Why variance, not options

Variance is the one volatility payoff that a smart contract can settle without an oracle of opinion. It is a sum of squared log returns over a fixed grid of timestamps, so given a price feed with history, the payoff is arithmetic — there is nothing left to model, quote or dispute.

One number, from immutable history

rᵢ = ln(Pᵢ / Pᵢ₋₁)                    Pᵢ = the Chainlink answer at tᵢ = start + i·Δ
RV = Σ rᵢ² · 31,536,000 / (expiry − start)

Every input is a Chainlink round that already exists on chain. Settlement reads that history; it does not ask anyone what the price should have been. Two people running the same window get the same number, forever.

An option, by contrast, needs a strike, a model, a spot at expiry and a volatility surface to price before expiry. Each of those is a place where someone's judgment enters, and every one of them is a place where a protocol has to trust something.

Capped, because a vault has to be able to back it

Uncapped variance has unbounded downside for the writer: no amount of collateral is enough. Tremor pays

payoutPerUnit = floor(unitNotional · min(RV, capVariance) / 1e18)

so one unit's worst case is a known constant fixed at creation. That single property is what makes full collateralization possible: the vault reserves ceil(units · unitNotional · cap / 1e36) the moment a unit sells, and that reservation is the whole liability. A buyer is not holding an unsecured claim on a writer's good behaviour — they are holding a claim on money that cannot leave.

The cost of the cap is honest and visible: above the cap the receipt stops tracking variance. Every screen states the cap in volatility terms, and the payoff chart flattens where it flattens.

Why it fits Aqua

Aqua's makers are strategies, not order books. A capped variance receipt suits that model well:

• The payoff needs no counterparty discovery — the writer's vault is the maker on all three legs.
• The worst case is bounded, so the maker's obligation can be shipped as a real, reserved USDC balance instead of an allowance somebody might revoke.
• Pricing is a pure function of time, inventory and what the feed has printed, which is exactly what a SwapVM program can express through an Extruction.

Why an LP should care

Loss-versus-rebalancing for a constant-product LP over a horizon T is approximately V · σ² · T / 8 — a bill denominated in variance. Options hedge that badly (wrong shape, path-dependent) whereas a variance receipt pays the same quantity that causes the loss. Tremor's /hedge page sizes the units against that formula and then shows the executable cost of buying them.

It is not a perfect hedge, and we do not call it one: the cap truncates the tail, the premium is a real cost, expiries are discrete, and the LP's pool prices are not the Chainlink feed.