Improving on-chain debt via emerging DeFi primitives — Options
Issue stablecoin loans collateralized by asset + corresponding put option.
How it works:
- Say the user wants to borrow $800 on $1000 ETH.
- Fetch available ETH puts with a strike price of $800 from the decentralized options market: Opyn / Hegic etc.
- User deposits 1ETH and pays an upfront fee (premium) to purchase the option.
- User borrows up to $800 of stablecoins (optionsCoin) from the protocol valid until the option expiry. A stability fee will be charged. All of the above happens in a single transaction.
- If at expiry ETH remains above $800, the user returns $800, takes their ETH back, the option expires out of money.
- If the ETH price drops below $800, the user is liquidated. The put option is exercised to sell the underlying ETH for $800.
- In practice, the protocol will issue < $800 to keep a buffer which is paid out to the liquidator.
- Opens up the market for broader collateral inclusion. With physically settled options, since the settlement is guaranteed on-chain, even relatively illiquid assets can be used as collateral.
- Capital efficiency — Borrow up to $999 on $1000 collateral as long you can afford the put option premium.
- Use case for existing and upcoming options protocol.
When does it work the best?
- Given ample yield farming opportunities, say the investor doesn’t want to lose the ETH (or any other whitelisted collateral) upside but wants to participate in yield farming. In this case, the investor can borrow a handsome sum on the assets.
- Bearish environment — Say we are in a corrective phase of the market. Investors may react to this in different ways. One of the ways is by buying puts. OptionsCoin gives the investor downside protection which might be subsidized or completely offset by gains from yield farms or a diversification strategy made possible with the loaned funds.
- Working with Opyn team to build Opeth (Opyn + Put + ETH) coin which is a tokenized eth + put. This tokenized instrument has a lower bound (strike price) on its redemption price. Pull request. This is exactly like WHETH built on Hegic.
- User research — Talking to several options power users to gather feedback on the utility. If you fit the user profile we’d happy to brainstorm with you. Please DM @sid_31 on telegram.
- App design for Opeth is underway.
- Build app and launch Opeth on testnet.
- Begin work on smart contracts for OptionsCoin — borrow stables collateralized by Opeth / Wheth.
- OptionsCoin testnet.
- Options liquidity aggregator — source put options from several options protocol to get the best price for the put option. In talks with PrimitiveFi.
- On-chain debt is heavily collateralized as compared to traditional markets. Reasons abound for secured loans ruling the roost for DeFi — Volatility, Trustlessness, Lack of Dependable reputation. These factors have led to a myriad ranges of Dai collateral-debt ratios.