FinNexus adopts the MASP (Composite Asset Pool) model to lower the threshold for user participation, thereby converging option liquidity.
Written by: LeftOfCenter
What FinNexus is trying to solve is the current common problems of insufficient liquidity and too few options in the options market. In addition, FinNexus also minimizes the risk of option market makers, allowing ordinary people to operate without complicated hedging strategies. Can participate in options market making. For novice users who don’t know much about options, decentralized options market making can be regarded as a kind of fund. In the long run, this is a low-risk and profitable financial management method. .
In addition, FinNexus also hopes to guide liquidity (Bootstrapping liquidity) through liquidity mining. After all, in the field of decentralized options, liquidity is the most scarce resource. Only with sufficient liquidity and more options can it be provided. It may attract more option buyers and generate platform scale effects.
How does FinNexus solve the problem of lack of liquidity in the current options market? This starts with the design mechanism of FinNexus.
What is FinNexus?
FinNexus is a decentralized options product that uses a unique MASP composite asset pool model that can aggregate the liquidity of multiple options categories. This can not only diversify option sellers’ exposure to single option risks, but also Improve the utilization of funds.
The so-called MASP (Composite Assets Collection Liquidity Pool) model is called Multi Assets Single Pool, which means that a variety of different option assets are brought together into a unified liquidity pool, and this liquidity pool provides margin and liquidity support. This can solve the problem of insufficient liquidity of decentralized options to a certain extent.
In addition, FinNexus adopts a cash settlement and delivery model, which not only enables a variety of different underlying asset option transactions and realizes the versatility of option agreements. At the same time, compared with physical delivery and full margin models, this can greatly increase funds Utilization rate and reduce Gas cost.
How to solve the liquidity problem?
It can be said that liquidity is the most scarce resource in the decentralized cryptocurrency market. No liquidity means that there are no buyers. Liquidity guidance has even become a kind of infrastructure construction. This is also the recent hot DeFi liquidity mining development. The reason and the biggest motivation.
This is even more true for the decentralized options market. Since DeFi options are currently in their infancy, liquidity solutions are not yet mature and expensive. At present, most options transactions are concentrated on the centralized options trading platform Deribit.
The data shows that the volume of decentralized options exchanges is much lower than that of centralized options exchanges. In the past two years, the trading volume of Bitcoin and Ethereum options on centralized exchanges has increased significantly, with the scale increasing by more than 30 times, from USD 198 million in January 2019 to USD 6.4 billion in October 2020.
Compared with centralized options platforms, the size and scale of decentralized options exchanges are far smaller than the former. The key reason is that the high settlement cost on the chain leads to problems such as lack of liquidity, low capital utilization, and scarcity of options. . In traditional finance, liquidity is solved by professional option market makers. Generally speaking, the exchange will provide these market makers with some special risk hedging tools to balance risks. In the field of crypto options in the early stage, especially on the chain, there is no professional option market maker, and there is a lack of professional hedging tools. Even if someone is willing to participate in market making, they will face high capital scale barriers and market risks. .
This is exactly the market that FinNexus is aiming at and the problem that it is trying to solve. That is, by lowering the trading threshold of options, ordinary novices can easily participate in option liquidity market making without complicated hedging strategies, which not only minimizes risks, but also As a sound source of profit, backtesting data shows that this is a relatively low-risk and profitable financial management method.
The MASP mechanism adopted by FinNexus is essentially a decentralized point-to-pool model that does not require permission. That is to say, multiple asset classes and options with different terms are gathered in a unified liquidity pool, and market making is not required. Complicated hedging strategy, you only need to invest stablecoins in this pool to participate in providing liquidity to obtain income, and FinNexus also provides very attractive mining income. In the long run, this is a steady financial income for Xiaobai users.
It can be said that FinNexus adopts a unique mechanism to lower the threshold of option market making to the extent that ordinary people can easily participate, so as to maximize option liquidity and gain market share in DeFi options.
What are the advantages of FinNexus besides liquidity
This MASP model design solves the liquidity problem of options well. In addition to liquidity, this model also brings other by-products to FinNexus.
