Saving Private Sasha Ivanov-Part 7: Derivative Markets on Waves DeFi Protocols
By Afsar Akal
Derivative instruments are tough nuts to crack. Warren Buffett refers to them as Financial Weapons of Mass Destruction. Given Vires Finance users have already experienced this phenomenon of wealth destruction, one hopes it could only get better. In this blog post, we will focus on the positive aspects of options and futures markets as they do serve a useful function in risk managament.
Active Options instead of Passive Index Investing
Instead of swapping USDN holdings with an index token (WIXT) from Waves ecosystem projects only, Vires Finance can easily deploy Options and Futures type contracts on its native platform. This suggestion does not mean index tokens are bad or should not be created. We only criticize a forced swap between a pegged token to an unpegged one. The incentive mechanisms for derivatives would be similar to the game theoretical construct we explained in our third blogpost.
There are a number of decentralized crypto derivative platforms, yet they all lack users and liquidity. When user acquisition is key to success, why not use an existing pool of users who already have funds stuck on a platform? When designed innovatively, these instruments can help recapitalize the Waves DeFi protocols as well.
Let’s consider this scenario. A USDC/USDT depositor had been keeping his funds on Vires finance for future use, like buying BTC or ETH on the cheap during bear and crab markets. Yet these funds are converted to USDN and stuck. Now say this investor would like to buy BTC and ETH when the price is right as well as being able to earn a better yield during this accumulation phase. By depositing additional USDC/USDT with the “Use as collateral” option switch logic on Vires Finance, an investor may prevent other users from borrowing the asset. This deposit, similar to the recapitalization model we explained in our second and third blog posts, would immediately take USDN from legacy markets to regular USDN, earning higher interest. The APY would be calculated dynamically based on the option price’s distance from the market price.
In the example above, the user decides to deposit 2000 USDC to move equivalent amount from legacy USDN to regular Vires deposit market. This method again overcomes the First-Come-First-Serve plus bot dilemma that we experience today. This amount gets added to Neutrino reserves for improving the BR and not used for lending to Vires borrowers for obvious reasons. We again note that, the method does not allow full withdrawal but only provides a higher APY of 12%. After making the deposit, the user, for illustrative purposes, purchases two put options of equal value. First one is to buy $1000 worth of BTC when price falls to $15K and the other when price falls to $10K. While these option contracts are open, the first deposit and second $1000 deposits earn 6% and 15% respectively. Why is the second put option earn a higher APY? Because the probability of BTC falling to $10K is less likely than it falling to $15K hence the option purchaser indicates that he/she is willing to keep the funds invested in Vires longer.
The conceptual design of the option above is slightly different than a normal put option which would have an expiry. Here the expiry date is a function of price distance from the market. If the price never hits any of these targets, the investor can close his/her position and the unlocked USDN gets moved back to legacy, earning a lower yield.
The same model can be applied to call options. This time the investor would deposit BTC worth $2000 to sell when the price is right.
As the probability of BTC price hitting $40K is lower in the short term, the BTC equivalent amount in USDN earns a higher APY compared to a call option price of $25K per BTC.
Let’s highlight again that, the methods are all gunning up to keep USDN alive by creating new markets like options contracts. Similar approaches can be used for futures type of contracts that have an expiry date with a target price.
No Taxation without Representation
The 3–4% APY on Legacy USDN markets have recently been slashed to zero with the recent Neutrino governance vote, hence Vires depositors are placed in a non-earning bet via a decision which they have not been consulted with. The slogan of “No taxation without representation” that sparked the American Revolution has seen a repeat of history on Waves territory. This issue we bring is for a reason. There is a lot of talk about PowerDAO, which by the way is a good idea to let Waves ecosystem solve its problems holistically rather than one protocol taking a decision on its own that causes damage to a sister protocol.
To create new markets for USDN using derivative contract designs should never ignore the fact that, the yield for USDN should be sourced from a legitimate source, rather than minted out. If USDC and BTC are deposited like the examples above, these funds should ideally be used in non-Waves DeFi, such as running a WBTC/USDC liquidity pool on UniSwap. The proceeds from the commissions should be converted to USDN and used to distribute the yield. This decision should be made by a governance vote of PowerDAO holders, not taken single-handedly by gNSBT or gVIRES holders let alone by Private Ivanov himself.
Let’s not forget the title of the series. We need to save Sasha from his own persona via a powerful governance mechanism.
