gm,
Molly Wintermute here, the founder and solo core developer of Hegic.
The last three months have been a bright time for Hegic thanks to new V8888 version that I’ve released on August 10, 2021. If you want to learn more about Hegic V8888, the latest version of protocol which is live now, click here to download the Hegic V8888 announcement deck or go to https://www.hegic.co/ and click Learn more.
For those of you who are new to the protocol: Hegic is an on-chain peer-to-pool options trading protocol built on Ethereum. With Hegic you can trade 24/7 American, cash-settled, on-chain ETH and WBTC call / put options with no KYC or registration required for trading. Hegic was founded in February, 2020 with the latest version released 3 months ago.
This quarterly report is presented to highlight the progress made by the protocol, to explain a number of unfolding bets behind the current V8888 version from a protocol founder’s / solo core developer’s perspective and to share a sneak peak of coming months.
The report is divided into three parts.
The first part is focused on the Hegic protocol’s traction. Because I personally believe that for an options trading protocol perfection lies in traction (wow very truth! such wise!). You will be one of the first to discover the key V8888 protocol metrics for the first quarter being live in mainnet.
The second part of this report offers a review of the essential technological and product-related parts that I’ve released with V8888 and my own reflections on their influence on protocol’s traction.
The third part is focused on four challenges that Hegic’s token-economics part is currently facing (in my own opinion) and the measures that I’m going to take to resolve them (very road! such map!).
Enjoy!
Key Protocol Metrics
The first quarter of Hegic V8888 being live has delighted me with its healthy and steady growth as well as with astonishing demand for on-chain options offered by the protocol.
285 unique addresses interacted with the protocol as options buyers in the last three month. These early V8888 users generated $94,400,000 in total options trading volume with 1,003 options acquired by them.
The beauty of an on-chain options protocol is that every single trade is transparent and verifiable. You can find all options acquired on Hegic V8888 right here with each ERC721 token representing one option contract.
With regards to key financial metrics, the total value locked (TVL) metric was in a range of $15,000,000–$20,500,000. These funds are utilized to collateralize options that are acquired through the protocol.
The total revenues of Hegic V8888 for the first quarter are $6,088,000 of which $4,641,000 — premiums received by liquidity providers who are selling options, and $1,447,000 — settlement fees (a share of the premium) earned by $HEGIC staking participants.
The average net revenues per user are currently sitting at $5,077 which means that one active option trader’s activity leads to five grands earned by $HEGIC staking participants on average.
As a protocol founder, I can’t be happier than I am now, with all the beauty that I personally see in organic traction behind the protocol, hundreds of active options traders, tens of millions of dollars in options trading volume and growing cash flows of Hegic.
I’m feeling grateful to all the early adopters of Hegic V8888.
Thank you frens!
Five Pillars of Hegic V8888
In this section, I will focus on five fundamental ideas behind Hegic V8888 which are essential to understanding the current state of the protocol:
● At-the-money ETH and WBTC Calls / Puts
● Zero Fees Options Trading on Ethereum Layer 1
● Gas Fee-free Options Trading
● Hedged Tranches and Auto-Hedging
● Hegic Long-Term Pools (HLTPs)
If you are familiar with all of the above and if you understand the reasoning behind all these ideas and how they are implemented in Hegic V8888, feel free to skip this section. If you want to master the value basics of V8888 from an options trader / liquidity provider perspective, keep reading.
Let’s start with ETH and WBTC options.
At-the-money ETH and WBTC Calls / Puts
The Hegic protocol is live for over twenty months. And still, there are only ATM (at-the-money) ETH and WBTC call / put options available for trading. Wen DeFi “blue sheeps” options? Wen Hegic deployment on layer one “X”? Wen this? Wen that?
Will all due respect to Hegic OGs and long-term oriented community members, I’m still focused on the BTC and ETH options market in 2021. In my humble opinion, it is a worthwhile goal to serve existing options market participants first rather than innovating for innovation’s sake.