In fact, in addition to solving liquidity, FinNexus has also made great efforts in minimizing market-making “risks”, increasing capital utilization, and reducing gas costs.
Compared with the decentralized options platform Opyn’s full-margin physical delivery mechanism, FinNexus adopts a price difference settlement mechanism, while using cash delivery. The differential settlement mechanism means that the utilization rate of funds can be improved. Compared with physical delivery, the cash delivery mode saves more calculations, which means that the cost of gas fees is lower. In addition, cash delivery only settles the difference, which allows the liquidity pool to derive options for a variety of different underlying assets. In addition to the currently online BTC, ETH, MKR, SNX, LINK, FinNexus also introduces physical assets, stocks, indices, The plan for legal currency and other currencies, and still share liquidity, will further increase the flexibility of option buyers and realize multiple compound strategies.
In addition, the FinNexus development team has minimized the “risk” of option market making, whether it is market making risk in the liquidity pool, contract risk or market equilibrium risk.
In fact, it is this single pool versus multiple option asset model that can greatly diversify the risk of this liquidity pool.
First of all, a single pool of multiple assets means that the underlying assets with different asset correlation coefficients can be grouped together to disperse the possibility of simultaneous fluctuations. In other words, a variety of different types of options converge into a smart contract fund pool. There are different underlying assets in this pool, such as mainstream BTC and ETH, as well as physical assets such as oil, gold, stocks, etc. The machine feeds the price of these underlying assets), these assets with different risks are combined together, and the possibility of price fluctuations at the same time is relatively small. If a pool is all digital currency assets, the synergy is too strong and the risk factor will be high. This is the focus of FinNexus’ asset enrichment work in the future.
A single pool of multiple assets also means that there are both call options and put options in this liquid pool, as well as options with different expiration times and exercise prices. The richer the categories in this pool, the more funds invested, which will also bring a passive dispersion of the other party’s risk.
So, how much income can be obtained through FinNexus option market making?
For option sellers, this point-to-pool model can be added without permission, and can become a market maker without complicated hedging operations. Although there may be floating losses in the case of unilateral trends in the short-term market, if time The line stretches to a longer cycle, and this income is still considerable.
Data from the FinNexus development team’s backtest of this strategy shows that within one year, if the pool utilization rate reaches 100%, the return rate of the option seller liquid pool will reach an annualized 50%-80%.
Of course, if you add the liquidity mining reward that will be implemented soon, this income will be even more impressive.
Boris Yang, the founder of FinNexus CEO, told Lianwen that FinNexus plans to change its liquidity mining incentive model, which will issue larger rewards to encourage liquidity mining, and will also take part of the premium income generated by the USDC liquid pool. Dividends are distributed to reward those who have contributed to the ecology and have operational behaviors. At present, this operational behavior is to provide liquidity.
At the contract level, FinNexus also provides a protection mechanism for market making. The FinNexus contract has a time-lock protection mechanism, which prevents buyers from exercising within 1 hour after purchasing options, which can effectively prevent lightning loan attacks and arbitrage happened.
Finally, FinNexus provides a price adjustment coefficient based on the BS model pricing model, which is similar to the operation mechanism of AMM, which can maximize the balance of the risk of call options and put options in the liquid pool.
Usually, as market sentiment fluctuates, most options in the pool may be unilaterally bullish or unilaterally bearish at a certain moment. If this ratio is too large, it may bring certain risks to the sellers in the pool. FinNexus’s price adjustment factor can prevent such situations from happening. If there are a lot of call options opened in a certain period of time, the coefficient will automatically adjust the price of up options to rise, thereby inhibiting people’s motivation to buy.
In the traditional financial field, options trading is a market with a scale of trillions of dollars. In the field of cryptocurrency, this market has just emerged. The decentralized options platform FinNexus adopts a unique mechanism design to allow ordinary people to make options market. Possibly, this can not only greatly release the liquidity of options, but at the same time, this point-to-pool model is simple enough, even ordinary users with small funds can participate in providing liquidity independently without too much cognitive burden. This is not only in line with the open spirit of DeFi, but also solves the long-standing lack of liquidity in the options market.
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