AMA with The Nerd Quarter — April 15th, 2021
Host Questions
Q: So, tell us a bit about how your project came to be and what made you go after options?
Paul: As some of our awesome community has mentioned, my background is bank treasury — 18+ years in derivative sales & structuring and ultimately left as bank treasurer. I have been bugging Fraser for months to take on DeFi options markets…it’s a massive passion of mine and the opportunity is ridiculously large in the space!
But I digress.
Options.Market began life as a fork of a VC-backed anon-project called SirenMarkets.com, which is an open source mainnet, decentralized options trading solution for ERC20 tokens.
However, I have given a tremendous amount of thought to all of the derivatives projects in the market and come to the conclusion that they are almost trying to be too clever. I’m a first-principles person.
We will be offering up to $25,000 in awards and grants during the Gitcoin Hackathon that Degen.VC is sponsoring, running from April 26 — May 17, to relook at the entire market and start from first principles.
This might well create a brand new use case for the OSM token beyond governance. Massively exciting.
Q: Thats fantastic! I love this approach. If we’re making a new financial system why not reimagine it while we’re at it right
So, how is your solution work to create on chain options, and how do I make my tokens have options (we have a BTC wrapper protocol)?
Paul: This is such a fascinating space — and many alternatives use wrapped tokens, pool tokens, proxy tokens etc.
In fact, the code we forked uses a token to represent the long & short options positions that the buyers and sellers hold. This is interesting in theory and does solve for the issue of underlying liquidity provision. Our version 1 will look similar…
Version 2 and beyond is where the real ideation starts
There I would like to think about mirroring how it works in the TradFi world…
Settlement currency standardization, fulfilment of buy/sell orders, and cash-settlement are all (relatively) new concepts to DeFi, and there is zero reason they can and should not be adopted. The next natural frontier then beckons.
Options structures — collars, call & put spread, butterfly spreads. Structured investment products through derivative-linked investment ideas.
So much scope, so much upside!! We want to build a world where every single DeFi token can be traded via options — and why not? Almost every TradFi currency has a 2nd-order market of some kind at least (forwards, futures, off-market settlements etc)…why not us?
Q: Now, I believe that one of the key features of crypto is composability, as in that protocols can bootstrap off of each other to create ever increasingly complex products. The question is, how do we break up all the complexity you’re describing into “legos” that can be interoperable on the space?
Fraser: The word protocol is bandied around a bit. Maybe it attracts investors I don’t know. But you have the right idea for it. The project that we forked made strides in onchain options in an innovative way. But their proposed “road to protocol” was deeply flawed with venture capitalists owning a huge chunk and the 5 anon founders tokens worth around $50,000,000 days after launch
It’s hard to become a protocol this way. We launched the opposite way — polar opposite — with a free distribution to the Degen VC community. And our next phase speaks to your point…
We now need to truly engage the open source community on the innovation in order to get to true protocol faster. We see the coming Gitcoin Hackathon as a means to unearthing those lego bricks and injecting live into them.
If we can structure the bounties and prizes in the right way it could be paradigmatic for the options market (which is $300tn you know).
Ataxia: That sounds like fun, we are working on our own open source project, its a wrapper protocol that now produces BTC and BCH in a one way trustless bridge. We also have a BTC backed stablecoin. How can we create pools for these tokens? Volumes are $500k/day. Our trdl token does 1.5–2m a day no problem, but we need things to do with our bitcoin, options seems like a good fit.
As a bootstrapped startup we need to look at the practicalities of where the liquidity is. But as with your bridges its only a matter of time before a true protocol is kind of ubiquitous
Ataxia: Have you thought about options against LPs? thats could be interesting. We do have 23 bitcoins available
Fraser: Our DEX project Behodler is fascinating for LPs because it allows swapping of any ERC-20 via a bonding curve governed liquidity token called scarcity. So you can swap one LP for another for around $30 compared to maybe $500 in an out of an AMM. This space is fascinating.
But you know I think our options will need to be quite boring to begin with.
Ataxia: Dude I love the Behodler. Our wrapped bitcoin has 18 decimals instead of 8 just fyi, and it can be flash loaned.
Fraser: Yeah, that works better for Behodler. There’s great synergy there.
Paul: For those who don’t know, Behodler.io is an innovative DEX provably allowing swaps 50% cheaper on gas than Uniswap! So in our ecosystem we now have a major emerging DEX that can leverage an options trading protocol of course.
Q: So is the v1 of OSM already live?
Paul: At this stage it is not as we are in the process of finalising all the smart contracts and a new UI. The new UI is super innovative.
Instead of using a table that the user has to navigate over 4-pages on a website, our UI will show ALL of this information on one page.
We are also super interested in what the Hackathon will bring — 80,000 Ethereum devs working on a project with $25,000 in rewards…some crazy stuff is going to come
Here is a sneak peek:
Our dropdown (final column of table) will have these choices:
Provide
Withdraw
Buy
Exercise
Sell
Details
Details will display these values:
Open interest
Break even
Delta
Gamma
Theta
Vega
TVL
APY
So much alpha to look forward to!
Q: So what’s the timeline for the next few months?
Paul: We published quite a detailed roadmap in mid-March, here: https://medium.com/options-market/option-market-roadmap-2021-deb82330e2de
The first few milestones have been completed, and we are now full swing into the marketing and awareness campaign.
Designing the UI and making sure all the smart contracts are ready to rock and roll
And of course, planning the Hackathon and the bounties. I am so super excited to bring my experience to bear on the space — the creative juices are flowing and the opportunity is massive
Q: How are you going to incentivize volume to your option offerings? got any plans to stand out?
Fraser: Offering 5X the rewards of our nearest competitor.BOOM!
Ataxia: How about products for institutional type clients, for example this nerd chat is part of the NERD dao? We could buy a structured product for a fund, we can raise funds just for this specifically. We’re selling NFT’s to fund a trust fund to buy expensive NFT’s and in the interim we’d love to gain passive income somehow.
Paul: Yeah, and when we get super creative on the underlying assets, it becomes a literal ocean of risk management tools to activate. Sounds like we should talk partnerships in the near future?
Ataxia: Yes we should! Have you got anything else you’d like to talk about?
Paul: I think we have covered everything. I guess to summarise, it would be this:
Our vision for the near term is to build a massively superior product offering using my 20 years of derivatives market knowledge, and to massively increase innovation in the space.
Longer-term, we aim to enable the trading and transaction of options and derivative strategies on any and every token in the market — even autonomously thereby allowing users to make their own markets through the AMM functionality we will build, or co-design with Behodler.io. The future in this space is so bright and opportunities so bountiful, who knows where the limit might be?!?
Community Questions
Q: How do you price the options contracts of alts?
A: The concept of volatility curves is super new to the space, however…
Any asset that has a 3–6 month trading history can have a volatility assigned to it — and volatility is the primary pricing metric in this space in my opinion, because forward curves are irregular / unknown and interest rates are almost mythical.
I can calculate a vol using an off-chain Black-Scholes model, which is super cool. The issue is that most of the current market alternatives input their own measure of volatility…which is centralisation by another way.
We’re using the Hackathon to work through this issue.
If sellers can find a way to manage their delta risk (the rate of change of volatility) and theta (time value) risks — that’s where the real opportunity lies for me. So cool.
