Discussing Derivatives in Decentralized Finance

Transcript

hello oh well thank you so much everyone for coming you uh i'm glad not to see the room empty actually because this is a very much relatively newer topic um that we have been tackling in because we come from traditional finance background and there's been a lot of growth of options in c5 uh but not as much in d5 so that's why this is the topic i wanted to talk about here at ethereum conference a little about me i work at ledger prime um aside from ledger prime i'm also a faculty professor at nyu tandon new

york university uh i teach a course on blockchain in distributed technology uh previously i was founding director at republic where i started public crypto i'm an angel investor in over 30 projects and i was a very early employee at consensus where i helped launch singular dtv which in turn to be breaker so i've known the team for a very long time i still have a great relationship with the team that i take a huge pride at um ledger prime so ledger prime is a multi-strat hedge fund

deploying a quantitative and systematic investment approach we have over um 150 million under management and have worked and invested it over 30 d5 projects till this date we only started actively investing since last year the fund started in 2019 but last year was our entry um to the defy space where we kind of realized that there's so many emerging traded protocols where we could take our expertise and you know provide the liquidity groundwork frameworks and whatever we could do to build up the space uh ground upwards uh we're one of the largest liquidity providers on several

c5 platforms such as therabit bit.com ledger x paradigm and cma we're also active users and investors in several d5 options pre platforms such as ribbon moa open dopex hero and d trade we provide consistent and predictable market liquidity ensuring high liquidity market depth and transparent price discovery which allow investors and participants to trade more efficiently so to give the overview of the c5 options market right like uh it's very much important to know that btc options only started in

um late 2019 and ethereum options started this year but there's been a huge exponential growth as you know the two charts out of sku kind of give you the frame um what's the reason behind it um even though the volumes have come down from the peak from earlier this year it's still going uh grown substantially and this does not include the otc market or non-btc um eth market which sometimes can be larger in volume and open interest uh growth is very much attributed to influx of sophisticated funds utilizing options to hedge

gaining leverage exposure so every single time you hear of like goldman sachs or like any of the traditional funds like investing in ether buying a neath or what not they're trading derivatives they're not buying into smart markets but because they're trying to ensure their positions well um and that has to say a lot because these are fully cholera collateralized position so that kind of sometimes gives them the advantage to either short the market or along the market we have started seeing manipulation in btc ever since uh you know more active funds have started to get involved like elon musk is it's a huge example in front of us but i'm not here to talk about btc but

wanted to give like an overview on more of the institutional involvement just means more of like manipulation of in the market um aside from the funds of having the exposure it's also the miners lenders token foundations utilizing options to hedge and generate yields via selling options uh something that we've started very much actively talking about i know sushi gave a presentation yesterday there's a couple of other protocols that have started doing discounted sales and one thing that you know we're trying to tell them is they can utilize their treasury to trade options in order to generate their

revenue that they're trying to look out of you know these token sales um so you can utilize you know options of whether it's start sushi options or whatnot um structured products that focus on yield enhancement like shark fins or double or no touch options have also contributed to the overall growth of the market so this is the traditional market as a blueprint for growth when i say traditional market is the traditional financial market we all know that crypto is here to stay and it is its own asset class by now it's gotten its distinction

very much um in other asset classes at scale options trade 30 times the size of smart markets which is actually very important to note because comes a point where derivatives slash options are driving the price forward of the spot um and we think that crypto will be absolutely no different um the charts here represent the speed of growth of derivatives for other asset classes as well as the size of derivative markets relative to spot this is i'm sorry so this is how basically the entire c5 options market structure

kind of look like this is just an example out of paradigm that we actively market make on um but as you can see the expiration dates are open the bid and ask the strike price dates you can basically go and pick an option that you think would you know would be willing to your appetite of um risk and based on that strike price you know you can buy that option so it's it's i mean i've made it sound like simple but it looks a lot like traditional option market this is how actually like cme um also looks like um and

these are separated by different expirations and strikes the uh given that there's so many different options to choose from you can imagine that options are orders of magnitude more complex than smart at futures so this is a very tiny example of like one order book but this goes on and on and on um the fact that we're still like very much in early uh stages for c5 uh the order book for d5 is way much more like smaller than this um so uh but market makers who have consistently have to maintain two-way liquidity for all options contract liquidity is kind of like dispersed it's extremely technologically and

computationally intensive given the automated models have to calculate prices for each option on a high frequency basis and update risk and invent inventory parameters one thing i would like to make a point that the handful of defy options pro protocols that we're working with are basically taking data off of each other because this is that much of a complex system to build so brings me topic of the day uh state of derivatives in d5 markets uh it's been a very promising field uh which we're personally very excited about because the on-chain metrics that crypto basically

promises could solve a lot of uh issues that traditional markets face and that's something that's like even much very much extended into derivatives as well so so far about 2.5 billion is locked up it's tvl has been um allocated to d5 derivative projects uh specifically built on eth and project themes in the decentralized derivatives space include options futures insurance and prediction markets um the total market peaked almost to 4 billion a couple of months ago um however the lies

of new two-layer solutions on ethereum has also increased volumes and tvl locked on d5 derivative protocols like dydx um starkware you know helping dydx and then uh similar like you know the ux that helped solve c5 exchanges um however from our personal perspective and something that we've noticed in the market markets perspective we haven't seen much of like the options growth other than ribbon finance and open so far um so the current and

