Andreas Park PRO
Professor of Finance at UofT
Instructors: Andreas Park
Commercial Paper/T-Bill like securities
1 ETH = 150 DAI
collateralization ratio 125%
seller
buyer
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
seller
buyer
Scenario 1: ETH \(\ge\)125 DAI
deposits 100 yDAI
withdraws 100 DAI
receives balance of 1 ETH - 100 DAI
What does the seller own (ignore keeper fee)?
seller
buyer
Scenario 2: ETH falls to <125 DAI
keeper
closes undercollateralized position \(\to\) 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 futures on dYdX
Example
Date: Oct 27, 2021
Example
Scenario: ETH \(\downarrow\) 7.5% to 1,850
1 ETH=
1,850 USDC
1,800 USDC
\(\frac{1,850}{1,800}-1=2.78\%\)
Scenario: ETH \(\uparrow\) 10% to 2,200
1 ETH=
2,200 USDC
1,800 USDC
\(\frac{2,200}{1,800}-1=22\%\)
Options for the trader
What will happen
long balance
(what you will get)
short balance
(what you owe)
margin
1 ETH=
2,000 USDC
2,000-200
=1,800 USDC
\(\frac{2,000}{1,800}-1=11\%\)
Beginning
Smart Contract Derivatives with Synthetix
Note: this screenshot is from June 2021; the equity synths have since been removed
Smart Contract Derivatives with Synthetix: how does it work?
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
main product:
BTC perpetual futures contract
initial margin =
amount of collateral needed to be posted
maintenance margin =
amount of price movement after which collateral needs to be replenished
Source: Harvey, Ramachandran, and Santoro (2020)
ETF-like securities
Securities Creation: Tokensets
idea: create new mutual fund like asset
Securities Creation: Tokensets
By Andreas Park
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"