Defying the Biggest Market in Traditional Finance With Tokenized Options
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 makeDeFi 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.
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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.
The rest of this piece is for paid subscribers only.
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.
Image source: DeFi Pulse
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About the author: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.