FAQs
What is ohmydai?
ohmydai is a decentralized tool that allows people to exchange risk between each other by writing and selling American put options on chain. In other words, ohmydai is minting and selling tokens that represent a right for the buyer and an obligation for the seller.
The tokens are called ohtokens. The writer is called the "seller" and the holder of the ohtokens is called the "buyer". As of today, this tool can only write and sell options on the DAI:USDC market with the same strike price of 1 USDC, same underlying asset (DAI) and same expiration.
What are options?
An option is an agreement between two parties: a seller and a buyer. The seller writes the contract terms and sells it to the buyer for a premium. That means the seller now has an obligation and the buyer has a right (but not an obligation) to exercise the contract terms upon expiration.
What are American options?
There are two types of options: European and American. European options allow the user to exercise only at the expiration date. On the contrary, American options allow the user to exercise the contract anytime before the expiration.
What types of options are there?
There are two basic types of options: puts and calls. A put represents the right to sell the underlying asset at the strike price. On the other hand, a call represents the right to buy an asset at the strike price.
What is an ohtoken?
ohtokens is an ERC-20 that represents "a right" granted to its owner. This means that whoever minted ohtokens, issued an obligation to comply with the contract terms at any moment until the expiration. This obligation is sold for a price (premium) to a buyer. In other words, the buyer acquires the right to exercise the contract terms at any moment until the expiration.
ohtokens are minted with a 1:1 parity to its collateral.
In the first version of our solution it's only possible to mint ohtokens with USDC collateral. For every ohtoken minted, there has to be an equivalent amount of USDC serving as collateral. For a buyer to exercise the option, they have to provide the ohtokens they hold plus the amount of DAI they are allowed to sell to the contract for the strike price.
What is an option series and how does it work?
An option series is defined by a unique combination of underlying asset, strike asset, strike price and maturity, and each option is fungible inside its own series.
What is a strike price?
Strike price is the term commonly used to designate the price which the underlying asset will be sold or bought for in the future. For now we can only write options with a strike price of 1 USDC per DAI unit.
How is the options premium calculated?
In traditional markets, options premium's are rather hard to calculate. It takes into account three basic factors: intrinsic value, time to expiration, and underlying asset volatility. Our solution is optimized for market liquidity on Uniswap. That means the premium, or price of ohtokens per expiration, is set based on supply and demand of the asset on Uniswap.
What asset can I offer as collateral for writing a put?
At this stage our contract can only use USDC as collateral.
If I have ohtokens and I want to exercise my right to sell the amount of ohtoken I own for 1 USDC each, what should I do?
Enter the website, connect your MetaMask wallet and go to the "Dashboard". You'll be able to execute your position, giving the amount of ohtokens you own.
If I sold ohtokens and expiration has not reached yet, how can I exit my position?
There is no way to "undo" or execute you position if you minted ohtokens. What you can do to stop your exposure to DAI:USDC is to buy the same amount of ohtokens you minted from another seller. This works almost as an unwind of your position. In that case, you'd be subjected to the current premium the market is trading. That means you could either benefit or get a loss with this unwind.
What is the buyer's potential PnL (Profit and Loss)?
Quick recap: a buyer is someone who owns ohtokens and, therefore, it owns the right to sell DAI in the future for 1 USDC.
The PnL of an option is a function of strike price and the current market price of the underlying asset. So, in our case, the PnL depends on what is the current market price of DAI, in terms of USDC.
Imagine that the buyer bought 1 ohtoken for a 0.1 USDC premium. If DAI is trading at 0.7 USDC (every DAI costs 0.7 USDC), we say that this option is in-the-money and the buyer should execute it. In this case, the buyer's profit would be 0.2 USDC.
But, if DAI's price is trading above the strike price there’s no reason for the buyer to execute the option(we say that this option is out-of-the-money). This means that the payoff PnL is actually a loss of the premium paid.
Observing the buyer's payoff, one can see that the buyer can only profit in case the price of the underlying asset falls bellow the strike price. This means that by buying ohtokens one can protect agains the DAI peg volatility.
What is the seller's potential PnL?
Quick recap: a seller is someone who minted and sold ohtokens in the past and now holds an obligation towards the buyer. This obligation is guaranteed by the collateral the seller inputted in the contract so, whenever the buyer wants to execute the ohtokens, the seller is obliged to buy to ohtokens at the strike price.
The PnL of an option is a function of a the strike price and the current market price of the underlying asset. So, in our case, the PnL depends on what is the current market price of DAI, in terms of USDC.
Imagine that the seller sold 1 unit of ohtoken at a premium of 0.1 USDC and had exactly 1 USDC locked in as collateral. If DAI is trading at 0.7 USDC, we say that this option is in-the-money and the seller is forced to commit to it's contract by repurchasing the ohtoken for 1 USDC. That represents a 0.2 USDC loss for the seller. Notice that the buyer's profit has to be always equal to the loss of the seller.
Observing the seller’s payoff one can see that it only profit’s in case the underlying asset do not fall below the strike price. That should corroborate to a strategy that thinks DAI will keep its peg.
How does betting for or against Multi-Collateral DAI have anything to do with trading options?
People always think something will happen. And an option is a way of exchanging risk between counterparts. We created a solution that allows people to pick a side and make their bets.
Regardless of who or where you are, now you can exchange risk with anyone around the world.
Since the DeFi community had polarized opinions whether the code Maker was just about to launch to upgrade to MultiCollateral DAI would work or not, we decided to allow people to actually bet on the DAI:USDC market.
We created this MVP to serve the community and the DAI:USDC market seemed to be the one that needed this tool the most.
Why can't I set a price of the put I'm writing?
To increase liquidity and make it easier to implement, we chose to market ohtokens on Uniswap. That means the price of the ohtokens depends purely of the liquidity pool available on Uniswap.
What happens if I have USDC locked and expiration is reached?
If you minted ohtokens and therefore locked the equivalent amount of USDC, your option can be exercised by the buyer until the expiration is reached. If the expiration was reached and your option was not exercised, you can unlock the collateral from the contract.
Why don't we use a price oracle?
There are two types of settlement: physical settlement or cash settlement. Physical settlement means that if the buyer decides to exercise the option, all the ohtokens will be traded for the equivalent amount of USDC, previously locked in the contract as collateral. On the other hand, cash settlement is the exchange of the price difference between the current DAI price and strike price. That requires a trusted price oracle and it can potentially add complexity to a first version of this tool.
Our solution does not require a price oracle because we decided to allow only physical settlements between counterparties.
Why do we need a token for writing options on chain?
The ohtoken is a redeem token, used to represent the amount of USDC the seller has locked inside the contract and the amount of the DAI the buyer can exercise. But it also has the nice property of being able to be freely tradable on other markets since it is an ERC20 token.
Basic terminology
Underlying asset
The asset in which the buyer wants to buy protection to.
Strike price
The agreed price in which the buyer will be able to sell the underlying asset to the seller at expiration.
Strike asset
The asset in which the strike price is fixed in and also the asset that will execute the physical settlement.
Expiration date
The date until which the contract is valid. Once it reached, ohtokens are burned.
Put
A type of option that represents the right to sell the underlying asset at the strike price at any moment until the expiration.
Call
A type of option that represents the buyer's right to buy an asset at the strike price at any moment until the expiration.
Collateral asset
Collateral asset is the strike asset and has to be locked in the contract to mint ohtokens.
Premium
The option's price; the amount of USDC that the buyer has to pay for the seller in order to buy an option.
ohtoken
The token that represents either an obligation or a right. It represents an option to sell one unit of the underlying asset per strike price.
