Opium‌ ‌Protocol‌ ‌launches‌ ‌first‌ ‌CDS‌ ‌derivative‌ ‌contract‌ ‌on‌ ‌USDT‌

Andrey Belyakov
Sep 6 · 4 min read

Opium Protocol is proud to announce the very first CDS (Credit Default Swap) on a centralized stablecoin — USDT. You can use it to protect yourself against (or speculate on) a systemic failure of the most widely used stablecoin in crypto. It also allows you to earn interest on your capital in case you are willing to bet on the quality and sustainability of USDT.

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Also refer to this feature article published by Coindesk

Why create a CDS for stablecoins?

Derivatives are financial products that can be used to hedge risks in financial markets, and CDSs are used to insure against credit default events. You might not see the connection between CDSs and stablecoins at first, but in fact, most of the popular stablecoins in crypto today are in fact centralized and can be regarded as credit notes. For example, USDC can be regarded as a credit issued by Coinbase, GUSD is issued by Gemini and USDT is issued by a firm called Tether, which is closely associated with BitFinex. Tether has often been scrutinized because of a lack of transparency regarding audits and collateralization of the stablecoin’s outstanding supply. A “bank run” or default event related to USDT will cause significant harm to crypto markets.

How does it work?

Crypto investors and DeFi users can purchase or sell CDS contracts by posting orders with the desired price to the order book on Opium Exchange. When a buy order is matched to a sell order, the buyer pays an upfront premium to the seller.

The CDS seller provides insurance through posting collateral in USDC, which is locked in a smart contract until maturity of the CDS contract.

For this CDS we are using a decentralized Chainlink price oracle to trigger the derivative logic in the most reliable way. At maturity, a USDT-USD price oracle is used to determine whether the market price of USDT is still on a peg or has fallen below $0.95 USD — which would pay out the collateral to the CDS buyer. For example, if USDT is traded at 70 cents per dollar at maturity the CDS holder will receive 30 cents per dollar to compensate for a loss.

The launch of CDS products on centralized stablecoins enables yet another powerful risk management instrument for DeFi.

An ongoing experiment

Opium Protocol is looking to further test and experiment with the various parameters that comprise this CDS product. Version 1 is live on Opium Exchange right now, but expect to see iterations in the near future. There are exciting improvements to explore, such as the usage of Aave’s interest-bearing aTokens as collateral type, which would allow CDS sellers to accrue yield on their collateral whilst earning risk premium on the insurance that they provide through selling the CDS contract.

“Derivatives such as Credit Default Swaps allow for DeFi users to express their confidence (or lack thereof) on assets and “money legos”, either by buying protection or earning premiums by providing insurance. Financial products like these will contribute to further growth and maturing of the DeFi space as a whole.” — Andrey Belyakov, founder Opium Protocol

Last month we successfully launched the very first CDS product in DeFi, in collaboration with Aave. That CDS is based on Aave’s recent Credit Delegation feature, which was first used by exchange DeversiFi through a 20 BTC credit line. Buyers of this CDS contract could use it to both cover the credit risk of the actual loan or speculate on the credit event.

The role of derivatives in risk management

People often blame derivative financial products as the main cause of the 2008 financial crisis. However, properly collateralized financial derivatives can actually help prevent financial crises, do not require risk management, and are ideally settled on-chain. Undercollateralized derivatives, however, do need risk management, margin calls, and introduce systemic tail risks. Read more on this topic in our previous blog post.

About Opium

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Opium Network

Opium is a universal and robust DeFi protocol that allows for creating, settling, and trading decentralized derivatives. Use our products today to speculate on opportunities inside and outside of DeFi, or hedge yourself against trading risks.

Explore Opium Protocol or try out Opium Exchange.

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Opium Team

Opium Protocol is the universal protocol to create, settle…

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