Why use options over a margin account?
Investors “buying on margin” (ie borrowing money from a broker to buy an asset) run the risk of significant losses in the event of rapid price drops, or flash crashes, where brokers automatically sell their assets to prevent brokerage losses. On cryptocurrency exchanges, trading on margin can also be extremely risky due to the ability of a large market player to decimate your position with a large buy or sell order, clearing the order book.
An alternative trading methodology is to use call and put options for leverage, thereby protecting your investment from “margin calls” and reducing risk.
Dex Brokerage provides the means for people to create, buy, sell, and execute decentralized call and put options contracts. To start, these options will be for Ethereum and ERC20 tokens.
In a call option, the investor takes up the right to buy a bond, stock, commodity or other instrument at a specific price (the “strike price”) within a specific time period. The investor is speculating that the price of the instrument will increase before the set date, and that he/she will therefore benefit from the difference between the strike price and the actual price on the day that the option is exercised. The investor can take delivery of the stock or sell the options contract at any time before the expiry date.
A put option is the opposite of a call option. In this case the investor has the right to sell a specified amount of an asset, at a specific price before a specific date. The investor is speculating that the price of the instrument will decrease during this period, and he/she will benefit from the difference between the higher strike price and the lower market price on the day that the option is exercised.
How will decentralized call and put options work on the Dex Brokerage exchange?
This is the format of a call option on the Dex Brokerage exchange:
BASEPAIR — Expiration Date (yy-mm-dd) — Call/Put — Strike Price (eight digits)
So, an ETH call contract with a strike of 1000 USD with an expiration date of March 16, 2018 would look like this:
ETHUSD — 180316 — C — 00001000
The following is a high-level overview of the process:
Why is this process a breakthrough for investors?
Throughout the process illustrated in the diagrams, Bob and Alice remain in control. The terms that Bob has set out are recorded in the smart contract, and registered on the blockchain, and no middleman can intervene to change them in any way. Bob interacts directly with the smart contract, and through this directly with Alice. If Alice decides to execute the option, the terms as set out in the smart contract are automatically executed. Whatever costs have been agreed with the exchange will also be automatically paid. If Bob decides to change his mind, his investment will be returned. The only wait will be for the transactions to be finalized on the blockchain.
The way forward for Dex Brokerage
Join the conversation on Discord, Reddit, or follow us on Twitter and Medium, to stay updated on the latest with Dex Brokerage. More technical posts, and how-to posts are coming. We expect to have our site live on the main net by the second week of October, 2018. Options will be live during the 3rd week of October.