Umbrella Network Announces Arbitrage-Free Pricing Model for Crypto Derivatives
Bringing previously unavailable, Wall Street level data sophistication to the DeFi ecosystem
Umbrella Network is pleased to announce an arbitrage-free pricing model for crypto options. This new crypto options offering will bring previously unavailable, Wall Street level data sophistication to the DeFi ecosystem, on par with the S&P 500 in terms of granularity in available strike price and expiration levels.
There is a lot to unpack in the statement above so let’s go through and review what we mean, and why we believe this is a major advancement to the current status quo.
Crypto options have always been a step behind options data in traditional finance (such as the ones on the S&P500). There is currently a lack of data and liquidity within the DeFi options space, specifically on strikes or maturities, which has led to gaps in values for options prices.
This will now no longer be the case with the launch of Umbrella Network’s Arbitrage-Free Pricing Model, which will provide efficient prices similar to those available to Wall Street traders, offering a full overview of options markets, prices that include options with the same maturity, as well as options with the same strike but different maturities.
Umbrella Network achieves this through a two-step process:
- Collecting much more comprehensive data with an entire data grid of strike prices and expiration dates
- Eliminating outlier data points, and thus minimizing arbitrage opportunities, which are essentially market inefficiencies
While the collecting of data is done via Umbrella Network’s decentralized oracles, the real innovation lies in the economic constraints applied. This ensures that the resulting Implied Volatility curve would be as smooth as that of any S&P 500 traded pair’s.
This new pricing model would be highly useful for both trading dApps as well as retail users. A trading dApp can now offer more granular and arbitrage-free options to its users.
The options contracts that can now be offered would be more numerous than any other crypto-options contracts in the market today. This is because the arbitrage opportunities have been removed.
Retailers, on the other hand, can use the Umbrella Network’s Arbitrage-free Options Pricing Model to ascertain whether the options contracts offered on other markets are over-priced or under-priced, and enter into trades much more effectively.
On the bylines of the announcement, John Chen, Umbrella Network’s President, said,
“The DeFi derivatives market currently lacks efficient market data. Because of this, options are expensively priced and thinly traded. Umbrella will look to change this with the release of our Arbitrage Free Options Pricing feeds, bringing a much needed level of advanced data availability and more efficient pricing to DeFi.”
Umbrella Network will provide options pricing data for both BTC and ETH, across several strike prices, and available across both Binance Smart Chain and Ethereum blockchains, with support for additional chains planned as they go live.
“DeFi doesn’t have a viable or developed options market,”
said Sam Kim, Senior Advisor at Umbrella Network.
“We felt that offering our advanced arbitrage-free options pricing data will be crucial for the DeFi market given the importance of options in traditional finance, not only for speculation but for risk management. As a decentralized oracle service, we work with data that is necessary to calculate true arbitrage-free option prices. So to us, spearheading this movement towards efficient option pricing is the next step to building a thriving derivatives market.”
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About Umbrella Network
Umbrella Network is a scalable, cost-efficient, and community-owned oracle for the DeFi and blockchain community. Its Layer 2 technology uses the latest advances in Merkle tree technology to write multiple data points on a single on-chain transaction, allowing for the batching of data to smart contracts accurately, securely, and inexpensively.
Umbrella believes a community-owned oracle is not only possible but essential to creating a truly decentralized financial system.
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