Defying the Biggest Market in Traditional Finance

Also, Ethereum tokens are having their best moment yet, the new SF-poop-linked ERC20, Ethereum names going for over $100k

Hello defiers! There’s lots going on in decentralized finance:

Opyn created an options market protocol for DeFi
The renaissance of Ethereum tokens
There’s a token linked to SF poop
People are squatting on Ethereum names
Synthetix is now the second-biggest DeFi platform

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Defying the Biggest Market in Traditional Finance

An options market has yet to develop in decentralized finance, even though they’d provide much needed investor protection against the high risk involved in transacting in this cutting edge market. This is what the team at Opyn wants to fix, but it’s doing it in a DeFi way, with options contracts minted as ERC20 tokens.

This would be a big deal for DeFi because it gives investors a tool to protect against market volatility and black swan events, such as Dai or Compound Finance tokens losing their value because of a hack, smart contract bug, liquidity crisis, or whatever number of things can go wrong in blockchain-based financial markets (a lot). Options are a key piece in traditional finance, and it’s no wonder they make up the most liquid market. This could make DeFi more palatable for funds who have so far stayed on the sidelines –after all, how can a hedge fund participate in a market of assets they can’t really hedge.

Besides serving as insurance for traders, options are a way to gauge what prices or how much volatility investors are expecting in an asset. For example, the VIX index, or so-called “fear gauge” for U.S. stocks, is based on options on the S&P 500.

So, the basics. An option gives its buyer the right, but not he obligation, to buy or sell a specific asset from the seller at a specific price at or before the option expiry. For example, in an option designed to protect against Dai losing its peg by the end of the year, the buyer would have the option to sell 1 DAI for 1 USDC before 11:59 PM on Dec 31, 2019. The seller of the option is willing to take on the obligation to purchase that 1 DAI in exchange for 1 USDC, and the buyer pays the seller a premium for this option, say 0.1 USDC.

Image source: Convexity protocol paper.

Opyn is creating Convexity, a protocol for issuing options contracts represented as Ethereum-based ERC20 tokens. Here’s a link to the paper. The way it works is, sellers deposit collateral in smart contracts called vaults, allowing them to mint and sell fungible ERC20 options called oTokens and collect premiums. Buyers can purchase these tokens on exchanges and exercise them if profitable. Many different sellers can mint the same series of oTokens as long as they have the same parameters, which should insure greater liquidity.

If a buyer exercises their oToken option, the seller will have to give up some of the collateral in their vault in exchange for the asset being protected, USDC and DAI, respectively, in the previous example.

They’re not the first to try DeFi insurance. Nexus Mutual also protects against smart contracts hacks, but it “acts as a single underwriter of risk, leading to a severe limit on the amount of insurance offered,” Opyn says in its paper. “Further, Nexus requires human involvement for claim and fraud assessment, which can be extremely difficult to execute in subjective cases such as distinguishing between code bugs and hacks.”

The emergence of an options market would be a sign the space continued to mature. The framework is there, now we just need traders and developers to build and use it, which, if DeFi’s short history is a good indication, won’t be a problem.

Tokens are Cool Again

After the ICOs explosion of 2017/2018 crypto boom and bust, Ethereum tokens were considered pretty much useless at best, or a way to scam investors out of their money at worst. Any project with a token was looked upon with suspicion. It might be time to start shaking those prejudices away.

Ethereum tokens are having a renaissance. Actually, more than that, there’s been no better time for Ethereum tokens, according to on-chain data found by CoinMetrics.

The ratio between ETH’s market capitalization versus ERC20s’ market cap, or the Network Value to Token Value, has been steadily declining. The NVTV ratio hit an all-time low of 1.57, and was at 1.9 on of Nov. 10. Eth to ERC20 tokens NVTV based on realized capitalization, which values assets at the price they last moved rather than at current prices, is at an all-time low.

If Etheruem tokens are gaining in value faster than ether itself, it signals Ethereum-based platforms and applications are finding users. This is especially significant in a relatively calm year for crypto, when there’s no flood of traders looking to buy altcoins to speculate.

Image source: CoinMetrics

Also, token transactions surpassed non-token transactions for the first time this month, meaning there’s more activity in Ethereum-based tokens than in ether itself. Ether is becoming the reserve currency in this decentralized ecosystem, for example left in smart contract “vaults” as collateral or used to fuel network transactions, while Ethereum-based applications grow. It’s still worth noting that this is of course an aggregate of all token transactions, and no single token has surpassed ETH itself.

Image source: CoinMetrics

When classifying ERC20s in utility tokens, exchange tokens and stablecoins, most of the past year’s growth has been coming from stablecoins, and more specifically Tether. As CoinMetrics has covered in previous reports, Tether usage has been shifting from the Bitcoin-based Omni protocol version to the Ethereum-based version. Still, utility tokens are the biggest category in terms of market cap and their activity has also picked up in the past couple of months.

We saw it with DAOs shedding their bad reputation and re-emerging this year, and we’re seeing it with tokens. In both cases, traumatic events of the past (The DAO hack and ICO scammers) are helping create a more sustainable way forward.

How to Profit From San Francisco’s Poop Problem

There’s been a rebirth of the token but that doesn’t mean there are no shitcoins –literally.

There’s now an ERC20 token on the Rinkeby testnet that tracks the frequency of poop sightings as reported by San Francisco's SF311. UMA cofounder Hart Lambur took developers Daniel Que and Tyson Battistella’s idea and issued the token using the platform’s synthetic token builder.

The holders of the token "profit" the more shit reported; the "issuer" wins if shit goes down.

Image source: Hart Lambur’s Twitter

While made as a joke it still goes to sow that DeFi opens up financial markets well beyond most people’s imagination. If you can think of a financial instrument, there will probably be a way to build it.

And more seriously, this shitcoin could potentially “align the incentives of local government: the city of SF could issue ‘shit coins’ to credibly commit to fixing the homelessness problem (and earn a profit if they succeed); residents of the city of SF could buy shit coins as an ‘emotional hedge’—they make money if the problem gets worse.”

People are Squatting on Ethereum Names

Ethereum Name Service, which links unintelligible Ethereum addresses with human-readable names, recently had an auction for popular names ending in .ETH and it’s become clear much like the early days of the internet where speculators looked to profit with .com domains, the same is happening with ENS.

The auction, which was done using non-fungible tokens on the OpenSea exchange, had 50,355 bids made for 7670 names, with the total worth of the winning bids at almost 5,700 ETH, or more than $1 million.

Amazon.eth went for 100 ether, or $186,000, the highest price. The second-highest was wallet.eth and next was google.eth. Read about all the stats in ENS’s report.

This is a sign some people are bullish enough on Ethereum they believe Amazon and Apple will one day want to buy those addresses. Others just wanted to buy the addresses for their own use, with first-names-dot-eth going for lots of ETH too.

Synthetix is Now The Second Biggest DeFi Project

Total valued locked in synthetic assets platform Synthetix on Tuesday crossed $100 million, surpassing Compound Finance as the second DeFi platform with most value locked after MakerDAO, according to DeFi Pulse.

Synthetix’s growth has been explosive, with assets locked in the platform surging 60x from $1.7 million since February. Users lock SNX as collateral to mint synthetic assets, which include tokens linked to stocks, commodities, fiat currencies and other cryptocurrencies, and trade them on the platform.