Three minutes to understand the decentralized option agreement Primitive Finance

What Primitive Finance is doing is to build a sufficiently healthy option market in the DeFi world.

Written by: Ad

The crypto world in 2020 is destined to belong to DeFi. From the early mortgage loan of MakerDao to liquid mining represented by Compound, DeFi is growing rapidly. As Defi’s exploration in the financial field continues to deepen, finding the next direction with explosive potential has become a common topic for market participants, and the decentralized option agreement in the derivatives track seems to be exactly what the market is looking for “she was”.

At present, cryptocurrency transactions based on the Ethereum network include spot and loan markets, which are a relatively missing part in the field of liquid derivatives market transactions. As one of the largest derivatives markets in the global traditional financial field, options will also play a pivotal role in the development of DeFi derivatives. What Primitive Finance is doing is to build a sufficiently healthy option market in the DeFi world.

What is Primitive Finance?

Primitive Finance is a decentralized option derivatives protocol based on Ethereum. It consists of different modules and is committed to building a healthy option market in DeFi.

Primitive Finance is currently still in the early Alpha development stage, and the mainnet will be launched for testing on May 2, 2020. In the test version, ETH put options are designed, and the expiration date is May 30, 2020. In the testing phase, the underlying asset deposited by Liquidity Providers in the fund pool is DAI, which is used to create put options for ETH, which is then sold to the buyer for a premium. These premiums are distributed to liquidity providers based on the amount of DAI provided.

At the same time, the liquidity provider in the fund pool will bet that the price of ETH will exceed 200 DAI at the first Prime option strike price on May 30, 2020. To put it simply, the liquidity provider has the right to purchase ETH at a price of 200 DAI at maturity. If the market price of ETH is lower than 200 DAI, it will cause losses to the liquidity provider.

The operating mechanism of Primitive Finance option contracts

According to the information in the white paper, Primitive uses a similar approach to American options, which allows option owners to “use” their options when needed, that is, they can exercise their options before the expiration date (the “exercise date”). Primitive is committed to creating simple and easy-to-operate option trading. For the simple and easy-to-operate feature, Primitive has designed four major token designs.

In addition, Primitive designed the option smart contract Prime based on ERC-20, which can be applied to any trading pair of ERC-20 tokens, and can be traded through Primitive’s fund pool or third-party exchanges such as Uniswap. Prime can match the pattern of regular options and has the following properties:

• Token U: underlying asset
• Token S: Execution assets
• Base: Number of underlying assets
• Price: the number of executed assets (exercise price)
• Expiry: Prime’s expiry date

These asset pairs can be any combination of ERC-20 tokens. The Prime contract itself does not support ETH, but according to the logic in the fund pool protocol, it can be deposited in ETH and converted to wETH.

The underlying assets (Token U) included in Prime ERC-20 are only available to Prime holders, and the underlying assets can be withdrawn in the following two ways:

1. The holder of Prime can exercise the option to convert the exercise asset (Token S) of the option holder into the underlying asset (Token U) held by Prime. At this time, Prime will be destroyed.
2. The maker of Prime (the user who deposits the underlying asset) will receive Prime ERC-20 options and Prime Redeem tokens. The maker of Prime can redeem tokens by destroying Prime and Prime, and withdraw the deposited underlying assets. This process is like the reverse Prime manufacturing process.

Prime redemption tokens are used to withdraw execution assets. If the trader has exercised the option, the execution assets are replaced with the underlying assets.

Primitive Finance provides PULP token incentives for liquidity providers

Primitive enhances the liquidity in option transactions by designing a fund pool in the agreement. The logic of this fund pool includes the ability to sell put options to traders. In the upgrade iteration of the future agreement, Primitive plans to make a more complex logical design for the fund pool. Traders can purchase put options by paying a premium to liquidity providers, depending on the usage of the fund pool.

Liquidity providers can obtain PULP (Primitive Underlying Liquidity Provider) certificates by depositing the underlying assets. The fund pool generates Prime from the remaining funds, and then sells it to the buyer at the price specified in the fund pool contract. The balance of the fund pool includes the premium of the sold Prime, and is distributed according to the proportion of the liquidity provider holding PULP. If the liquidity provider withdraws the deposited underlying assets and option proceeds, the PULP held by it will be destroyed in proportion to the withdrawal.

Primitive Finance’s latest progress and development plans

At present, Primitive’s option contract project is in the early development stage. According to the audit report issued by OpenZeppelin on August 21, 2020, 3 serious problems and 3 high-risk problems were initially discovered during the audit. The Primitive team targeted Some risk warnings have been repaired and adjusted to reduce the potential risk of being attacked. For other details, the Primitive team confirmed and adjusted according to the inherent design of the system. The Primitive project is in progress but has not yet been put into normal use. The first round of audit is Primitive’s first step towards a financial derivatives project. It needs to reach a mature level in terms of system, safety and use.

Primitive Finance is currently still in the early Alpha development stage, and the mainnet will be launched for testing on May 2, 2020. There is no clear news about when Primitive option products will be officially launched, but the words 2020 Q4 are marked in an obvious position on the homepage of the official website. Perhaps new actions may be taken in the fourth quarter of this year.