the Pool Entity

An easy way to build the Pool entity is available through the peripheral contracts. The Primitive Manager smart contract has a function [`uri`](https://github.com/primitivefinance/rmm-manager/blob/ac34c7d1a022d5d687330aeeeaa988c63919fc02/contracts/base/PositionManager.sol#L28) which accepts a `poolId` as an argument. Calling this will return some encoded json data, which can be decoded and then passed directly to the Pool entity's `from` method, returning a Pool entity that's "synced" to the same block as the `uri` call.

This is the optimal way to instantiate the pools, as a bundle of `uri` calls can be batched in a multicall.

## Managers

Along with the entities are "managers". These expose easy functions to encode function selectors and arguments to build a transaction's calldata.

### Periphery Manager

This class is designed to match the Primitive Manager smart contract's public functions. Primitive Manager inherits a Multicall contract, making it possible to bundle several transactions to the Primitive Manager in a single transaction.

#### Multicall Example

For example, a "zap" is a way to provide liquidity to a two-or-more token pool with only one token. How it works: some of the tokens are first swapped to the token of the other side(s) of the pool, and then all the tokens are provided as liquidity. With multicall, its possible to do this without an on-chain function!

It takes two steps:

- Given an amount of $ value to provide, denominated in one token, compute amount of liquidity tokens that could be minted (i.e. $ to provide / $ value per liquidity token)
- Given an amount of LP tokens, compute how much of each side of the pool is required
- Compute the amount needed to swap to get the other side of the pool
- Add the swap transaction to an array of calldata
- Push the allocate liquidity calldata to the same array
- Wrap the calldata in a multicall!

There are nuances here, but that's the general idea.

#### Encoding function data

Each of the static methods on the PeripheryManager expose an easy way to build ready-to-send transaction payloads to the on-chain PrimitiveManager contract. Mix and match these methods to build all kinds of useful functions!

Here are some ideas:

- Roll positions (update a liquidity position from one expiration to another)
- Single-asset liquidity provision (zaps)
- Distribute liquidity across curves at different implied volatilities
- [Tokenless AMM](https://mirror.xyz/alexangel.eth/XUtGuUBPkh0UIHNVd1XglC79gtjJeUPwBGha64aePww)

### Factory Manager

The factory contract only has a single function `deploy`. This manager has a static method to encode this function selector with two token addresses, which will deploy a new PrimitiveEngine contract.

### Dependencies

This SDK relies on an ethers.js wrapper: [web3-units](https://github.com/Alexangelj/web3-units).

Along with that, it uses the [Uniswap Token Entity from their sdk-core package](https://github.com/Uniswap/sdk-core).

Primitive pools have a trading function, which the Pool entity computes using the typescript implementation in [rmm-math](https://github.com/primitivefinance/rmm-math).

# Helpful links

[Use the RMM SDK now!](https://github.com/primitivefinance/rmm-sdk)

## Community

Go tell your friends about the **oracle-free** derivative protocol launching soon with concentrated and fungible liquidity.

To meet the rest of us, join the discord:

[Primitive discord](https://discord.gg/primitive)

## Published on Mirror

[mirror.primitive.eth](https://mirror.xyz/mirror.primitive.eth)

## Published on Primitive Blog

[blog](https://primitive.finance/blog)

## Learn More

#### Visit the website

[primitive.finance](https://primitive.finance)

#### Visit the docs

[primitive documentation](https://docs.primitive.finance)

#### Follow Primitive on twitter

[primitivefi](https://twitter.com/primitivefi)


A software development kit for building on RMM protocol.

Primitive RMM SDK.


One week ago, the [Primitive app](https://rinkeby.app.primitive.finance) for RMM protocol on rinkeby was shared in the [Primitive discord](https://discord.gg/primitive) and since then has done over **12,000** transactions!

![](https://i.imgur.com/YzPvQJy.png)

Over **2,500** users hold RMM liquidity positions across six different test pools. In addition to that, the discord has almost **3,000** members along with more than 60 feature requests and 60 bug reports for the app.

## What is RMM protocol?

The Replicating Market Maker ("RMM") protocol was built for a reason: to build **novel liquidity products** from **innovative financial vehicles**.

Any user of RMM has access to derivative payoffs **without reliance** on oracle systems or counterparties.

