FinNexus Weekly-chat recap 08/06/2020 & 15/06/2020
Participants:
Boris Yang — FinNexus Founder & CEO
Ryan Tian — FinNexus Financial Specialist
Discussion:
Sarah Huang: As we know that the current decentralized options products in DeFi are well known for Opyn and Hegic. Could you give our community an idea of how our product will be different from theirs?
Ryan Tian: Well. Last week I introduced the basic concepts and terms on the options. I hope you all get some ideas of what options means.
In traditional finance, options are quite big and liquid. It is a type of financial derivatives. And it is said that the holy grail in the traditional financial market is derivatives.
The traditional derivatives markets are estimated to involve notional amounts over $1 quadrillion.
Historically, this enormous market has played an indispensable role in growing global financial markets, providing massive enrichment to financial instruments and trading strategies deployed using them.
Anas: Wow! It is huge!
Ryan Tian: It is far more bigger and flexible than we can imagine.
Back to the crypto derivatives, Centralized exchanges have already seen significant volume in their centralized derivatives products. Binance, BitMEX, Huobi, OKex and more all have retail-facing futures platforms, but no options yet.
FYI, futures contracts, forwards, options, and swaps are typical derivatives on the traditional financial market is Same as in crypto markets.
Anas: If we succeed on adopting 0.1% of that amount into #DeFi that would be enough to make a big difference.
Ryan Tian: Centralized Options products are available via Deribit, FTX and LedgerX.
John Eck: New partners? Listing? Product? What is the discussion about?
Ryan Tian: The next phase in DeFi development will be to develop decentralized protocols that mimic the functionality of these centralized Market Monsters.
If DeFi is still a child, decentralized derivatives are the new-borns, but growing fast.
Last year, we witnessed the rise of dydx and Synthetix. This year has already seen the launch of some very promising DeFi projects like Futureswap, and UMA. Options have always been among the platoon leaders in the derivative army.
While the centralized options platforms mentioned above are now trading, decentralized options platforms are the new recruits to the DeFi Movement. Here on the market we have OPYN and Hegic, with totally different but interesting models on options.
FinNexus would like to provide something advanced than them, firstly on Wanchain, and later on Ethereum in Q3.
Well I wonder if you guys know how the OPYN and Hegic is working right now?
They are both new born options platforms built on Ethereum!
Anas: Would love to hear from you!
Ryan Tian: OK. OPYN first.
OPYN is an options platform built on “Convexity Protocol”.
OPYN made the first trial on the market in margin trading services in 2019, but they relocate themselves as a protection and insurance platform from Feb 2020, by making protections on Compound finance deposits against both technical and financial risks. Later in March, OPYN launched its first protections on ETH, as the ETH put options tokens tradable through Uniswap. OPYN packages the options products as oTokens.
Options sellers create options by locking up collateral for some period of time and minting oTokens. The Options seller can sell these oTokens on an Uniswap to earn premiums, or just provide liquidity to earn transaction fees.
They are growing very quickly but until now, there have been only ETH put options alive on OPYN, and the calls are yet to be released.
Users have to collateralize 100% USDC, with the same amount as the ETH puts contract strike price, into the smart contract known as a vault, to mint one oToken. Different options, with various expirations or strike prices, are distinguished by different oTokens, and controlled by separate smart contracts.
Anas: That’s a very essential step toward the project success.
Ryan Tian: Well I just did some basic introductions here, to fully understand our options model, we have to dig into the models.
Uniswap is the major trading venue for oToken trading. The pooled liquidity model has a problem dealing with the liquidity of options.
We know that LP providers in Uniswap are suffered from impermeant loss if the price moves away from the one when the LP providers add both tokens into the pool
But the value of options is expected to depreciate at a rate known as theta as time goes on
The speed of decay goes even faster as the time moves closer to expiration. Therefore, LP providers may suffer great impermeant loss in providing oToken liquidity. Also when exercising the option, the OPYN smart contract requires the actual delivery of the underlying assets, which is often called Physical settlement.
But normally, an option buyer would like to hedge, insure or speculate on the movement of the underlier’s price, he/she wouldn’t care much about whether or not the counter party may deliver the full underlying asset when exercising. Therefore, cash settlement that covers the potential gains of the holders is likely to be adequate, and far more efficient.
Okay that’s enough for OPYN for now.
Let us take a look at Hegic.
Similar to OPYN, Hegic is an on-chain options trading protocol on Ethereum but the model is fundamentally different. A pooled liquidity model is the key to Hegic’s way of options creation and premium distribution.
A bit similar to MakerDAO or Compound.
I will not come to the details of the pooled models, but I will introduce the advantages of the pools.
Firstly, though the Hegic model is a bit more complicated, the UI is quite pleasant to operate. Users may buy options or contribute in the pool easily
Secondly, the options buyers are granted with more flexible choices according to their strategy. Hegic allows users to set any strike price and choose among several selectable durations.
