Andreas Park PRO
Professor of Finance at UofT
DeFi Derivatives
Instructors: Andreas Park
Commercial Paper/T-Bill like securities
YIELD Protocol
- basic idea: zero-coupon loans
- You have:
- target asset
- collateral
- y-token trading at discount price
- examples: yDAI
- expires in 1 year
- price: $.92
- backed by ETH
- buying = you earn 8/92 cents=8.7% RoR
YIELD example
1 ETH = 150 DAI
collateralization ratio 125%
seller
buyer
Assumptions
supplies 1 ETH collateral today
mints (=borrows) 100 yDAI to be repaid in 1 year
y
receives 92 DAI today
pays 92 DAI today
y
receives 100 yDAI
repays loan with 100 DAI
deposits yDAI and receives 100 DAI
YIELD example: scenarios
seller
buyer
Scenario 1: ETH ≥125 DAI
deposits 100 yDAI
withdraws 100 DAI
receives balance of 1 ETH - 100 DAI
What does the seller own (ignore keeper fee)?
- 92 Dai (the loan)
- 0.2 ETH x price(ETH)=25 DAI (assume price=125)
seller
buyer
Scenario 2: ETH falls to <125 DAI
keeper
closes undercollateralized position → sells 0.8 ETH for 100 DAI
receives 100 DAI early
receives balance
of 0.2 ETH
Futures-like securities
Perpetual futures on Bitcoin on dYdX
- perpetual future = futures contract without a settlement date
- can be long or short
- index price based on Binance, Bitfinex, Bitstamp, Bittrex, Coinbase Pro, Gemini, and Kraken
- dYdX:
- decentralized exchange with L2 solution
- stores signed orders off-chain
- liquidates underwater positions transparently on-chain
Perpetual futures on dYdX
- Why? Access returns on non-native assets (Bitcoin, Solana) on the Ethereum blockchain
- Goal of perpetual futures: keep price close to index
- funding fees:
- futures price>index: long pay short
- futures price<index: short pay long
- two margins:
- initial: 10%
- maintenance: 5%
Example
Date: Oct 27, 2021
Example
- 1 ETH = 2,000 USDC
- open long of 1ETH when 2,000 USDC with 200 USDC margin
Scenario: ETH ↓ 7.5% to 1,850
1 ETH=
1,850 USDC
1,800 USDC
1,8001,850−1=2.78%
Scenario: ETH ↑ 10% to 2,200
1 ETH=
2,200 USDC
1,800 USDC
1,8002,200−1=22%
Options for the trader
- Withdraw up to 200 USDC to bring margin to 10%
- Close the position with a 200 USDC profit = 100% return
What will happen
- position is below 5% maintenance margin
- keeper liquidates position: sells 1 ETH and pays 1,800 to contract
- keeper keeps $50 as reward
long balance
(what you will get)
short balance
(what you owe)
margin
1 ETH=
2,000 USDC
2,000-200
=1,800 USDC
1,8002,000−1=11%
Beginning
Smart Contract Derivatives with Synthetix
- creations of Synths
- tokens linked to underlying price feed provided by a Chainlink Oracle
- long asset: sToken (sETH, sBTC)
- short asset: iToken (iMKR, iAAV)
Note: this screenshot is from June 2021; the equity synths have since been removed
Smart Contract Derivatives with Synthetix: how does it work?
- single collateral asset SNX = utility token
- you first need to buy SNX tokens and stake them using Mintr
- you can mint sTokens against SNX holdings (over-collateralization: 750%) (fluctuations in SNX and Synths both matter!)
- you incur debt as proportion of total debt of the system
Example for Synthetix
assets
price
quantity
fraction of debt
BTC
ETH
USDC
10,000
1,000
1
2
20
20,000
total debt: 60,000
33% of 60,000=20,000
33%
33%
2 sBTC
20 sETH
20,000 sUSDC
minted
gain/loss
Example for Synthetix: prices for ETH and BTC up
assets
price
quantity
fraction of debt
BTC
ETH
USDC
20,000
5,000
1
2
20
20,000
total debt: 160,000
33%=53,333
2 sBTC
20 sETH
20,000 sUSDC
minted
gain/loss
33%=53,333
33%=53,333
40,000-53,333
=-13,333
100,000-53,333
=46,667
20,000-53,333
=-33,333
you effectively bet that your position outperforms the pool
Example for Synthetix: prices for ETH and BTC down
assets
price
quantity
fraction of debt
BTC
ETH
USDC
5,000
500
1
2
20
20,000
total debt: 40,000
33%=13,333
2 sBTC
20 sETH
20,000 sUSDC
minted
gain/loss
10,000-13,333
=-3,333
20,000-13,333
=7,777
33%=13,333
33%=13,333
10,000-13,333
=-3,333
ETF-like securities
Securities Creation: Tokensets
idea: create new mutual fund like asset
Securities Creation: Tokensets
DeFi Derivatives Instructors: Andreas Park
Blockchain 2: DeFi Derivatives
By Andreas Park
Blockchain 2: DeFi Derivatives
This slide deck provides an overview of DeFi protocols for derivatives (broadly defined). It draws insights from Harvey, Ramachandran, and Santoro (2020) "DeFi and the Future of Finance"
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