## What's next?

**Mainnet will be in January**. The team is following a strict quality process to get to mainnet.

This version of the app helped narrow down the remaining issues that broke the interface. Significant upgrades are being developed in parallel to the fixes to ensure the app is an extremely reliable interface for RMM protocol.

**The next scheduled upgrades to the app:**

- Beta 3: _Current_
- Beta 4: 1-week expiry pools, 1 chosen feature request, bug fixes and performance updates
- Beta 5: 1 chosen feature request, better and faster data
- Beta 6: Style updates + final bug fixes, 1 chosen feature request
- Release Candidate 1: Final release before mainnet
- Release Candidate x: If any bugs found in a release candidate, fixed here
- Mainnet: With a reliable interface, tested contracts, and exceptional UX mainnet can be launched!

## Pipeline

Along with the app, these are some interesting products the team is exploring:

- Tokenized Theta (an up-only token)
- Vanilla options (long call and long put options)
- Binary options

Each of these simply interacts with the RMM-01 liquidity token in a different way, it's the **ultimate DeFi lego**.

The smart contract team is working on contracts that will improve adoption for the liquidity token, including an [LP staking contract](https://github.com/primitivefinance/rmm-examples/blob/main/contracts/primitiveChef/PrimitiveChef.sol).

## Adoption

The team is focused on writing better documentation, building reliable tooling, and following best security practices in preparation mainnet launch. These upgrades, scheduled by end of year, will make it easier to build on the RMM protocol:

- Docs overhaul with better and more concrete examples
- User guides to understand risks, rewards, and how to best use the protocol and its products
- Private discord for the teams who want to build on RMM-01

## Closing thoughts

Each of these items will improve every user's experience on mainnet launch. The goal all along:
A reliable interface that can work in a decentralized setting, simple examples to understand building on RMM, and basic user guides to make the learning process easier.

# Helpful links

[Use the testnet now!](https://rinkeby.app.primitive.finance)

## Community

Go tell your friends about the **oracle-free** derivative protocol launching soon with concentrated and fungible liquidity.

To meet the rest of us, join the [Primitive discord](https://discord.gg/primitive).

## Published on Mirror

Read this post on mirror: [mirror.primitive.eth](https://mirror.xyz/mirror.primitive.eth).

## Published on Primitive

Read this on the Primitive blog: [blog](https://primitive.finance/blog).

## Learn More

Visit the website: [primitive.finance](https://primitive.finance).
Visit the docs: [primitive documentation](https://docs.primitive.finance).
Follow Primitive on twitter: [primitivefi](https://twitter.com/primitivefi).


RMM protocol is live on Rinkeby test network

RMM Protocol Testnet.


Today the $1m bug bounty on the Primitive RMM smart contracts goes live. We are ruthlessly hunting any high level or critical issues in the smart contracts before they are launched this month.

View the bug bounty details on [Immunefi](https://immunefi.com/bounty/primitive/).

Primitive directly handles a $250k portion of this bug bounty, while Sherlock has committed the remaining $750k. Being under the umbrella of [Sherlock Protocol](https://sherlock.xyz/) has improved the protocol security by tenfold through direct smart contract review, coverage, and incentivizing bugs to be reported rather than exploited.

The smart contracts have a scheduled audit starting in January with Trail of Bits. These audit weeks will cover the RMM contracts (which have already been audited). This final review will give us full confidence in the security of the protocol, cementing its status as an immutable and anti-fragile system, as all low-level primitives should.

The smart contracts are planned to be launched before this audit is finished, therefore caution should be exercised when interacting with the protocol at all times. The protocol should be considered as an alpha version.

## Testnet

The testnet is live and the app is scheduled to be available to users during this week, if not today. There will be a separate blog post to give a brief overview of the testnet and the goals of having it.

## Discord

The testnet will first be made available to the users in our discord, you can join here: [Primitive discord](https://discord.gg/rzRwJ4K).

## Published on Mirror

Read this post on mirror: [mirror.primitive.eth](https://mirror.xyz/mirror.primitive.eth).

## Learn More

Visit the website: [primitive.finance](https://primitive.finance).
Visit the docs: [primitive documentation](https://docs.primitive.finance).
Follow Primitive on twitter: [primitivefi](https://twitter.com/primitivefi).


Up to $1m in bug bounty rewards for critical issues reported.

Primitive Bug Bounty.


