Will decentralized options be the next DeFi track to explode? As a newcomer to the DeFi options protocol, what new gameplay does Asteria bring to the table? What features will be covered on this beta site and how can investors of different styles participate? How is this financial derivative instrument more suited to the market trend? How to control the risk while “playing small to big”? What is the potential of platform coin ATA? For the above questions, Michael shared in depth.
Moderator: First of all, please ask Michael to introduce the background of Asteria project. Why did you and your team choose to enter the decentralized options track?
Michael: Hello, Asteria is a project that I co-founded with the founders of DAOStack in Europe, and our international team is located in the US, Europe and China. I have been in charge of secondary market data and trading on Wall Street for over a decade, and have been involved in incubating, designing and developing various DeFi projects since the previous year, including some of the industry’s leading prediction markets, spot swaps, stablecoins and aggregators, among other protocols.
Having experienced DeFi’s two years of development and drift, I have gained a deeper understanding of the industry as a whole. Personally, I believe that the options track is perhaps the last track with explosive potential for DeFi, and with my years of experience working with derivatives on Wall Street and my in-depth research of some competing products in the industry such as Hegic and FNX, I chose to lead our experienced team to develop a decentralized options trading platform that is professional, comprehensive and secure enough, aiming to become a unicorn of decentralized protocols.
Moderator: So, what are the differences between DeFi+ options compared to traditional options trading?
Michael: The centralized options trading of digital currencies is basically concentrated in Deribit, and even after years of development, its trading volume is still not comparable to spot and perpetual futures, while in traditional financial markets, the trading volume of options contracts is usually double-digit multiples of the sum of the spot and futures markets. The following chart reflects the difference between options and perpetual in comparison to the size of traditional financial and digital currency markets.
The underlying reasons are two: 1 is that options themselves can become discrete markets due to their different exercise dates, strike prices and other parameters, which makes the already less popular digital currency options market be more fragmented; 2 is that options require a relatively high level of expertise, especially for option sellers or market makers, then due to the slow regulatory process of digital currencies, similar to the senior players on Wall Street institutions are The slow regulatory process for digital currencies has resulted in a less rich seller’s market for options, thus diminishing liquidity even more.
After the rise of DeFi, teams of practitioners have made different attempts, and basically decentralized options have gone through three main development processes: off-chain order thin aggregation -> tokenization of each option contract, automated trading using the spot Swap AMM mechanism -> Peer-to-Pool trading model. The off-chain order thin aggregation does not solve the problem of fragmentation in the options market. The spot AMM tokenizes the contracts but is also a pool of multiple fragmented trading pairs, while automated market makers have to face the Achilles’ heel of impermanent losses. Peer-to-Pool, on the other hand, solves these problems perfectly, as the buyer can not only customize the parameters of the options contract, but the seller basically only needs to pledge collateral to complete the market maker’s operation. This lowers the barrier to participation for both buyers and sellers.
The Peer-to-Pool trading model places high demands on the market maker’s capital management capabilities. Asteria decided to create a highly rewarding, highly secure, highly automated, and highly customized options protocol platform precisely because it saw that no platform or protocol at this stage had done a professional and secure enough job in this area, coupled with the capabilities of its own team.
Moderator: As a newcomer in the defi options track, how is Asteria’s development progressing so far? What features will the test network cover?
Michael: Asteria completed the test network back in March and is now iterating, including the design and backtesting of different option pricing models, the design and construction of algorithms for aggregated returns and hedging, and the technical interfacing with the head Oracle provider API3 to become their Airnode to provide data providers for implied volatility IV.
The test network is expected to be open for community testing this weekend or next week, mainly for European options, and will then launch trading contests, bug bounty and other activities, with corresponding cash and airdrop rewards for active participants.
Moderator: According to the white paper, Asteria Decentralized Options Trading Protocol (ADOP) supports two types of investments: market making and speculation. What is the difference between the two? What kind of people are options market makers and speculators for?
Michael: Options pricing and hedging is a very specialized area that involves very complex mathematical formulas and computer simulations, so Asteria’s professional team does the hard work of financial engineering for market makers.
To briefly explain, market makers in options are usually run by professional financial teams in traditional finance, and there are two main aspects involved here, one is the pricing of options and the other is the hedging of positions to ensure against buyers when they exercise their options. With full hedging, the seller/market maker of the option receives a class fixed return on the buyer’s premium.
Since both of these tasks are done by the Asteria team through smart contracts and on Airnode in API3, users who want to become options market makers only need to pledge their digital assets in the asset pool, and Asteria will dynamically allocate the assets to the aggregated revenue and aggregated hedge modules, plus LP mining for much higher market maker revenue than other options platforms. market maker returns.
Speculators, or option buyers, can more automatically and customize the system by easily setting up different option contract parameters and instantly getting quotes on option fees and maximum tradable volume.
Asteria will continue to introduce a wide range of options to meet the speculative or hedging logic and objectives of different traders, enriching the product range.
Moderator: In other words, the options market maker (seller) can get the fixed income of the option fee, and the speculator (buyer) can meet the needs of hedging/hedging/speculation. Further, for investors, what kind of market is suitable for options trading?
Michael: Options have a very wide range of application scenarios, and the most basic model is the possibility of unlimited returns with maximum risk control. Regardless of the market, options can be used for the purpose of gaining more or less or avoiding risk if they are used wisely.
For example, when a one-sided market occurs, investors can choose the more traditional European American options, even if there is any reverse market before the moment of exercise, as long as the direction is correct at the moment of exercise, there will be no perpetual contract leverage burst, and the maximum return of the correct directional prediction.