Thirdly, Hegic’s options are only existing in the contract level; therefore, they are more tailored to the buyers’ needs and may not easily circulate on the secondary market after creation. But in Hegic Protocol v1.1, there will be a ‘resell’ function that allows users to sell the position into the pool
Lastly, Hegic’s pooled model provides a relatively easy way for the writers to participate, by tokenizing the interest of pools into WriteTokens (WriteDai or WriteETH).
Back to FinNexus:
Our initial options model will a bit more like OPYN’s tokenized one, rather than having a pooled model. (Well Hegic has experience some bad exploit last month) but with some distinguished features:
- Cash settlement rather than the requirement of physical delivery upon exercise.
- Automatic settlement triggered by oracles in SMC. FinNexus’ options will firstly be an European type and the exercise will be done automatically based on the underlier’s price.
- Based on Bitcoin. Right now, all the options are built on Ethereum with the same underlier — ETH. We would like to fully utilize the Wanchain’s cross chain tech and be the first one building decentralized WBTC call and put options. Also later, there will be ETH and other cryptos.
- multi-coin collateral. Right now, the collaterals on OPYN and Hegic are quite limited, to make sure that the writers will never go liquidized. But we have designed a different mechanism to allow the writers to use FNX, stable coins, Underlying assets, and even WAN as the collateral coin.
- Under-collateral. We call it under-collateralized, compared with the full collateral model that covers the physical delivery upon settlement. Actually, the FinNexus’ model is fully collateralized to cover the cash settlement. For example, for selling 1 ETH call option, one has to deposit 1 ETH and locks in the SMC. However, our model requires less to be collateralized, as long as it may cover the potential cash settlement; or there will be liquidation procedures.
- There will be an independent system to boost the liquidity of these options products. Okay, that’s it for now. We will fill you in with more details in the coming days and weeks.
Cryptodogg: Do you see integration with XRPL DEX?
Professor K: We will go where-ever there is liquidity.
Thank you everyone for being part of the Weekly-chat. We will see you again next week!
FinNexus Weekly-chat recap: 15/06/2020
Sarah Huang: First of all, please give me five minutes to briefly introduce to you the progress of our work in May.
As we said in our month report, May was the busiest month yet for the FNX team.
Our initial fundraising efforts concluded in May. Approximately 4,060,000 USDT was raised in this public portion of the process, calculated according to the relevant subscribing token price on Coinmarketcap.
Now that these important operations have concluded, we now turn our attention to technical development.
Our software engineers have been hard at work on a variety of initiatives.
While our main emphasis is on the development of a cross-chain decentralized options platform. We also have our tokenization platform, Wandora Box and a new Wanchain dapp that we’ve worked on this month as well.
As for the Decentralized options, which is the focus for FinNexus team now is expected to launch in Q3 this year, which sets the stage for the initiation of our decentralized model, as mentioned in our 2020 roadmap.
This model will incorporate staking the FNX token for profit. The development team has made enormous progress on this coding in May.
You can see the first version of the OptionsContract that has been published on the FinNexus Github.
Link: https://github.com/FinNexus/OptionsContract
As for the conversion of UM1S, the conversion process for turning FNX into UM1S via our decentralized smart contract has been working smoothly.
Anyone may check the real-time conversion through this Wanscan address.
https://www.wanscan.org/address/0x749a2594508a0e8090857393b87a1048c83ac758
If you click on the “Token Transactions” tab in the previous link, you will see FNX tokens coming in to the smart contract and UM1S going out. With each conversion to UM1S, more FNX is “burned” or, rather, another way to say it is that FNX goes into a black hole in the conversion smart contract.
Recently many community members have asked that Where does the money come from? What is backing the return on UM1S?
After fundraising in May, FinNexus immediately used 80% of those raised funds to create UM1S in order to gain exposure to real-world cash flows.
The underlying asset of UM1S is a package of Southeast Asian consumer loans that enjoys steady and frequent cash inflows and outflows.
More details on the process of UM1S tokenization and information on the real-world assets backing the returns can be found here.
Monthly Report: https://medium.com/finnexus/finnexus-monthly-progress-report-may-2020-89a279b7b7e1?source=friends_link&sk=969c87817cea42b250819f5362dd32fa
As for the development of Wandora Box, the game successfully integrated BTC/USD and ETH/USD price prediction markets. Those pairs are in addition to our WAN/BTC prediction market that has been operating once every 8 hours for a few months.
The cool aspect of these new markets is that BTC turns over every hour while ETH turns over every 4 hours. That’s a lot more chances to stack WAN!
And the last one I’d like to share is the most advanced progress, the FinNexus development team, in cooperation with Wanchain developers, began coding a no-loss lottery DApp similar to Pool Together.
