The beauty of blockchain is beyond decentralization and censorship resistance. Those are its building blocks.
Astoundingly, in the last couple of months, developments in Ethereum have proceeded to highlight the true gems of innovation through financial products that promote inclusion and distribute opportunity.
Anchoring on decentralization, open finance, or DeFi, has been shaping. It is literally cannibalizing centralized on-ramps thanks to its special open source model and lack of a centralized entity. At the time of writing, over $10 billion worth of value was under management by different financial dApps.
Although most participants zero in on providing liquidity through automated market making (AMM) protocols, there are exciting developments beyond robo-advisors and yield farming that’s worth mentioning.
The experimentation of innovative trustless and non-custodial trading portals where users can simply connect their wallets with no KYC demands and hedge their assets is exciting.
The world of DeFi is now expanding and evolving beyond lending and borrowing to more advanced financial products that eliminate intermediation.
Hegic is one such product.
What is Hegic?
Hegic is introducing an elegant mechanism that integrates the “pool” model for liquidity providers who want to enhance trustless Options trading.
The Ethereum-based platform is an Options trading portal where traders can engage for profit or directly participate as a liquidity provider for a share of transaction fees. All contracts are created, maintained, and settled in a decentralized manner without third-parties.
To understand the protocol’s value proposition, one must find and understand the importance of a derivatives–lauded as the Holy Grail in the traditional markets and estimated to hold a notional value exceeding $1,000 trillion.
In the traditional market, this accounts for trillions of dollars because traders of all forms directly interact mostly with derivatives products which track the performance of the underlying. They could be futures, options, exchange-traded funds, and so much more complex products.
Options are derivatives that give the owner the right but not the obligation to buy or sell the underlying asset. In this case, Hegic seeks to provide ETH options where the holder of the option can choose either to sell or buy the underlying depending on the set conditions.
The governor will be smart contracts and every detail of the trade will be immutably executed by Ethereum smart contracts.
How Trustless Options Benefit Participants
Often, options tag several advantages for holders.
Aside from hedging assets—options being used as insurance, ETH options are not only beneficial for speculators (traders) but for miners and others.
For instance, by owning ETH options miners can hedge against their future mining revenue using Put options giving them a right to sell the underlying contract at a given price within a given period. Whales can also hedge against ETH prices if they are unsure of the trajectory of prices by purchasing call options.
Similarly, traders can protect against their position by purchasing call options when selling ETH in the secondary markets or put options when buying. Also, it can be used to safeguard against damaging relationships.
Borrowers can get money from their friends or relatives. To shield against price fluctuations and loss of funds, ETH options can be used as a safety net just in case things go haywire.
Hegic options benefit holders who will rely not on third-parties but on Ethereum code for their options to be exercised trustlessly without KYC. Besides, Hegic options can be customized.
Asset underwriters also earn a decent yield (0.5 to two percent per week—108 percent per annum) when they provide liquidity in ETH or DAI on top of the HEGIC governance token which helps in neutralization risks of impermanent loss.
Notably—and a big advantage, is that underwriters can be confident of their position because the risk of one position is distributed evenly to all liquidity providers in that pool.
These providers can be in their thousands as participation is incentivized and premium is shared depending on the amount of DAI/ETH dedicated to the pool.
This helps to diversify liquidity allocation and makes capital work more efficiently. Additionally, every detail about Hegic premium is on-chain where pricing and settlement is transparent.
ETH and DAI Pools
At the moment, the Hegic ETH Pool is non-custodial and liquidity providers earn premium in ETH. All deposited ETH in this pool are used for selling ETH call options as holders of these options have a right to swap their DAI for ETH at the agreed strike price after expiry.
In exchange for this right, the purchaser of the option pays a premium. It is this premium which is distributed to liquidity providers at a pro-rata basis when the option expires either within two days, one week, or four weeks.
Also, if the holder of the option exercises his/her right early, they will draw profit from the ETH pool. 20 percent of the ETH Pool will be set aside for liquidity providers who want to exit the pool. However, if at the time the set amount isn’t enough, the provider must wait until after there is enough liquidity or when the pool receives more ETH from options expiry.
Conversely, the DAI pool is for DAI liquidity providers and is used for selling ETH put options. That is, this pool is for traders who want to purchase puts where providers supply their share of DAI for writeDAI tokens indicating their share of the pool.
ETH put options buyers pay for a right to swap their ETH for DAI from the pool at the strike price at expiry. Like the ETH pool, liquidity providers share premium denominated in ETH and only 20 percent of the amount of DAI in the liquidity pool is available for DAI liquidity providers who wish to exit their position.
On 10/10/2020, the DAI pool will be deprecated for ETH and wBTC bi-directional pools.
The HEGIC token is an ERC-20 utility token used for distribution of 100 percent of the settlement fees between all the token holders. Transaction fees accumulated are distributed to all HEGIC holders every quarter.
Holders can participate in governance to determine things like rates, settlement fee sizes, strike price multipliers, or the type of assets supported.
