Oiler Vision

Published in

Oiler Network

5 min readDec 30, 2020

What is Oiler?

Oiler is a protocol for blockchain native derivatives. At Oiler, we have in mind a very specific set of properties to call instruments ‘blockchain native’.

1. The instrument can be priced without any external (off-chain) oracles

2. The instrument can be settled without any external (off-chain) oracles

Before 2019/2020, it was practically impossible to deliver blockchain native derivatives. Without stablecoins and AMMs (automatic market makers), it was not possible to provide a reliable pricing solution. What has changed? Stablecoins introduced a non-volatile on-chain base for pricing (a USD peg) and AMMs introduced a pricing discovery mechanism; on-chain and with high volumes. It has also been proven that if the markets are efficient then the AMMs are efficient too and arbitrageurs will set the price right (Angeris, Kao, Chiang, Noyes, & Chitra, 2019).

In order to settle derivatives on-chain nowadays, we need to ensure that the payout can be calculated entirely on-chain. At Oiler, we not only assume that we will not take off-chain data but also that there is no oracle hidden behind the layers of on-chain data sources that our smart contracts use. It means that the prices of the underlying instruments should not be derived from a protocol that uses off-chain oracles. Moreover, it is desirable to avoid any on-chain oracles like Uniswap since they can always be manipulated within a flash loan based attack. The last requirement is much stronger but still holds for the initial set of Oiler products.

We can achieve that for the class of underlying instruments that we build our derivatives on — blockchain parameters like hashrate (via block difficulty), block times, block gas limits and gas prices — as long as we can reach out to them from the smart contract directly (they have to be verifiable by the Ethereum Virtual Machine (EVM)). Some of these parameters are available to us already while for others we will need to wait a bit — until EIP-1559 is introduced on the Ethereum 1.0 chain. (Buterin, et al., 2019).

Further, upcoming Ethereum 1.0 changes, like EIP-2935 (Buterin, Stanczak, EIP-2935: Save historical block hashes in state, 2020) will allow us to extend the blockchain native derivatives beyond what is currently possible and with much stronger and safer settlement behaviours.

While there are other option protocols in the DeFi space and ones which could potentially host the simpler products that we are starting with, we see Oiler as a future go-to venue for anything related to blockchain protocol trading. Whether these will be options, futures or more exotic products — the team’s protocol engineering experience is unmatched in the DeFi world.

Who is Oiler for?

DeFi users are most likely to use Oiler if they already have exposure to blockchain protocol parameters — their operations rely on big shifts in the network behaviour, manifesting via big hashrate changes, massive gas price movements and protocol behaviour changes. Who would that be?

· Exchanges that cover the highly volatile on-chain assets withdrawal costs

· Miners having exposure to shifting block reward and transaction fees

· Institutions with exposures to many blockchains and a need for hedging the protocol-level risks

What instruments is Oiler starting with?

While we are waiting for EIP-1559, Oiler delivers the initial set of instruments — binary options for hashrate, block gas limit and block times. They are fully collateralized — each option contract locks 1 USDC until option expiry or exercise (whichever comes first). Important thing to notice is that Oiler does not deliver a ‘gambler’s type’ binary options that have the strike price set at the current market price (so you would only bet about the direction of the price move at the given moment). Oiler delivers binary options in the format as they are known in TradFi — the strike price is set away from the current market price and the holder of the option receives a 0 or 1 USDC payout depending on whether the strike price is reached before the expiry. Because of this 0 or 1 payout, the binary options are also called digital or cash-or-nothing options.

While vanilla options have a payout related to the difference between the strike price and the market price at the time of exercise, the binary option payout is always the same — 1 USDC. It means that the whole option (defined by the underlying, strike price, put / call, expiration date) can be exercised for all holders at once. Since they have the same payout, there is no need to exercise them separately for each holder. This saves holders some gas fees.

How to use it?

(read more at https://docs.oiler.network/oiler-network/ for any terms that are not clear)

Oiler will allow you to write one of:

· Hashrate put

· Hashrate call

· Block time call

· Block gas limit put

· Block gas limit call

Each of these with expiration dates, strike prices. Because each of Oiler options is following the ERC20 standard you can add them to AMM liquidity pools and swap them there.

When?

The initial version of Oiler is currently in the beta testing mode with a small group of DeFi traders and will soon be released to the public.

What is next?

Oiler will continue bringing products — both new underlying blockchain parameters and new instrument types that will be related to the category of blockchain protocol trading. We will continue working on pricing models without oracles and will look at the instruments related to both Ethereum 1.0 and Ethereum 2.0 (and their coexistence).

Works Cited

Angeris, G., & Chitra, T. (2020, 03 22). Improved Price Oracles: Constant Function Market Makers. Retrieved from arXiv.org: https://arxiv.org/abs/2003.10001

Angeris, G., Kao, H.-T., Chiang, R., Noyes, C., & Chitra, T. (2019, 11 08). An analysis of Uniswap markets. Retrieved from arXiv.org: https://arxiv.org/abs/1911.03380

Buterin, V., & Stanczak, T. (2020, 09 03). EIP-2935: Save historical block hashes in state. Retrieved from eips.ethereum.org: https://eips.ethereum.org/EIPS/eip-2935

Buterin, V., Conner, E., Dudley, R., Slipper, M., Norden, I., & Bakhta, A. (2019, 04 13). EIP-1559: Fee market change for ETH 1.0 chain. Retrieved from eips.ethereum.org: https://eips.ethereum.org/EIPS/eip-1559

Legal Notice:

This article and any information contained in it is subject to the Oiler Legal Notice available at https://docs.oiler.network/oiler-network/token/legal-notice-and-risk-disclosure-statement. Please carefully review the Legal Notice as it contains important legal information, risk disclosure statement, limitations and restrictions relating to the information that we provide, third-party resources and forward-looking statements.