Ribbon Finance: Crypto-Focused Structured Products - Ken Chan - [Toronto Ethereum Developers Meetup]

Transcript

we have ken chan from ribbon finance he's a former engineer with coinbase he's a serial entrepreneur back at home in malaysia and is now based in the uk where he is a co-founder of ribbon finance so ribbon finance is a new first of its kind protocol that helps users access cryptostructured products for defy its tagline and i love this on the website is sustainable alpha for everyone so what are structured products well in the world of finance this typically comes in the form of a package a package of financial instruments that gives retail investors easy access to derivatives in ribbon finance this means they use a combination of options futures and fixed

income trading strategies to improve a portfolio's risk and return profile if you're not familiar with uh derivatives it might be helpful to get yourself up to speed through google but ribbon finance features uh the fate of vault as its core product with four offerings as part of this vault currently and uh more importantly they recently announced a version two release of their protocol this was like i think last week um and it's a new release which will focus on automation decentralization proper accounting and governance so full disclosure chain safe recently helped ribbon finance complete an audit of their smart contracts which is how chain safe and ribbon first got connected officially nevertheless i consider myself lucky to

have ken join us today and at risk of stealing too much of his thunder i'm gonna stop now and um invite uh ken to you know unmute yourself and share your screen and yeah welcome hey everyone yeah hopefully i live up to the co-intro that just happened just now and yeah no i i thought that it was epic to uh share the stage the virtual stage at least with rick because like eaters is amazing love using eaters it's like the backbone of everything ribbon does as well so yeah i love that it's opening it opinionated and all of that okay so now i'm going to share my screen

okay so i'm just going to walk you through like this okay so ribbon finance what we are working on is crypto focused structured products uh how i would describe structured products is structured products are these collections of things like derivatives options futures sort of packaged together into a very simple product for users to use below the surface is all really complex stuff to help users earn yield but we've already seen this before right uh crypto already has high yields uh in this example it's badger finance

where you can somehow earn 155 apy which is s9 crazy the thing about these yields is that at the time of these screenshots a 155 percent number there 80 percent of that comes from badger emissions so it's a bit like really weird ponzi nomiks happening there where it's like the yields come from emissions of the tokens itself so it's really weird there so we don't think that is sustainable in crypto in d5 so we think that ribbon offers an alternative source of yield that's sustainable like tim mentioned this is what we call the og yolk farming

in trap 5 what would happen is that people would sell options to earn yield uh if you remember from the gme sorry gme yeah gamestop gamestop fiasco what happened is that a lot of people bought these options and basically gambled on these call options and try to make money from there so on the other side of these option buyers are option sellers what they basically do is that they say okay i'm betting that the price of a stock one go to a certain price and if it hits beyond that price i lose money so we'll see more concrete examples of what an option is later

but what ribbon does is basically automating all that so this is what we call an options vault so when you deposit eve into the vault what happens is that on a weekly basis what it does is it means call options and sells it off to market makers so it's free yield for you not really free because we'll see that it actually introduces some risk giving you an example here this is what we call a payoff graph so if you are selling let's say btc options on a weekly basis you have to think of it as like on a weekly basis i'm betting

that let's say btc won't go over 60k so if it goes beyond 60k i lose money but if it stays below 60k i make money so every week you make these bets so this this week or bad 60k this another week of bad 65k so it adjusts upwards right so how it works right now is fairly centralized uh we have a privileged role called the manager which decides on a strike price uh for example bitcoin calls it'll decide okay we'll sell a bitcoin call option at 60k and then we'll mint it and it will sell it with airswap to market makers that we're connected to so this

error swap process is also centralized uh we'll have it basically like is like a telegram chat where we're chatting with them and selling and offloading these options to them uh they basically make money from this okay so we're going to talk about v2 which basically decentralizes these processes about the theta ball so one of the features are algorithmic strike selection which basically in this first part here is decided by a manager and the second is open auctions where these options there are minted are so

openly to anyone who wants to buy them instead of these market makers that are whitelisted on our behalf v2 fixes this first the strike selection contract will algorithmically select a strike price based on some inputs and then once the call options are minted it will be offloaded to an auction where anybody participants market makers can actually buy them so this is an example of an open auction the ui isn't great because i guess it's not our fault but uh yeah this is how it looks like right so a really cool tech here that we

want to show is arvol or ribbon volatility for long it's an open source library that basically prices options with on-chain data it basically looks like a uni swap pool and calculate the volatility of prices based on some period of time and this basically enables v2 algorithmic strike selection feature and with this you can compute any realized volatility number for any v3 pool out there so if you wanted to turn around and say okay i want to do sushi options you can actually use this number to calculate a price of a sushi option or any altcoin out there

so this is how it looks like uh first you can do val oracle get analyze f ball for a certain pool address then we also have a separate contract called the pricer which is get option premium you pass in a strike price expiry and whether it's a put or not and then it spits out how much an option should be priced at option delta related to premium as well yeah so that is basically the tech behind v2 happy to dive into v2 code if you guys are interested in that kind of stuff and also finally we're hiring solitides so got to shield it at the end uh this

