Mirror Protocol has brought an innovative and decentralized way for users to mint and trade synthetic assets such as mAAPL on the Terra blockchain. While the benefits of gaining exposure to assets tracking traditional stocks and ETFs are massive for the individual retail user, a common theme the Sigma team noticed was a lack of opportunities for the knowledgeable user to either leverage or hedge away their risks on-chain due to the lack of financial tooling available in traditional markets. Through the Sigma Protocol, users will be able to mint and trade options in a transparent manner, with the help of the decentralized order book technology provided by Stardust.
Within Terra’s growing ecosystem, options should be a shining-star in the suite of financial products for several reasons:
- Leverage: #Lunatics will be able to enter leveraged positions on their favorite Terra assets for high returns (and high risks!)
- Hedging: Over the last few months, LUNA price has greatly fluctuated from under $10 to over $40. Dramatic fluctuations of cryptoassets (= high implied volatility) makes Sigma not only the perfect tool for directional leveraged trading, but more risk-averse users are also able to effectively protect their portfolios from large price exposure risks.
- New Products: The Sigma Protocol will allow for more than just exotic options — in the future, users will be able to immediately write and trade options on any of their favorite CW20 assets, such as MIR, ANC, MINE, VKR, and so on. Additionally, Sigma will allow for users to trade contracts that are non-equity based. A notable example is an option with the underlier being an LP token. This will have the enormous advantage of allowing users to hedge away their IL risks for any liquidity pool position at a pre-determined cost. A key characteristic of DeFi products are the high levels of composability across protocols. All options positions will be able to be integrated into your favorite protocols. Options can be written on (or included into) simple mAssets or complicated clusters from Nebula, pTOKENS & yTOKENS from Prism, and much more. Strategies on portfolio management protocols such as Spar, Apollo, and Nexus will diversify exponentially.
Additionally, Sigma provides transparency into the structure of the market and order flow that is difficult for the retail trader to access.
- Market Depth: Market depth provided by typical brokers to retail users generally shows only the best 5–10 bid/offer prices. Taking AMZN stock as an example, we can actually see that in the background, millions of quotes are made. Level III Quote data allows for a fuller picture but is generally only accessible to brokers and market makers. Sigma, combined with Stardust infrastructure, will allow users to analyze all quotes made on chain.
- Unclear Incentives: Under the rebate pricing system, market makers are given rebates, which can distort pricing, diminish liquidity, and cost long-term investors. Additionally, brokers have been under scrutiny for behind-the-scenes deals with third parties for routing trades (called payment for order flow). These types of activities blur the lines between the broker-customer relationship and the broker’s own financial incentive. In 2020, Robinhood Financial was charged $65 million dollars in fines for “failing to satisfy its duty to seek the best reasonably available terms to execute customer orders” arising from price distortion, where users were not given the best execution prices available. By design, Sigma Protocol’s transparent and decentralized structure will allow any investor to have full market information prior to making a trade.
Sigma is scheduled to launch after Columbus-5, so please be on the lookout for updates on how you will be able to join in the launch in November!