DeFi Derivatives

 

Instructors:           Andreas Park & Zissis Poulos
 

 

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 \(\ge\)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 \(\to\) 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 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 \(\downarrow\) 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

  1. Withdraw up to 200 USDC to bring margin to 10%
  2. Close the position with a 200 USDC profit = 100% return

What will happen

  1. position is below 5% maintenance margin
  2. keeper liquidates position: sells 1 ETH and pays 1,800 to contract
  3. 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

\(\frac{2,000}{1,800}-1=11\%\)


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

what is dydx?

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

@financeUTM

andreas.park@rotman.utoronto.ca

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