is my email there if anybody wants to reach out got to get the chill in but um i mean if you have time we'd love to dive into the code sure so um yeah we can do that for sure so what i'll walk through first is arvol which is what i mentioned before uh its goals are to build volatility in this is you can query this information on chain as well so the problem we saw with these different option protocols that are online like hedgeick or siren is that

a lot of them actually manually input these volatility numbers they basically go to dairy bit and say okay uh this is the volatility of bitcoin over the past 30 days and then we'll input it manually by just posting it on the blockchain so it's not great because it's not trustless it's dependent on people updating the state on the contract so uh here we're trying to solve it by looking at that pricing from unisot because we think union soil is sufficiently liquid for that purpose already it looks like in practice yeah we basically have

we basically store like mean of the prices over time and then uh from that we can calculate something called uh volatility which is a standard deviation of these prices another cool part is that we have the options premium pricer which has the function called get premium and then from there we actually use black shows black shows is a method that's discovered some time ago to calculate how options should be priced

based on certain inputs and those inputs are like the spot price next expiry of the option and so we are basically codifying that on the smart contracts yeah [Music] maybe something interesting to share is also strike selection every week you basically have to say okay i'm betting that bitcoin won't go over 60k how how would you get that

number 60k so what what we have is that uh we have a parameter called delta and delta just means that the higher the delta the the more likely that you are going to lose money essentially so uh if i have let's say a delta of 50 what that means is that i'm betting that bitcoin will go over i don't know what what's it at right now 50k there's a very high likelihood that you lose money so if you choose like a low delta like 10 delta for example you select something like 55k something like that um based on that delta number there you

can say you you can iterate through a list of strikes you you you start from the spot price let's say spot btc spot is at 47k right now you can iterate from the spot price 47k for the ak 49k and see which strike price is the closest delta to what we are trying to achieve so this is the while loop here as you can see we are doing like a brute force approach to calculating what the strike price should be it found target strike price and yeah that's basically it how we're

calculating the strike price for uh on a weekly basis yeah so open the questions sorry sorry if um there wasn't enough contacts happy to just walk it back if you guys need to about options and stuff because it's not for the layman for sure definitely like some complex like financial like magic and smart contract magic too we had one question from steven swartz uh where does the risk-free interest rate come from for the pricing model initially we thought we wanted to use something like compound for example but we just walk

walk the decision back because the period at which we are selling the options in just one week so i don't think it's like great to even have an interest rate number in in that model at all it's just simply that way too cool and uh yeah if anyone if anyone else has any questions please feel free to drop it in the chat box or raise your hand or admit yourself but me i have two questions for you uh ken and again just trying trying new questions so you know if it doesn't apply or if it's stupid feel free to just say pass um but i took the liberty of creeping your linkedin

and you have quite an interesting background right you have experience in fashion retail analytics building custom software solutions um before making a dive into blockchain development by first uh interning at uh or first being a developer at analytics then you know interning at silica and then jumping into custody engineering for coinbase so if you were to highlight two you know high impact habits you had during that journey to becoming a blockchain developer just as a lesson for prospective developers looking to break into the space what would they be tough one it's

it's always hard to answer these like psychoanalysis questions where you're trying to psychoanalyze yourself and try to give advice based on that i'd say in crypto at least it's always useful to lend a hand to anybody in the community so just jump in oh these are the pr's that are open just learn ahead because crypto in crypto people are so open and public about these issues right and they're always open to help as well so it's always nice to just jump into a discord offer some help you can really

make yourself like a public figure in that sense just helping out developing new things and putting them out there creates right create side projects putting them out there showing yourself off yeah that will really pave your path as a death i think i i definitely agree with the discord not that i'm a developer i'm non-technical like as like i don't do any coding but i feel like being part of a discord community and just like you know uh adding in your you know thoughts and helping develop stuff over there definitely seems like a high high value-add thing for uh developers

and then okay so my next question is your your career trajectory is notable for the marked shift from um building custom solutions at a company you founded to suddenly becoming a blockchain developer um if you had to query your memory for a second what was the motivation to get into blockchain development and then how has that changed since founding and creating urban finance yeah i think i first joined the space at like 2017 so it was the ico boom that brought a lot of people in uh as as many of you are also i'm sure uh i think from then just realize that blockchain cryptocurrency is really cool will be a big thing so

easily the best bet ever i could take and then oh what was the last part of your question like advice was it yeah um how has your motivation changed since founding and creating ribbon that too generic i guess here's a better question actually um it's you went from you know like like i'm not sure what your your background is like in terms of like what you were developing back at coinbase or um your previous companies but jumping into ribbon finance you're creating these complex financial products which is like

like you know like deep like finance stuff so was there a particular resource that like you really relied upon um to learn about you know like all this finance stuff and then also coding all this stuff and then you know pairing that with blockchain yeah most of the finance stuff was just learned online and just trading yourself just opening a finance account opening a derebit account just start trading and then use of understand the patterns and all these stupid symbols options come comes with and then for for blockchain development it's always

just reading up dogs crypto zombies for beginners thank you um we got one question from carl um how does your team handle handle and or consider the potential regulatory risks of such financial products it's a good question yeah the regulatory cover for us is that these are like open source strategies that people run so we are not trying to manage your funds there we're not running a hedge fund these are automated strategies that are open for anybody to yeah we're just like software developers