Every user that interacts with a DeFi product runs the risk of total loss. This risk remains elusive to the user, overshadowed by intangible underlying risks. For all Primitive products, no user will walk away with zero if a hack or economic exploit takes place.

Primitive is purchasing $10m of coverage for its users through Sherlock Protocol. This entitles all users to claim a portion of USDC from the pool in the case of an adverse event.

This coverage also comes with the benefits of increased security:

- $1m bug bounty incentivizes against black hat attacks
- A future avenue of scaling coverage on Primitive products
- Continuous audit capacity on smart contracts

Since this is all handled on behalf of users, if any funds are lost users will simply gain access to a claim USDC button.

The unique model of purchasing coverage through Sherlock has an important feature: coverage pricing that moves with code complexity. As Primitive launches new products that may be more complex, the Sherlock team will be best positioned to make better pricing decisions. This ultimately leads to more coverage for the end user because more can be purchased at a better price.

Sherlock has already proved themselves to be invaluable through the security expertise of their _Watsons_, and we couldn't be more excited to offer coverage for all of our users.

## Visit Sherlock

Learn more on the Sherlock website: [sherlock.xyz](https://sherlock.xyz)

## Community

Go tell your friends about the **oracle-free** derivative protocol launching this month with concentrated and fungible liquidity.

To meet the rest of us, join the [Primitive discord](https://discord.gg/rzRwJ4K).

## Published on Mirror

Read this post on mirror: [mirror.primitive.eth](https://mirror.xyz/mirror.primitive.eth).

## Learn More

Visit the website: [primitive.finance](https://primitive.finance).
Visit the docs: [primitive documentation](https://docs.primitive.finance).
Follow Primitive on twitter: [primitivefi](https://twitter.com/primitivefi).


$10m of coverage is available to all users in the event of an exploit.

Exploit Protection.


# Introducing Dodoc: A zero-config Hardhat plugin to generate documentation

Good documentation for a DeFi protocol is absolutely mandatory, but writing it can be sometimes cumbersome. Here comes Dodoc: a super simple Hardhat plugin allowing you to generate documentation for your smart contracts with no hassle!

## Overview

A couple of weeks ago while wrapping up the contracts of our brand new [Replicating Market Marker](https://mirror.xyz/mirror.primitive.eth/l5F1BLMhfmcm_B1R2w-by003_oiAz2-Ir_Jj_rCvGCs), we decided to have a look at the current solutions to generate and host our contracts documentation.

Finding how and where to host the docs was not a big deal, and among many different choices, our front-end team decided to go with [Docusaurus](https://docusaurus.io/) and to use Markdown-based files.

The last thing to do was to find a way to automatically generate the Markdown documentation, based on the NatSpec of our Solidity contracts, and pass that to Docusaurus.
But after some research, we started to scratch our heads since we found out that the only available plugin was [Hardhat Docgen](https://github.com/ItsNickBarry/hardhat-docgen), which was generating a whole static website. Not exactly what we wanted!

So we decided to have some fun and write a brand new tool from scratch: Dodoc was born!

## Features

### Zero-configuration required

Just [install Dodoc package](https://github.com/primitivefinance/primitive-dodoc#-installation), import it in your Hardhat config file and you're good to go! Documentation will be generated on the next compilation in the `docs` folder of your repository.

### Compatible with latest Solidity versions

Even the latest Solidity versions (0.8.x+) are supported, this means that you can even write documentation for your custom revert errors!

### Extendability

Default output is generating Markdown files, although custom templates can be [created using Squirrelly](https://github.com/primitivefinance/primitive-dodoc#-customize)! This means that literally any format can be supported.

## Conclusion

While working on Dodoc, our goal was to make a very simple tool that would also be flexible enough to allow anyone to reuse and extend it. So we did it!

Finally, the last thing to do is to share a live example, so here is the new [Primitive documentation](https://docs.primitive.finance), generated using Dodoc:

![](https://i.imgur.com/lV0ZbX3.png)

Let's try out and check out the installation instructions in the [README on Github](https://github.com/primitivefinance/primitive-dodoc). Trust me, it's super simple!

Feel free to open any issues on [Github](https://github.com/primitivefinance/primitive-dodoc) and join us on [Discord](https://discord.com/invite/gYDVGNPVz8) to share your thoughts and give some feedback! Happy hacking! :)

- [Dodoc on GitHub](https://github.com/primitivefinance/primitive-dodoc)
- [Primitive documentation](https://docs.primitive.finance/)
- [Primitive Discord](https://discord.com/invite/gYDVGNPVz8)

## Published on Mirror

Read this post on mirror: [mirror.primitive.eth](https://mirror.xyz/mirror.primitive.eth).

