skew. & Crypto Garage trade first peer-to-peer Bitcoin-settled S&P500 derivatives
- Crypto startups skew. and Crypto Garage entered into an S&P 500 derivative contract on September 6, settled in bitcoin on the Bitcoin blockchain.
- The Sep19 2975/3025 call spread expired and settled on September 20th using an oracle price feed provided by ICE Data Services’ Consolidated Feed.
- The groundbreaking experiment underlines the potential of blockchain technology to radically improve the functioning of financial markets — in terms of security, efficiency & costs.
- Options on S&P500 alone traded on average $400bln notional daily in 2018.
One of the most beneficial ways blockchain technology could be used in traditional markets is by speeding up trade settlements — typically taking two days to complete through a cumbersome and expensive process. The efficiency gains could yield potentially tremendous savings — options on S&P500 alone traded on average $400bln+ notional daily in 2018.
skew. CEO Emmanuel Goh’s comments:
“With its hashrate making regularly new all time highs this year, the Bitcoin blockchain is arguably the most secure distributed ledger globally — it is the ideal candidate for becoming the settlement ledger of global financial transactions”
In comparison to the Ethereum blockchain, historically it has been technically extremely challenging to develop smart contract technology on the Bitcoin blockchain. Japan based Crypto Garage has been pioneering the space — developing the open sourced P2P derivatives protocol and earlier this year trading with crypto startup Blockstream a peer-to-peer BTCUSD forward settled in BTC.
Crypto Garage’s Chief Cryptofinance Officer Justin Dhingra comments:
“The experiment transaction with skew. was a great occasion to demonstrate to bitcoin investors that in a not so distant future they can seek returns from traditional finance assets on their holdings and not be limited to only exposure to native crypto assets”
The S&P 500 derivative settled in BTC was implemented as a quanto option — a type of derivative in which the underlying — S&P 500 — is denominated in one currency — USD -, but the derivative itself is settled in another currency — BTC — at a fixed rate called quanto conversion rate.
On September 6, 2019, skew. bought from Crypto Garage ten S&P500 2975 / 3025 call spreads paying 0.0202 BTC — with corresponding S&P500 futures level @ $2,978.5 and Bitcoin price level @ $10,747. The contract expired on the third Friday of the month at 9.30 EST — at a similar time to the standard listed options market.
On trade date, the trust-minimized derivative contract allowed bitcoin collateral to be posted by both parties. skew. paid its option premium of 0.0202 BTC via the Bitcoin smart contract and Crypto Garage posted 0.04667 BTC in collateral, which was locked in a multisignature smart contract until maturity date.
Payout at maturity was distributed using Bitcoin digital signatures from the participants and a trusted S&P500 price feed oracle provided by ICE Data Services, which is part of Intercontinental Exchange (NYSE: ICE). With S&P500 expiring at $3014, the call spread structure expired “In-The-Money” leading to the following settlement — 0.036 BTC to skew. and 0.01 BTC to Crypto Garage.
The trade settlement took 45 minutes to process with total transaction costs equal to a few US dollars. In theory, this cost would have remained the same even if the notional traded had been in the millions or billions of dollars.
About skew. & Crypto Garage
skew. is headquartered in London and was founded in 2018 by two former derivatives traders from Citigroup and J.P Morgan. The company is backed by leading venture funds — including Firstminute Capital, Seedcamp, Kima Ventures and Kleiner Perkins — and launched this month its analytics product for crypto derivatives markets skewAnalytics.
Crypto Garage, Inc., a subsidiary of Digital Garage, Inc., is headquartered in Tokyo and is a Fintech company developing and structuring financial services based on Bitcoin and blockchain technology.
Disclaimer: skew. and Crypto Garage are neither a regulated or a licensed financial company. This transaction is strictly a proof-of-concept transaction and does not and is not intended to constitute investment advice or an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
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