why there hasn't been much much growth other than open and um ribbon ribbon basically takes uh opens data um reason is wide variety of possible options contracts like expirations and strikes making it computationally expensive to build liquid markets on chain necessity for order streaming or cancel of replacing of orders making it very expensive for gas cost like we've had this discussion within the industry over and over all we think that maybe 1559 probably could be a solution for that let's hope um robust on chain portfolio margining and liquidation

system uh it is a lot more tedious than it sounds um and binance coinbase um all of the other c5 platforms have taken years to build it uh with d5 we've just gotten started like last year and then um option market makers people like us need a liquid on chain delta one uh for spot perps and futures to dealt hedge options risk uh so that's why um a couple of days ago actually khal zamani on twitter raised a very valid point on how perps need to succeed before

options in order for the entire derivatives place um derivative space to grow maturely in d5 and he was absolutely right about that and that kind of most of the projects like moe um open you know took as a feedback went back and said you know we need to solve for perps first so market makers like us can has an option to hedge uh against the options that they're trying to sell and then um the application of x y k like m m models for d phi uh can lead to severe and permanent loss uh not a single day goes by where we're not

bitched by a project that is trying to come up with the solution for amm but us come up for a solution for uh impermanent loss but hasn't really uh you know we're hopeful for it so this is the entire current landscape that of d5 ecosystem that says you know we're like creating d5 options when we're saying d5 options technically that basically just means ethereum attic um of a sushi in some cases but main of the market cap is being led by open and ribbon and

ribbon is taking opens data so um so yes like i said like open has the um on-chain order book and you know hedged octus and pulls liquidity like i did and primitive and siren uh these are projects like still in development so uh you know we're very much interested to see what comes out of it um open and then the other thing this this is the other um hurdle that as market maker that we've started to face is most of our positions uh on these d5 protocols are fully collateralized um

that's how options trade anyways but open recently has decided to launch partial collateralization which is kind of a big deal for the industry as well uh because it makes it very difficult for capital you cap capital utilization and roi perspective for us um because we have to completely lock our capital in order to trade that position uh c5 or you know offers margin there's a bit of leverage um and then most of the positions at max are like 30 collateralized so that's a good case for open going on these days so just to give

on the work that we do uh for these d5 protocols um i've picked out three examples three of the protocols that we're helping market make or set up the framework or set you know or and have invested in in as well i've mentioned open a couple of times already but it's the largest d5 options protocol enabling projects such as ribbon opeth and gamma to integrate and use open standardized products they enable partial collateralization which makes it extremely capital efficient at this point and then robust liquidation engine designs

enables users and market makers to provide increased liquidity there's a reason uh their notional value was at 530 million just as of last week since their inception which is an excellent number for a protocol that just launched last year the other one is ribbon finance uh ribbon was just an idea last year and julian launched earlier this year we're one of the largest and initial liquidity provider for ribbon structure products um they generate yield of through their structured products uh

through on-chain option contracts using opens protocol and wrapped eth or btc ribbons initial contract the fact that market makers are initially buying and not selling options and thus um there's cap capital efficiency for market makers you know it's less of a concern and as well as concentration of stride liquidity makes it easy for us and other market makers to keep on providing liquidity on ribbon in size ache into c5 markets the other case is moe um we are an

investor and future liquidity provider in moa finance even though it's currently building on solana and they are trying to tackle perps first uh it it can be used a guide for like existing or future defy options protocol to be built on ethereum so if any one of you want to take a stab uh please like be our guest and do it because um i think like the ethereum network could use a product like this um so far we've only seen a separation of dydx and then open we need a combination uh what moe is doing it's it's a hybrid um amm and order book model

along with um course margining and liquidation engine um it's it's starting with like i mentioned uh robust perps market before options enabling market makers to better head in a capital efficient manner and my last example is dopex uh this is being built on ethereum protocol um we are an investor and liquidity provider in dopex topex relies on delegates uh professional market makers with deep liquidity within the ecosystem to help in price and stabilize their options

uh this is a good thing because it keeps the market extremely stable and within the certain parties kind of you know what even proof of stake is you know going after it will launch on optimism made net to minimize fees and transaction times uh rebates for option writers in case of losses are through dpx tokens so no chance of impermanent loss in any shape or form um and this also ensures superior returns in comparison to writing naked options um so the the necessary attributes for d5 options markets right like what

what is really required in order to like create one builds one and make you know a very efficient protocol uh pro portfolio margining cross margining obviously and liquidation engine enabling partial collateralization this enables greater capital efficiency um i would say no collateral should be the answer to it because we are still very much early on with on-chain metrics so um but like if 30 to 40 is something that a protocol could offer i think market makers are very much

receptive to it uh the ability to delta hit for option market makers via robust spot perps or futures just the way that c5 exchanges have managed to like introduce a bunch of different products under one umbrella so the market makers or traders or funds have the options to use multiple products to hedge against one each other that something is you know sort of also needed in d5 uh efficient protocol in terms of speed and cost like layer 2 solution we already know about this enabling uh full order books and then if a mm model uh the ability to deal with impermanent

loss via theta dk as well as capital efficiency and then obviously a very robust community of professional option market makers enabling accurate pricing and deep and consistent liquidity there is no shortage of capital in crypto at this point and all of most of the market makers that you would come across or you have come across is willing to provide the liquidity it's just that everyone is looking for to answer the collateral required and a solution to impermanent loss if it's an amm pool and that's all i have for today thank you thank you very much

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