## Published on Primitive

Read this on the Primitive blog: [blog](https://primitive.finance/blog).

## Learn More

Visit the website: [primitive.finance](https://primitive.finance).
Follow Primitive on twitter: [primitivefi](https://twitter.com/primitivefi).


The Primitive Protocol is live on Rinkeby and Kovan.

Introducing Dodoc.


## Acknowledgements

Building this protocol was a collaborative effort that could have not been done without the help of [Alex Evans](https://twitter.com/alexhevans), [Guillermo Angeris](https://twitter.com/GuilleAngeris), [Tarun Chitra](https://twitter.com/tarunchitra), and [Experience](https://twitter.com/trustlessexp).

# Introducing Primitive

Today, we are ecstatic to introduce the Replicating Market Maker ("RMM-01"), a **spot exchange** and **derivative** protocol.

While derivatives in traditional finance are massive, DeFi derivatives have yet to grow to a comparative scale. This is in part because they are bottle-necked by their dependence on **oracle** systems and high collateralization requirements.

Oracles are one of the largest sources of smart contract vulnerabilities and perhaps the largest centralization vector, so we sought out an architecture that excluded them.

Primitive is an **oracle-free** solution to scalable and efficient on-chain derivatives, reflecting our belief that the future of decentralized finance should not depend on expensive (and often brittle) oracles.

The protocol is slated to launch **December 2021** on Ethereum L1 mainnet, Arbitrum L2, and Optimism L2.

### The features on launch include:

- Concentrated fungible liquidity
- Liquidity pool tokens that replicate covered call options

### The protocol can be used for:

- Earning swap fees as a liquidity provider
- Swapping between tokens of underlying pools
- Building structured products using the composable liquidity pool tokens
- Creating liquidity pools for any token pair

Out of the box, Primitive is the base infrastructure for an oracle-free DeFi and the future of on-chain derivatives.

Read on to learn about "derivative tokens" and how the pools concentrate liquidity as an AMM.

## Derivative Tokens

Every liquidity provider to the popular automated market makers ("AMMs") has, implicitly or explicitly, held an underlying derivative: the **liquidity pool token** ("LPT").

Primitive is not an AMM that trades derivatives, **the LPT is the derivative**. This specific niche of derivative market has seen some early growth, but has yet to reach the spotlight. For example, there are a few protocols that leverage the LPT as a derivative: [Onboarding Uniswap V2 LPTs](https://blog.makerdao.com/executive-vote-february-5-2021/), [Aave AMM Markets Released](https://medium.com/aave/aave-amm-market-released-73ae76a7cbc0), [Balancer as a portfolio manager](https://medium.com/balancer-protocol/balancer-v2-generalizing-amms-16343c4563ff), and the idea of "Pool 2", [Yield Farmer's Guide](https://www.nansen.ai/research/a-farmers-guide-to-yield).

Primitive leans into this market as an AMM whose primary use-case is having financially useful LPTs. This makes the protocol different when compared to other AMMs, which have arbitrary LPTs that are not the most straightforward to value.

Using RMM liquidity pool tokens, virtually **any** derivative payoff can be offered or created. For example, in a decentralized lending market like [Fuse](https://medium.com/rari-capital/fuse-explained-3ef2e0747953), these LPTs can be _shorted_, expanding the possible derivative payoff range to call and put options, and [therefore nearly any derivative payoff one could imagine](http://pricing.online.fr/docs/TradingVolatilityStrat.pdf). Structured product and liquidity strategy protocols, like [Ribbon](https://www.ribbon.finance/) and [Charm](https://charm.fi/), can use a basket of LPTs to make novel products for **any** token on **any** EVM chain. [Binary options](https://en.wikipedia.org/wiki/Binary_option) can be created by selling the rights to one side of the LPT, as researched in [Replicating Monotonic Payoffs](https://arxiv.org/abs/2111.13740). A basket of these binary options can be used to replicate an unlimited number of instruments!

## Spot Exchange

All of the liquidity which backs these LPT derivatives **is productively used as a spot exchange** for tokens, just like any other AMM. Better yet, **concentrated liquidity curves** make these swap rates competitive within the DEX ecosystem, which captures more trading flow and generates fees for liquidity providers.