Its main value proposition is for users of the protocol, that is, liquidity providers contributing funds to DAI and ETH protocols, writers.
HEGIC token holders receive a 30 percent discount when purchasing contracts exclusive of settlement fees which is determined by the Ethereum network—highly dependent on prevailing Gas fees.
Overly, there will be 3,012,009,888 HEGIC tokens. This will be distributed as follows:
In the first epoch, 10 percent will be allocated to a DEX for HEGIC liquidity. Funds generated will be channeled to the Hegic Development Fund (HDF) where specifically it will be used to pay for auditing the contract and to further develop the protocol.
The “the historical trading volume of HEGIC token on decentralized exchanges should not be less than 10% of the new capitalization level that has been reached (to eliminate the HEGIC token price manipulations to unlock new tokens)”.
By the seventh epoch, the development team hopes to offer each HEGIC token at $332,000 for a market capitalization of $1 trillion. 95 percent will be distributed to token holders and the remaining five percent to the HDF.
40 percent of the total supply is set for liquidity mining and utilization rewards. Also, a maximum of 3,000 staking lots will be allowed.
Overly, tokens will be distributed as follows:
- 20 percent is set aside for early contributors (vested)
- 10 percent will be for the development fund (vested)
- 40 percent to liquidity and rewards
- 25 percent will be distributed via a bonding curve
- Five percent for the balancer pool
HEGIC Market Performance
The total market cap of the HEGIC token is $9,528,870 drawing a daily trading volume of $664,640 from the current circulating supply of 89,787,658.
At the time of writing, HEGIC was changing hands at $0.106 down from its listing price of $0.171 according to Coingecko.
HEGIC rose to an all-time high of $0.258 on Sep 12 before tanking to $0.043 on Sep 21.
Uniswap is the dominant market where the token is paired against ETH. Other notable exchanges supporting the coin include Bilaxy, Hoo, and Balancer.
- Stakers with 888.000 HEGIC tokens and over can begin earning the full 1% settlement fees in WBTC and ETH accumulated by the protocol’s staking contracts.
- I have been tracking wallets and found that BIG DeFi whales who were early and became rich on the SNX, YFI and LEND bull run last summer are accumulating a staking lot of 888.000 tokens. Some already done so which makes it very bullish that early tech adopters endorse the project with a fair amount of money. (a staking lot is now worth $88.000)
- The UX is easy to use, an advantage especially for traders who want to trade without prior experience.
- Trading Options in Hegic is flexible and traders determine their own terms. Depending on the risk profile, a trader can choose any of the five expiry dates, strike price, and other variables without shifting tabs.
- Trustless derivatives platforms are being developed and Hegic is unique in their under-writing styles translating to better capital efficiency due to asset pooling. Basically, one doesn’t need to wait to sell the option. The contract can be closed anytime even before expiry date which can be anywhere between two days, one week, two weeks, three weeks, or a month—28 days.
- The idea of trading decentralized derivatives without totalitarian central entities dictating terms will soon catch up. What’s more, there is no KYC and participation is incentivized meaning LP earns more funds.
- The introduction of Bidirectional ETH and WBTC Liquidity Pools on Oct 10 minimizes LP’s risks and makes the system more robust since it can withstand a bearish or a bullish market.
- HEGIC tokens continue to be listed in leading DEXes. Balancer and Uniswap are already dominant markets for HEGIC. Soon, CEXes versions will support the token, deepening its liquidity. In the medium term, the team looks to create more markets for HEGIC token.
- There is more liquidity now that in-the-money contracts can be re-sold in the secondary markets. In the first iteration, it wasn’t possible to resell meaning circulation in the secondary market was harder.
- The Hegic code has been audited by PeckShield rectifying previous exploits that saw funds lost and premium distribution affected.
- Hegic’s Wrapped Bitcoin (WBTC) and ETH will provide more options for traders.
- Developers want to expand Hegic Protocol’s features to beyond trading options. By November, the team plans to launch Autonomous Hegician (AH) for automating the exercising of the in-the-money options contracts. The ETH and WBTC Hedge Contracts by yet another Hegic developers will see options contracts position hedged against volatility.
- Hegic protocol will eventually provide an insurance cover against losses via existing DeFi protocols like Nexus Insurance.
- Automatic price feeds for implied volatility determination will soon be drawn from Chainlink instead of being manually generated.
- Eventually, the control of the protocol will be via DAO where use and voting by HEGIC holders will determine the trajectory of the dApp.
- Finally: I think one of the most important features that many have forgotten about is that the team behind the protocol is anonymous and therefore there is no single point of attack like with satoshi and bitcoin. Anons have a bad rep lately but this team proved many times they are here to build. My view is that many of the so called “DeFi” projects will get in trouble with strict financial regulation and this makes them no different than their centralised counterparts. Hegic Protocol, like Bitcoin, is the most robust because of this. This will matter in the long run and only smart money sees this as of yet.