HedgeBase Options —
Written to be simple.
I would like to tell you about what we’re doing with HedgeBase.
The problem we’re fixing
The futures market is fragmented, highly monopolized and infested with unhealthy competition between exchanges and proprietary technologies/data. The learning curve for trading derivatives is steep, and differs between platforms and even assets. The result is that a few people know how to do it, and the majority relies on professional brokers/exchanges who come with high fees. The real majority is those who do not trade at all. We want to fix this problem and we find the blockchain a great vehicle to implement our vision.
In a nutshell
HedgeBase creates a new tradable asset class to abstract and unify all derivative markets, under one open standard. Our technology decouples assets from derivatives and hence uses “cash settlement” (as opposed to “physical settlement”). We call the new asset class a smart derivative. It can represent anything that has a price. That could be corn, orange juice, a stock or even a cryptocurrency. They’re all treated and executed the same way.
What this means for the average person is that now a farmer, a home owner or a film producer can take hedge positions to protect their asset value from the next storm, housing bubble or less than perfect box office numbers.
Traders are also a clear client of the protocol and can monetize their long or short positions with the help of predictive analytics (Elliott, Fibonacci, etc.).
The Technology
We worked hard to draw where the blockchain should be used, and where it’s better off to keep things off-chain. The result was an off-chain/on-chain protocol, motivated by Lightning and 0x Project.
— Off-chain —
The protocol simulates Ethereum’s ECDSA off-chain to facilitate contract agreement between makers and takers — or buyers and sellers — with blockchain-grade security. The protocol does not match buyers and sellers itself nor does it keep track of contracts.
When a buyer and a seller come to agreement on contract terms, they sign the contract with their respective private keys completely offline without the need for any type of connection but to wallet. The contract can be a long or a short on anything, like a stock, commodity or anything with a price. At this moment we have an off-chain contract signed with two private keys. It is worth saying that contract agreement is network-agnostic and may occur via email, twitter, text, pen and paper, an exchange, etc.
— On-chain —
The multi-sig contract is sent to HedgeBase Proxy smart contract. The Proxy is the brain of the protocol. It will issue a new smart derivative (smart contract), pulls funds from maker/taker wallets (using ERC20 allowance) and deposits them into the now collateralized smart derivative. The end user never has to give possession of their tokens until the contract is actually published. The user does not actively transfer funds.
The protocol uses the American derivative model (as opposed to European or Asian). This means the contract remains open for execution at any time prior to its expiration date. Prices are retrieved from the blockchain where we introduce a role for price providers to publish their prices and collect fees from transactions needing them. The market decides which price providers to use based on trust and track record accuracy.
Conclusion
We believe that healthy competition is a catalyst for prosperous financial markets. HedgeBase open standard allows exchanges and newcomers to pool together and generate compounded liquidity. More competition generates higher trading volume for everyone. A contract created on Exchange A may be consumed on Exchange B and executed on Exchange C. The derivatives market is perhaps the largest of markets today. Our vision is to simplify derivatives and bring them to the average person.
Finally, please feel free to reach out to us at contact@hedgebase.io
— Rawad Rifai — HedgeBase