Let’s try to assess the opportunity that lies in focusing solely on the existing BTC and ETH options market. When I say focusing I mean a few years of work dedicated to serving options traders who might find such opportunities as anonymous, KYC-less, transparent, 0% fees options trading on Hegic more attractive than continuing to use centralized behemoths.
The size of the options market (BTC and ETH) as for November, 2021:
As you can see from the Glassnode’s graphs above, the open interest for BTC and ETH options on centralized venues is more than $20 billon which is a relatively large number. Compare it to $32M in open interest on Hegic V8888 and you might be inspired by Hegic’s SOM (serviceable obtainable market) opportunity: the share of the market that can be served now.
DeFi 2.0, Aribitrum, Optimism, Solana, Avalanche, new options pairs — you name it — there are dozens of ways I can expand and lead the Hegic development. Meanwhile, I’m laser focused on the only thing that matters to me: happy users who trade options on Hegic and earn money from it.
Look below: isn’t that how the protocol’s purpose is being fulfilled?
Zero Fees Options Trading on Ethereum Layer 1
You might argue: “What’s wrong with layer 2s and all the other L1s with low transaction fees? Isn’t that how you should serve your users and provide them with the lowest fees to execute their trades?”
I have a different POV. And a different solution.
The development bet (if I can call it so) that I’ve made a quarter ago and which is still in place at this point is that with more projects and protocols migrating to L2s and other L1s, the transactions fees on Ethereum layer one will start to decline and the gas fee will be relatively low.
With Hegic V8888 I wanted for options traders to have the same user experience they have while trading on an ordinary DEX or other venue. No migrations, no bridges, no L2s mechanics time-consuming research. Just MetaMask or other wallet, the Hegic website and 24/7 options trading.
Hegic V8888 has zero commissions on trading options. The options buyers don’t need to pay any commissions on top of the premium.
At this point, transaction fees on Ethereum are still high (or even very high). At the moment of writing this quarterly report, the cost of buying an option on Hegic is around $350 (the transaction fee). This is an affordable amount for large options trades but it isn’t suitable at all for traders who are willing to pay a few hundred or thousand of $ in premiums for their options.
That’s why users are able to trade gas fee-free options on Hegic V8888.
Gas Fee-free Options Trading
All call and put options on Hegic V8888 with a size of 10 ETH+ or 1 WBTC+ have a zero gas-fee if an option buyer enables gas fee-free trading on the website. As I’ve stated it in the announcement deck:
At launch, the minimum option size for gas fee-free trades will be 10 ETH for ETH calls / puts and 1 WBTC for WBTC calls / puts. After 10,000 options in total will be acquired on Hegic V8888, the minimum option size for gas fee-free trades will be x2 lowered: from 10 to 5 ETH, 1 to 0.5 WBTC. After 20,000 more options will be acquired on Hegic V8888, the minimum option size for gas fee-free trades will be x5 lowered: from 5 to 1 ETH, 0.5 to 0.1 WBTC.
The only thing a user needs to do to feel the magic of gas fee-free options trading is to approve it on the Hegic interfaces. After that, every option she/he acquires or exercises with profits will cost her/him $0 in gas/transaction fees as they will be covered in full by Hegic.
The gas fee-free trading functionality is built in with the help of Gas Station Network (GSN) and uses Relayers to enable other addresses (in this particular case, Hegic’s addresses) to pay for users’ transactions when they are using the protocol.
As you can see from the explanation above, the trade size limits for gas fee-free trading will be lowered as soon as 10,000 options will be traded in total on Hegic V8888, and lowered drastically once again after 20,000 more options acquired. 1,000+ options have already been acquired on Hegic V8888 and the path to lower limits is covered by 10%.
Hedged Tranches and Auto-Hedging
As you might already know, liquidity providers are acting as options sellers on Hegic. They are taking the opposite side of trades and their liquidity is used to collateralize options they sell in an automated way.
If options expire worthless (out-of-the-money), liquidity providers earn pro rata share of premiums. If options are exercised in profits (in-the-money), LPs suffer losses.