It’s called Jack’s Pot
So let’s start todays’ weekly chat from this cool product.
Question 1:
Sarah Huang: Could you give us a brief introduction about Jack’s Pot? Why do you call it No-loss lottery game?
Ryan Tian: In May, the FinNexus development team, in cooperation with Wanchain developers, began coding a no-loss lottery DApp similar to ‘Pool Together’.
It’s called Jack’s Pot, after Wanchain founder Jack Lu
The interface works like this :
The idea is to turn the world’s most played gambling game (the lottery) into a savings game!
Unlike a typical lottery where you lose the funds spent on tickets, with Jack’s Pot, your initial funds are never at risk.
By generating the prize pot through delegation rewards from Wanchain’s consensus mechanism, Jack’s Pot allows for a no-loss lottery.
Professor K: It’s pretty much exactly like Pool Together except for 3 things:
- You use WAN instead of stablecoins
- Wanchain gas fees are significantly lower than Ethereum right now so it makes sense with much, much smaller amounts of coins.
- The payout is based on a lucky number you choose rather than being random.
Ryan Tian: While unlike Pool Together, Jack’s Pot gives users the chance to choose their own lucky number.
Jack’s Pot uses a liquidity pool which allows for instant withdrawal (ordinarily, unstaking WAN can take up to 3 days).
It will go alive later this month!
Anas Y: So the rewards and winning tickets are going to be payed from the staking rewards?
Ryan Tian: Yes, the mechanism like pool together; the staking rewards are distributed to the winner.
Professor K: All the WAN is put into a pool and then delegated to a validator. Then whichever lucky number wins gets all the staking rewards. Everyone gets AT LEAST their principal back! less the gas fees, I guess.
Ryan Tian: Well it is a mechanism much initiated by Wanchain but development upon FinNexus; to get more WAN locked up away from the market.Well Later, after FNX staking stabilizes, we might have FNX lottery pool :)
Sarah Huang: That’s the question I wanted to ask! LOL
So let’s wait for Jack’s Pot to come online.
OK, back to our flagship product, we’d like to know more about Decentralized options.
Ryan Tian: Today, I was discussing with Professor K about an interesting thing happening on OPYN.
It is a bit strange that ETH price+premiun < Strike Price.
Professor K: The folks who bought those puts were happy for a few minutes today, though!
Ryan Tian: For a put option like this, there seems to be a certain gain. I can just buy it and exercise the option instantly.
Professor K: Looks like they made enough to cover their gas fees!
Boris Yang: Ryan Tian, did you do it instantly?
Ryan Tian: The abnormality is still there.
Nope, I was talking with Professor K about why it is happening and how the options on OPYN are priced.
Sami Bouteraa: It looks so Risky!
Professor K: You can play on Wandora box first.
Ryan Tian: Why? they are all decentralized and partly due to the low liquidity in Uniswap on this very put options product and the pool is not deep enough!
Question 2:
Professor K: When the pool is not deep enough, you encounter loss via something called slippage. Can you explain that?
Ryan Tian: Yes, there seems to be some certain gain at this time for protecting 1 ETH. But if you increase the purchasing amount, the cost may rise significantly.
Plus, for physical delivery, you have to prepare this strike price amount to exercise such options.
But it might be worth trying with the AAVE’s flash loan functions for settlement.
Professor K: So it’s like a catch-22… Use too little ETH/USDC/DAI and profit is eaten up by high gas fees. Use too much ETH/USD/DAI and you get rekt by slippage. Gas fees are making EthFi profit a little tough these days.
Ryan Tian: Right, the profits seem unclear for some cases and the pricing is somehow twisted.
Boris Yang: Defi protocols depends on each other and they take more gas fee. Ethereum 2.0 is really needed for DeFi future.
Professor K: Or can do transaction settlement on a dedicated DeFi chain!
Ryan Tian: Seems, Wanchain’s gas fee is very cheap right now!
I’ll try with 1 ETH and see if it is working on OPYN after this chat :)
I see there is some problems with the pricing models built on Uniswap, especially with the unique features of options.
Boris Yang: I think because options price does not completely depend on liquidity.
Sarah Huang: Ok, it’s time for today’s weekly chat. Thanks for your time guys!
For better communicate with our community members, we will change the next weekly chat to Tuesday!
Boris Yang: If everything goes well, Jackspot will be realsed soon and Options beta will be released at the end of June or Early July!.
Thank you everyone for being part of the weekly-chat. See you all next week!
About FinNexus
FinNexus is building an open finance protocol to power hybrid marketplaces that trade both decentralized and traditional financial products. The FNX token will live on the Wanchain blockchain to take advantage of the most robust cross-chain capabilities currently available in the industry. The first products FinNexus plans on releasing will be innovative tokenized assets (available Q1 2020) with value based on real-world cash flows.