When there is a lot of volatility in the market, but the direction is not clear, straddle options are a kind of contract that can be profited entirely by volatility, without considering the up or down direction.
For the blockchain space, options can also have more interesting applications, such as options can be used to hedge against spikes in the gas fees of the Ether-like mainnet, or to offset the unpredictable losses of Uniswap-like spot auto market makers, which are all very clever uses of options to prevent or predict the interesting play generated by the nature of large volatility with small capital.
I believe that as more players enter the DeFi space, the application of options will become more widespread. At the same time, Asteria’s volunteer team will regularly provide investors with options knowledge explanation and sermons, underlying quotes analysis and other content output. Follow us on our website (https://asteria.finance/) and twitter (@AsteriaProtocol) to be constantly surprised.
Moderator: When the unilateral market or market volatility is high, but the direction is not clear, option instruments are a good choice, and the core is to make a big difference with a small one. It’s interesting to note that in addition to DeFi, Asteria has also introduced NFT into options trading, can you tell us about that?
Michael: It is indeed interesting, the application of NFT to LP equity is a design that the Asteria team invented on its own, but we have seen the same embrace of NFT technology in the recent Uniswap V3, which can be described as heroic.
Simply put, both buyers and sellers of Asteria options receive NFT tokens. The seller gets it in the form of an LP, which on the one hand can be used to get the option market maker’s revenue through NFT, and also as proof of mining arithmetic.
The buyer’s NFT also has two uses, on the one hand, it is the proof of rights when the buyer exercises his options, and on the other hand, it is the synthesis of option contracts using the feature that NFT can be synthesized, so that the variation can be easily customized for the various types of options mentioned in question 5. Of course, the buyer’s NFT is also mining arithmetic.
Moderator: What role will the Asteria Platform Coin ATA play in the whole ecosystem? What does the pass-through economic model look like?
Michael: ATA will have two roles: on the one hand, it will support the value of Asteria protocol and platform, and realize the deflation mechanism of ATA by using part of the fees to buy back and destroy the platform coins through smart contracts; on the other hand, it will also serve as the governance token of Asteria, which can be used by users holding coins to govern the protocol platform and make development decisions, such as the ratio of fees to buy back the platform coins On the other hand, it also serves as Asteria’s governance token, which can be used by users to govern the protocol platform and make development decisions, such as the ratio of commission buyback platform coins, the priority of different types of options products coming online, or the decision to introduce other market makers to the platform in the future.
Moderator: In the decentralized options track, platforms such as Opyn and Hegic have also emerged, what unique advantages does Asteria have compared to them?
Michael: Opyn is the spot Swap AMM solution that arrived in question 2, which not only fails to address the problem of fragmented options markets, but also comes with unavoidable and unpredictable losses for market makers.
Hegic is the program with the highest TVL in the Peer-to-Pool model, but the problem of its own lack of hedging module exposes all market maker investors’ funds to digital currency market risks with much higher volatility than traditional financial markets, and the safety of the liquidity pool is not guaranteed. At the same time, the difference between a TVL of 10 million and a daily trading volume of several hundred thousand makes Hegic’s TVL returns become very low at the end of head mining, then it is completely uncompetitive compared to other high APY DeFi projects, so it will inevitably cause the loss of funds and thus liquidity to dry up.
For option sellers, Asteria uses the most professional and advanced model for risk management, and with DeFi’s Aggregate Return Module, market makers will not only be safe but will also earn excess returns.
For option buyers, Asteria’s pricing model is much more professional than Hegic’s, which gives buyers a reasonable price on one hand and provides a solid theoretical basis for hedging on the other.
Moderator: Safety is always the top priority of investment, what are the risks that need to be paid attention to in options trading, in addition to the price fluctuation risk itself, and what does Asteria do in terms of risk control mechanism?
Michael: Asteria has implemented a comprehensive risk management system for options market maker capital (shared pool).
The first is Delta risk, which is the directional wind, when the buyer of the option is correct in the direction of the forecast, the market maker needs to deal with the buyer’s earnings when the buyer exercises the option, we hedge the directional risk through a professional Delta neutral strategy.
Liquidity risk refers to the risk that market makers face a shortage of capital or a shortage of liquidity in the hedging market when providing liquidity and hedging, Asteria provides a dynamic pricing + quantitative mechanism based on the liquidity pool, and also uses a downside mechanism to ensure that market makers meet their payment obligations when liquidity is depleted, in order to prevent liquidity exhaustion and ensure the stability of market making capital.
Gamma risk is the risk that a small change in the underlying asset near expiration will have a significant impact on the option price, and Asteria provides a large number of customizable option types to diversify the option structure and diversify the option structure parameters to reduce net position ratios and hedging costs.
Vega risk refers to the loss from a market maker’s position leaving a large Vega exposure, a loss from volatility, when the market is illiquid in Delta hedging, especially in markets with volatility instability and a large number of short jumps. Asteria avoids this type of risk by adjusting the frequency of hedging based on dynamic estimates of the underlying asset’s volatility.
Market maker credit risk is controlled using a margin call system for odd options (such as Snowball and Phoenix options).
To summarize, Asteria provides a complete risk control system to secure the shared pool of all liquidity providers and apply hedging mechanisms that are critical to being a legitimate market maker/seller of options transactions.
Moderator: Last question, what are Asteria’s immediate development plans?
Michael: Asteria will open beta network outbound testing activities from next week, while each iteration of the product update will be accompanied by a campaign with rewarding user participation, the end of June is expected to test on Layer2, while Asteria will will be the first decentralized options platform to launch perpetual options. Please look forward to it.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/asteria-beta-online-coming-soon-defining-a-new-paradigm-for-options-trading/
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