For an ordinary liquidity provider it might be hard to manage her/his LP positions on Hegic as they should always be hedged elsewhere.
That’s why I’ve introduced two types of tranches in Hegic V8888: classic and hedged. The classic tranches holders earn 100% of gross premiums paid by options buyers but they also take 100% of risks for selling options.
The hedged tranches holders are in a different situation. They are fully protected from losses on selling options. Instead of 100% in gross premiums, they earn 20% in net premiums and are always able to withdraw the same amount they have previously deposited into the pools.
The hedging process is currently conducted off-chain while hedged tranches holders have an on-chain guarantee of withdrawing the same amount they deposited into the pools.
Hegic Long-Term Pools (HLTPs)
The Hegic long-term pools (HLTPs) is a new incentivization primitive used for rewarding the liquidity providers long-term participation in the protocol which is based solely on the cash flows generated by the protocol.
You can learn more about HLTPs from this article:
The HLTPs rewards are being accumulated during 12 months and will be distributed in August, 2022 among those liquidity providers who deposited their funds and haven’t withdrawn them during the whole period.
The reward size will depend on the month of liquidity deposit and on the period during which liquidity is allocated in the pools by this particular LP. $330,000+ have already been accumulated in the HLTPs rewards pool in three months since V8888 launch.
Let’s sum everything up.
Hegic V8888 currently offers at-the-money ETH and WBTC call / put options. The user experience for options traders on Hegic is the same as on popular Ethereum DEXes: you are trading options on layer one, with no migrations or additional steps required. The gas fees (transaction fees) for options with a notional size of 10 ETH+ and 1 WBTC+ are covered by Hegic so you are paying $0 to buy and exercise your options.
Liquidity providers can choose the hedged tranche option when depositing funds into the pool to be fully protected from losses on selling options. And they will also be eligible to receive a share of HLTPs rewards if they will stay in the pools till August, 2022.
Try Hegic V8888: https://www.hegic.co/
Four Challenges of HEGIC Token-Economics
Challenge 1/4: One can’t acquire a meaningful amount of $HEGIC for a reasonable (market) price with low slippage
The issue with $HEGIC token is that it currently has low liquidity on DEXes and CEXes. One can’t buy or sell tokens for $100K+ without suffering a double-digit loss due to slippage. Those who are willing to acquire tokens might hesitate to take this action. Others who want to sell are not OK with losing a big chunk of the dollar value of their tokens.
Challenge 2/4: $HEGIC price is not catching up with fundamentals
The challenge with liquidity might be one of the reasons of $HEGIC’s inability to make meaningful moves in any direction. If V8888 is a step forward for the protocol or if it was a disaster in someone’s view, market participants should have reacted and bought more or sell their bags in the last three months. But because $100K+ trades are impossible to make without losing money on slippage, the only thing that left for small bag holders is to whine that the price isn’t moving anywhere and to continue to “wenmooning” in the chats.
Challenge 3/4: $HEGIC token-holders are not actively involved in generating value for the protocol or positively influencing its economics
With regards to $HEGIC holders who have previously acquired tokens, their impact on the protocol’s economic outcomes is indirect. They are staking tokens and earning staking rewards in ETH, WBTC and USDC, but not adding value to the protocol. $36,000,000+ in $HEGIC are currently being staked and these illiquid staked tokens are just sitting idle on the contracts.
Challenge 4/4: $HEGIC is a boring and unsexy crypto asset
For the wide audience the zeitgeist might be that $HEGIC is an attractive crypto asset but it’s impossible to deal with it (see reasons above). The protocol has quantifiable cash flows since day one, thus, there’s no promise of unlimited upside behind it. Because in public opinion an old protocol that generates real monies is worse than a random fresh moonshot with zero money generated but with bold promises and unlimited possibilities.
