VarianceSwap

How it works

Everybody who has provided liquidity to an automated market maker is short volatility. It is not a choice they made and in most cases not one they were told about: the position loses to whoever rebalances against it, in proportion to how much the price moves, which is the payoff of a short variance position with extra steps. The literature calls it loss-versus-rebalancing, and the practical consequence is that a provider's real risk has no name in the interface and no way to hedge.

The exposure exists. What is missing is the other side of it. This hook measures the pool's realised variance from its own ticks, and lets anybody take either end: deposit collateral to be short variance and collect premiums, or pay a premium to be long it and get paid if the pool turns out to be wilder than the strike said.

A provider who wants to stop being short volatility can buy exactly enough of the long side to cancel it, in the same contract, denominated in the same units, against the same pool. The variance is the pool's own. It is the sum of squared tick moves the pool actually made, divided by the seconds it took, and it is not quoted by anybody, not signed by anybody, and not available to be reported wrongly.

Ticks are log prices, which is exactly what a variance calculation wants, so the pool's own data structure happens to be the correct input with no conversion at all. Every note is fully collateralised when it is written. The most it can ever pay is locked at that moment and released when it settles, so the short side cannot be surprised and the long side cannot be defaulted on.

That is a real constraint on how much can be written and it is the right one: an uncollateralised variance seller is a counterparty risk wearing a payoff diagram.

Using it

Uniswap v4 removed hookData from initialize, so per-pool parameters arrive out of band. Fix them for a pool key whose pool does not exist yet, then initialize. Nobody can change them afterwards, including you.

poolManager.initialize(key, startingSqrtPriceX96);

Parameters

This hook takes no per-pool configuration.

From TypeScript

npm i @hookforge/sdk

import {getHook, hookAddress, poolKeyFor} from "@hookforge/sdk";

const hook = getHook("variance-swap");
const key  = poolKeyFor({
  hook: hookAddress("variance-swap", 8453),   // Base
  currencyA: USDC, currencyB: WETH,
  tickSpacing: 60,
});

What it reverts with

The callbacks it claims

Uniswap v4 reads a hook's permissions from the low fourteen bits of its own address, which is why deploying one means mining a CREATE2 salt. This hook claims 2, so every deployment of it has an address ending in 0x1080.

• beforeInitialize
• afterInitialize
• beforeAddLiquidity
• afterAddLiquidity
• beforeRemoveLiquidity
• afterRemoveLiquidity
• beforeSwap
• afterSwap
• beforeDonate
• afterDonate
• beforeSwapReturnsDelta
• afterSwapReturnsDelta
• afterAddLiquidityReturnsDelta
• afterRemoveLiquidityReturnsDelta

It says what it is, on-chain

Nothing about a hook's address tells an indexer, a wallet, a router or an agent what the pool does, which is why hook discovery today is a curated list. This hook answers for itself, in one eth_call, with no registry in the loop.

cast call $HOOK "hookName()(string)"    # VarianceSwap
cast call $HOOK "specURI()(string)"     # https://variance-swap.pages.dev/hook.json
cast call $HOOK "hookTags()(string[])"  # derivatives, volatility, variance-swap, oracle-free, no-admin

Build, test and deploy

git clone --recurse-submodules https://github.com/nirholas/variance-swap
cd variance-swap
forge build && forge test

# Dry run: mines the salt, prints the address, sends nothing.
forge script script/Deploy.s.sol --rpc-url $RPC_URL

# For real.
forge script script/Deploy.s.sol --rpc-url $RPC_URL --broadcast --verify

Try it

This is the hook running, not a picture of it. Connect a wallet on a chain it is deployed to, or bring the whole stack up locally in one command and use it with no funds and no wallet risk at all.

git clone --recurse-submodules https://github.com/nirholas/variance-swap
cd variance-swap

anvil &
forge script script/DeployLocal.s.sol --rpc-url http://127.0.0.1:8545 --broadcast \
  --private-key 0xac0974bec39a17e36ba4a6b4d238ff944bacb478cbed5efcae784d7bf4f2ff80

node web/build.mjs && npx serve web/dist