How to Earn by Providing Liquidity on Oddz?
Learn about Liquidity Pools and Staking
Liquidity pools are an essential part of the growing DeFi space. They are the foundational technologies behind the current DeFi ecosystem that plays an essential part in automated market makers (AMM), borrow-lend protocols, yield farming, synthetic assets, on-chain insurance, blockchain gaming and the list goes on. A liquidity pool is basically funds pooled together to perform certain actions.
While pooling funds in traditional finance (TradFi) often means under-the-table operations and non-transparency, pooling funds together on DeFi is in fact cost-efficient because of the transparency that blockchain technology brings with it. Now that we know that liquidity can be used for multiple purposes on DeFi, let’s see why it is used in options trading and more specifically how it is used on Oddz.
Snapshots:
- Learn the different advantages of adding liquidity to different pools on Oddz
- Add liquidity here: https://app.oddz.fi/options/liquidity and get oUSD tokens
- Stake your ODDZ and oUSD tokens here: https://app.oddz.fi/options/staking
Options Trading in DeFi
In our previous blog, we had explained the basics of options trading and the reasons why people choose to trade options for different kinds of assets. As explained before, an option is a binding contract that allows the buyer of the contract the right but not the obligation to sell or buy an underlying asset (goods, stocks, indexes, etc.) at a predetermined price within a set time frame.
With options, in order to get the right to buy or sell a particular asset at a predetermined price, one has to pay the option seller a price, which is called the option premium.
The option buyer pays the option premium and is entitled to rights only. The option seller receives the premium as consideration for giving up those rights. Therefore, it is usually required that the option seller needs to deposit collateral for the performance of the contract.
The potential risks exposed by options sellers are theoretically unlimited. For example, a naked call occurs when a speculator sells a call option on security without ownership of that security.
In TradFi, the sellers are usually professional institutional players, with sophisticated hedging tools to mitigate the risks. Also, there are professional dealers and market makers to provide order-book liquidity for different option trading pairs.
However, as discussed above, operating on an orderbook model on DeFi tends to be very expensive as each transaction on DeFi costs some transaction fees associated with the blockchain you are using. These orderbook models tend to be less efficient and therefore are avoided by most players in the market. Instead of building an orderbook, traders in DeFi rely on Liquidity Pools.
Let’s see how traders on Oddz can use the liquidity pool and benefit from it.
Liquidity Pools in Oddz
The liquidity providers on Oddz are the option writers of the protocol. The pools are the counterparties to all the options with different terms, while providing collaterals to them. Risks and premiums are shared equally across the entire group of liquidity providers so that no individual participant is at high risk and all participants can share in the rewards. In simple terms each pool is a mutual fund for writing options. In exchange for providing liquidity and collateral for options, these pools are rewarded with option premiums and undertaking risks. The option writers are at a benefit as long as the options purchased are Out of The Money (OTM). It is possible to lose money in cases of the unilateral market price movement of the underlying assets but in the long run, it could bring some favorable rewards for the liquidity providers.
The liquidity pools in Oddz have been built based on multiple factors:
- Assets (BTC, ETH, BNB, MATIC, etc.)
- Option Type (Call or Put)
- Option Pricing Model (Black Scholes, etc.)
- Option Writer Exposure (1 day,, 7 days, 30 days)
Oddz launched on BSC Mainnet on September 13, 2021 and is offering liquidity providers to add liquidity to options that are priced using Black Scholes option pricing model and with an exposure of 1 day, 7 days, and 30 days. This means there are 6 pools for each asset (Call and Put options for 3 pools each). Users can provide liquidity for BTC and ETH here.
Users aiming to diversify their risk exposure can also deposit their USDC in our unified pool (default pool) which has exposure to all the long-term assets, all option types, all pricing models and all expiry.
Benefits of Adding Liquidity on Oddz
- Liquidity is collectively shared by all options buyers that are eligible to get liquidity from that pool.
- Since we do not rely on an orderbook system, not only does it make the protocol design more capital efficient, but it also helps reduce price slippage.
- Liquidity pools provide constant liquidity for options transactions.
- This model provides flexibility for option buyers, who can literally tailor their options terms according to their needs.
- The interface is so simple that neither the buyers nor the liquidity providers face difficulty interacting on Oddz. We have conducted 2 testnests on Polygon and Binance Smart Chain testnet to ensure users do not have any difficulties in understanding the interface. The suggestions given by our users were implemented to further improve the interface for them.
- Pool participants are collected together in the pool as options writers. Due to this, there may be risks if the market makes dramatic movements that are unfavourable to the options sellers.
Another major advantage of adding liquidity on Oddz is allowing users to move liquidity from one/many pools to one/many pools based on their strategy without taking the liquidity out of the Oddz protocol and hence not losing premium for early removal of liquidity. (At present premium is locked for 14 days and users can move liquidity once in 3 days).