Proposed Solutions
Solution 1/4: $HEGIC liquidity venue with zero slippage
The first step that I’ll make to improve the $HEGIC token-economics is dealing with basics: letting people acquire $100K — $1M+ in $HEGIC with no slippage or selling tokens back to the contract. A bonding contract from the previous version of Hegic (V888) will be reincarnated and improved to help users operate with big amounts of $HEGIC both on the buy and sell sides.
Solution 2/4: Integrating Hegic + Whiteheart (Hedging-as-a-Service)
The second step is integrating Hegic with Whiteheart. Hedge contracts by Whiteheart help DeFi users to protect value of their holdings. You can learn more about it on https://www.whiteheart.finance/
$HEGIC would become an ERC20 token with no downside risk if hedged on Whiteheart, so that token holders will be able to have a piece of mind while owning this crypto asset. The concept of Hedging-as-a-Service (HaaS) will be battle-tested with $HEGIC. The on-chain hedging (token’s USD value protection) prices will be based on $HEGIC’s historical volatility (HVOL).
Token holders will be able to wrap their $HEGIC into $whHEGIC (Whiteheart $HEGIC) and have an on-chain guarantee of receiving the same value of USD for their tokens in case if the price will decline during a certain period.
Solution 3/4: Non-liquidatable loans with hedged $HEGIC as collateral without overcollateralization (collateral size 1:1 loan principal)
The third step is making $HEGIC liquid in terms of it’s ability to be utilized as collateral for receiving stablecoins. Hegic will help holders to provide their protected $whHEGIC as collateral and get 1:1 loans in stables.
The 1:1 borrowing ratio will be available for those borrowers who will provide this liquidity into the Hegic pools. In essence, this step would help to productively utilize $HEGIC that are currently being staked with no additional utility provided to the protocol.
Solution 4/4: Rewarding token-holders who will deposit borrowed liquidity into the pools with $HEGIC
Those who will add borrowed funds with their $whHEGIC as collateral would be receiving rewards. More details will be revealed after the whole process that is described in the steps above will be established.
In conclusion, the roadmap for improving $HEGIC token-economics is: making it possible to acquire small, medium and large amounts of tokens with zero slippage using Hegic’s liquidity venue. Integrating Hegic with Whiteheart and adding protection for $HEGIC token value through Hedging-as-a-Service (HaaS). Utilizing $whHEGIC as collateral for borrowing liquidity that would positively influence the size of liquidity pools. And distributing rewards to those who will pave the way and pioneer this process. Stay tuned for future updates.
Thanks for reading and have a nice weekend.
Molly Wintermute
11/12/2021
DISCLAIMER: Hegic V8888 is an experimental open source protocol in beta built on Ethereum. Use it at your own risk. If you will lose any money using Hegic V8888, you won’t be compensated or refunded. Only use Hegic V8888 with money that you can 100% afford to lose. You can lose 100% of your funds provided to the Hegic liquidity pools. Hacks, security bugs and economic abuses can happen because of an experimental nature of beta version of the protocol. You won’t be compensated in case of any losses related to the Hegic protocol. If you do not agree with any part of this disclaimer never use the Hegic protocol / Hegic V8888.
ACQUIRING/HOLDING/OWNING/USING HEGIC TOKENS DOES NOT PROVIDE/GUARANTEE YOU OR ANYBODY ELSE DIVIDENDS OR ANY KIND OF RETURNS. ACQUIRING HEGIC TOKENS DOES NOT PROVIDE YOU WITH ANY RIGHTS IN ANY JURISDICTION. HEGIC TOKEN IS NOT A CURRENCY BUT AN INTERNET DIGITAL UNIT OF NON-FINANCIAL UTILITY THAT CAN BE USED SOLELY IN THE HEGIC PROTOCOL. THE HEGIC PROTOCOL SHALL NOT BE LIABLE TO YOU OR ANYBODY ELSE FOR ANY DAMAGE OR(AND) LOSSES IN ANY CONNECTIONS WITH HEGIC TOKENS. IF YOU DO NOT AGREE WITH ANY PART OF THIS DISCLAIMER NEVER ACQUIRE/HOLD/OWN/USE HEGIC.
