THELOGICALINDIAN - Decentralized allowance for decentralized finance
Opyn, a new DeFi product, has alien an options-based allowance bazaar for investors to barrier adjoin atramentous swan contest and assure their Compound deposits. By leveraging options, the allowance apparatus is beneath centralized and added able than adversary Nexus Mutual.
Ensuring Security for DeFi Investors
Despite strong traction aural the DeFi ecosystem, there is no curtailment of accident back it comes to these protocols. Most of this accident may not be arresting on the surface, but they abide aural layers of code, cat-and-mouse to be exploited by awful actors or closed by agog bug compensation hunters.
Nexus Mutual, DeFi’s aboriginal absolute able at arrest insurance, has about $3.6 actor account of amount bound in the protocol.
A accepted criticism of Nexus Mutual, and alike Maker, is the charge for animal action to appraise risk. Nexus Mutual requires bodies to assay claims to shakeout fraudsters. Maker’s accident letters for abacus new accessory are additionally conducted by humans.
Rather than ambience up as a alternate and accumulation in the acceptable ecosystem, as Nexus Alternate has done, Opyn operates like a approved Ethereum dApp.
Utilizing the Convexity Protocol, Opyn leverages the customizable accident acknowledgment approach offered by options affairs to actualize a peer-to-peer allowance mechanism. There are three key use cases for the protocol: attention adjoin adverse amount movements, ambiguity risks accompanying to the DAI peg collapsing, and insuring tokens, such as Compound’s cTokens.
While the aboriginal two use cases are important, allowance adjoin Compound deposits promises abundant added absorption than the others artlessly due to Compound’s prevalence as a baton of DeFi.
Say a DeFi broker has DAI in Compound’s money market, and this accurate broker wants to ensure their funds are safe in the accident that Compound or DAI collapses for whatever reason.
Opyn offers this broker the adeptness to buy options affairs for the agnate bulk of cDAI (Compound’s captivated DAI token) captivated by them. Normally, to banknote out of cDAI aback into DAI, this broker would artlessly charge to redeem these tokens on Compound’s interface.
Hypothetically, if Compound was compromised and funds in the agreement were lost, this broker with acknowledgment to Opyn’s allowance derivatives could artlessly exercise their options arrangement and accept the pre-determined bulk of funds.
This advantage would be a cDAI:DAI options, area cDAI is the basal asset and DAI is the bang asset that the broker receives back the advantage is exercised. The about-face amount of cDAI to DAI for the advantage is absitively back the options are minted.
Protocol Risks
As a peer-to-peer protocol, the counterparty to the advantage buyer, or the advantage seller, is addition absolute article – not the agreement itself. To advertise options on Opyn, one charge drop a cogent bulk of collateral, agnate to a Maker CDP or Vault.
This accessory charge be added than the best accident that can be incurred by the seller.
While this apparatus offers bright allowances in ability and improves decentralization compared to absolute allowance primitives, clamminess and accumulation counterparty risks are pertinent issues with attention to Opyn.
Sellers excellent options, alleged oTokens by the protocol. oTokens with the aforementioned accomplishment date accept changeable clamminess and are changeable with anniversary other. oTokens can appropriately be awash to a third affair who again bears the accident of the advantage actuality executed.
This strains built-in agreement liquidity, as anniversary set of oTokens, with altered accomplishment dates, charge be a aqueous bazaar in itself. On the ablaze side, advancing options markets ache from this actual predicament, with assertive bang prices and accomplishment anachronous affairs enjoying decidedly added clamminess than others.
However, DeFi is a altered barbarian about to acceptable markets, so it is alien how clamminess will comedy out here.
Mass counterparty accident is addition specific phenomenon. If the DAI peg collapses, or if a bug in Compound accustomed a awful amateur to cesspool funds from the protocol, all advantage buyers would exercise their affairs at once, arch to a accumulation burning of liquidity.
A approved automotive insurer, for instance, does not accept to accord with accumulation accident on this level. One birthmark does not beggarly that every insured car ends up damaged or totaled.
Stock and article options-based allowance do have this aforementioned risk. If the amount of awkward oil steeply declines, put options will see a massive clamminess burning as buyers exercise their appropriate to advertise at a college price.
Advancement of Crypto Options
Options affairs for cryptocurrency accept apparent cogent absorption off late, with Deribit and CME arch aggregate with their BTC options.
As added adult speculators access the space, options are accepted to accretion absorption as they action a capital-efficient way to brainstorm and barrier adjoin risk.
The use of options for added specific accident administration processes like that of Opyn is a able assurance that crypto markets are gradually deviating appear the recreation of acceptable markets in a permissionless, accessible manner.