Please note: The market for a specific option does not need to be terminated or rebuilt when the contract expires. Liquidity providers do not need to worry about rolling their liquidity to another pool at expiration. As soon as one contract expires or is exercised, the remaining funds are used for other options contracts.
Now that we have discussed everything about liquidity pools on Oddz, let us take a simulation to understand how the funds are distributed when a buyer purchases an option on Oddz.
Example
Situation 1:
Consider an example where the Oddz protocol has liquidity (in USDC) in the following pools.
- Unified Pool — 10000
- ETHUSD | PUT | B_S | 30–1000
- ETHUSD | PUT | B_S | 7–500
- ETHUSD | PUT | B_S | 1–0
- ETHUSD | CALL | B_S | 7–1000
- ETHUSD | CALL | B_S | 1–500
- ETHUSD | CALL | B_S | 30–500
Here, ETHUSD means that the asset is ETH and underlying is USD, PUT or CALL is the respective option type, B_S means the option pricing model used (Black Scholes here) and 1, 7,30 etc used here is the maximum exposure i.e. 7 days pool can write options with expiry 1,2,..7 days And on the same note 30 days pool can write options for all expiries from 1 to 30.
Now, an option buyer purchases their first ETH/USD CALL option having 28 days expiry — consider this requires locking liquidity of 10000 USD.
Only 2 pools are eligible for this option
- Unified Pool (Available 10000)
- ETH | CALL | B_S | 30 (Available 1000)
Situation 2:
Another buyer hops on to Oddz and wants to purchase an ETH/USD CALL option expiring in 2 days — consider this requires locking liquidity of 3000 USD.
3 pools are eligible for this option:
- Unified Pool (Available 10000)
- ETH | CALL | B_S | 7 (Available 1000)
- ETH | CALL | B_S | 30 (Available 500)
So how do we allocate for this option contract?
We sort eligible pools based on available liquidity
- Sorting result: [500, 1000, 10000]
At most 6 pools can be eligible for an options contract depending on the availability of liquidity and the duration and option type for the options contract that the buyer is interested in.
After sorting, we divide equally the amount received per pool i.e. 3000/3 = 1000. Since all pools do not contain liquidity of 1000. Each pool has a different allocated amount based on the availability of liquidity in the pool. We, therefore, remove the lowest value from the sorted pool (i.e 500) and allocate it to the option.
Now remaining liquidity to be locked is 2500 (i.e. 3000–500 = 2500)
Now again follow the divide equally logic and try allocation equally 2500/2 = 1250
Remove the lowest liquidity from the sorted pools which are 1000 and it’s less than 1250 and hence only a maximum of 1000 can be locked from ETH | CALL | B_S | 7.
The remaining liquidity to be locked is 2500–1000 = 1500.
We remove the lowest from the sorted pool i.e. 10000(> 1250) so we allocate 1250 equally from the remaining pool.
Profit and Loss Calculation
All the allocation % with the address of the pools will be stored in the <LockedLiquidity> storage in the liquidity pool manager.
At the time of exercise and/or unlock, the premium will be allocated to the eligible pools based on the percentage of liquidity locked per pool.
Now that you know everything about providing liquidity on Oddz and its benefits, add liquidity to your favourite liquidity pools to earn rewards.
Guide: Adding Liquidity
All you need to do is select any one of the pools that you would like to add liquidity to. This includes selecting the underlying asset, the option type and the exposure. Enter the number of USDC you would like to add to the Liquidity pool and click on deposit. Once your transaction is completed, you will be able to see the amount of liquidity you have provided on the platform and the premium earned.
Please note: Liquidity providers (LPs) receive oUSD tokens that can be staked to yield $ODDZ tokens along with a share in premium fee and protocol transaction fee. While the liquidity can be removed anytime, profits will be locked until 14 days. In case of early removal of liquidity, premium forfeited will be shared amongst other active LPs. Users will not be able to withdraw their liquidity in case the oUSD tokens are transferred to any other wallet.
Guide: Staking oUSD
To stake your oUSD tokens, click here.
Select the amount of oUSD you would like to stake and click on Stake.
Please note: Staking will lock the tokens for 24 hours and the users can claim the staking rewards on a daily basis after the initial 30 days lock period.
Users can also stake their ODDZ tokens similarly.
About Oddz
Oddz is a trustless on-chain derivatives trading platform that expedites the execution of call and put options contracts, conditional trades, and futures. It allows the creation, maintenance, execution, and settlement of trustless option contracts, conditional tokens agreements, and futures contracts in a fast, secure, and flexible manner.
It employs the synergies of Ethereum, Binance Smart Chain, Polkadot, Polygon, Elrond Network and Chromia to unleash the potential of a decentralized derivatives market. It focuses on building solutions that can propel the DeFi ecosystem by simplifying derivatives trading and enhancing the user experience.
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