Building trustless derivatives with dBonds
One more interesting application of dBonds protocol is an opportunity to construct fully trustless instruments which behave exactly like call and put options, and can be used for hedging, leveraged trading and constructing short positions.
Assume that you have 1 EOS and today’s EOS price is $5. You may use dBonds protocol to hedge your EOS downside risk while still having upside of EOS price growth. This trade will be the same as you would buy a call option on EOS. Below, we will explain how.
You may issue a dbond to borrow in USD nominated stablecoin (say, DUSD) and put your EOS as collateral to this dbond.
WIth this dbond you promise to pay 5 DUSD (e.g., in one month) and lock your 1 EOS as a collateral.
Someone on the other side may be willing to buy such dbond for, say, 4 DUSD. Effectively, he provides you a protection from EOS price drop and requires premium of 1 DUSD for it.
Pay-off upon expiration of this dbond (call option) is the following:
a) If EOS price will stay above $5. You will pay your dBond back for 5 DUSD and your result will be:
EOS price increase — 1 DUSD (option premium you paid)
Your counterparty result is:
5 DUSD (you paid) — 4 DUSD (he paid) = 1 DUSD (option premium he received)
b) EOS price goes below $5. You will not pay off your dBond back as its collateral value isn’t worth 5 DUSD. You result is: 4 DUSD (you received) — 5 DUSD (initial EOS price) = 1 DUSD.
You hedged your risk and cannot lose more, regardless how far EOS price goes down
Your counterparty will receive collateral (1 EOS) and his pay-off is:
New EOS price — 4 DUSD (he paid for your dbond)
Risk reward profile of this dbond is exactly the same as of a call option with a strike price of 5 USD for EOS. Dbond issuer is effectively an option buyer (who pays premium and hedges his downside risk), dbond buyer effectively is an option seller who gets fixed premium but takes the risk that EOS goes below 5 USD.
Using the same approach, the parties may construct instruments with different risk profiles (putting more or less collateral), borrow and provide collateral in different tokens (EOS, stablecoins and others). This enables to borrow different assets at market rates, being long or short, depending on what is loan base currency and what is collateral.
