Implications of these features on DeFi
BY ALEX MICHESLEN, CFA CHARTER HOLDER AND COFOUNDER AT HEDGEY
"Whilst there are a growing number of options markets available, the Hedgey Protocols allow for Options to be treated like an actual legal contract between to parties, without the need for any intermediaries to ensure credit (for no default). This means that token holders can actually deploy their tokens rather than sitting on them idly to generate legal contracts with other parties. There’s no requirement to provide a large one time amount of liquidity - options can be generated Ad hoc, one at a time, and in whatever size level to attract a variety of buyers and sellers.
Flexibility is necessary as investors are not all alike - and so it is necessary to allow flexibility such that investors can choose exactly the exposure they are looking for. Some investors may only want a small exposure, or over a long or short term, or something that is extremely out of the money for cheap. With more flexibility holders have access to the real tools to hedge 100% of their token exposure, or utilize some or all of their tokens for earning revenue through selling covered calls.
Peer to Peer style Options have the unique advantage that anyone can participate in the market. Although we expect DAOs and Token Teams to be a primary supply of writing Calls, any token holder has the ability to write calls, and there are no up front liquidity requirements to participate. Peer to Peer allows for users to write OTC deals to sell tokens at particular prices. Peer to Peer additionally allows for a variety of options that suit the varied needs of crypto investors and speculators.
American Style Options have unique advantages where Option Owners can take advantage of huge unexpected price swings and profit on those swings without concern that the price may trace back to its original price on the expiration date. Whereas, with European Style Options - users are stuck to a single expiration date. With the volatility of Crypto, placing a bet on a single particular exercise date is much higher risk and does not create true value in the same way American Style Options do.
Exercisable Options are incredibly important as well - as this is what is will give the Option a true arbitrage-able value. Without the ability to exercise physically, there is nothing outside of speculation that ties the value of the option to the underlying pair. And even more unique to Hedgey is the ability to use a linked AMM to physically close an option by the Owner without need to have the crypto capital to exercise it. This means that speculators can purchase options much cheaper and do not have concerns about not being able to afford to take the profits on the option.
Secondary Markets are of course necessary for a well functioning market - and Hedgey Options make it very easy to sell currently owned Options, and even more importantly option Writers can buy secondary options to exit their short exposure. With the ability for option writers to buy back a position and get their tokens held in escrow back is crucial for well functioning options markets, and means that call writers do not have to worry about their tokens being locked up for the entirety of the contract - they have mechanisms to get their tokens back."
Last modified 2mo ago
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