Liquidity providers are exposed to the price risk of the underlying assets and are _not neutral_. While the swap fees compensate for the risk, being an LP on Primitive is almost the same as market making covered call options. With this complexity, positions will be optimally managed in a more active way and ideally delegated from most users to vault products like [Yearn](https://yearn.finance/) and [Charm](https://charm.fi/).

## Tokenization

Liquidity within the RMM is not tokenized itself, enabling higher level smart contracts to make the decision on their own. This allows any token standard to be used: ERC-20, ERC-721, ERC-1155, etc.

Primitive's Manager contract uses the ERC-1155 standard to tokenize liquidity. This comes with several important features:

- All metadata of the liquidity pool token is aggregated into a single location, the token URI
- Each token id matches the pool id
- Multiple LPTs can be batch transferred, enabling more efficient structured products
- Reduces on-chain state bloat by using one smart contract for all pool tokens, rather than one per pool
- On-chain image constructed from the metadata, for easy viewing in any wallet!

## Cheap Liquidity Management

The core smart contracts can hold internal balances, allowing liquidity to be moved in and out of pools **without paying the gas cost of transferring tokens**. These token transfer costs are usually 1/3 of the total gas cost for providing liquidity to AMMs. Now liquidity can be moved in and out of pools (for the same pair) with much lower friction.

## TWAP Oracles - Spot and Implied Volatility

The state of reserves for these pools are valuable on-chain resources which can be weaponized into TWAP oracles. This is done by utilizing the _cumulative reserves_ of a pool and viewing it over a select time range.

While this oracle would be for spot prices, a TWAP oracle for volatility can also be created using the _cumulative liquidity_ of a pool. Mapping the most liquid pools to their respective volatility curves gives incredible insight into the implied volatility of the token pair.

Although ideally, oracles wouldn't be needed in an RMM world.

## Audits and Bug Bounty

Several professional smart contract security firms were engaged to review the core and peripheral contracts of the Protocol:

- [ChainSecurity](https://twitter.com/chain_security) audit over 8 audit weeks
- [ABDK](https://twitter.com/Khovr) audit over 4 audit weeks
- [Dedaub](https://twitter.com/dedaub) audit over 4 audit weeks
- [Sherlock](https://twitter.com/sherlockdefi) continuous review since August

While we believe such a range of serious audits is the absolute minimum safety measure in the DeFi, the complexity of the protocol and the ecosystem means that a completely bug free codebase can't ever be guaranteed.

As such, an open bug bounty of $250,000 is offered through [Immunefi](https://immunefi.com/bounty/primitive/) to anyone who finds a critical bug within the smart contracts.

## Launch Details

The Primitive Protocol will be deployed to testnet during the week of **December 7, 2021**, allowing anyone to use the protocol in advance of the launch.

- View the [Primitive RMM Core](https://github.com/primitivefinance/rmm-core) repository for the source code of the AMM.
- The [Primitive Manager](https://github.com/primitivefinance/rmm-manager) repository has the smart contracts which users will be interacting with.
- Visit the [Primitive Examples](https://github.com/primitivefinance/rmm-examples) repository to check out some of the early ideas for products on top of the protocol.
- Use the [RMM Simulator](https://github.com/primitivefinance/rmms-py) developed by Experience to model LPT payoffs.

For launch to go smoothly, we will focus during the remainder of December on these priorities:

- Testing and review of the protocol's smart contracts
- Supporting integrations with other products and protocols
- Interface design and functionality finalized
- An analytics site to explore the Primitive pool ecosystem
- Further documentation, tools, and examples to support the ecosystems growth

## Community

Go tell your friends about the **oracle-free** derivative protocol launching this month with concentrated and fungible liquidity.

To meet the rest of us, join the [Primitive discord](https://discord.gg/rzRwJ4K).

## Published on Mirror

Read this post on mirror: [mirror.primitive.eth](https://mirror.xyz/mirror.primitive.eth).

## Published on Primitive

Read this on the Primitive blog: [blog](https://primitive.finance/blog).

## Learn More

Visit the website: [primitive.finance](https://primitive.finance).
Visit the docs: [primitive documentation](https://docs.primitive.finance).
Follow Primitive on twitter: [primitivefi](https://twitter.com/primitivefi).


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