Economics Design

Responding to the twitter poll, you guys want more finance and #DeFi explanations. So instead of assuming you know how to use #option strategies to help with risk management, let's do it in this video.   

No overwhelm. Just simple basic strategies for now.   We cover 3 strategies today:  

1. Covered call — think of it as being LP on HEGIC's platform  

2. Married put — think of it as insurance for price falling  

3. Bull spread call — think of it as LP on #HEGIC and insurance for price falling   

Why am I covering this? Because next week's #OPYN's protocol has such strategies available. So it might be useful to understand them when we do the deep dive. It's better to explain to a few who don't know, than to assume everyone knows and skip this!

Back to our theme of February, we are covering a new protocol, #Potion.   

Potion is a decentralised protocol for creating price volatility insurance contracts that run on the Ethereum Blockchain. The protocol allows users to protect against discounts on any asset: $BTC, $MKR, $LINK, $ETH, $MKR, $BAT.  

User can create their own contract with custom Number of Contract, Strike Price and Expiry Date.  

The interesting part of this protocol is that it does NOT have a token!   

Potion Protocol is currently in the development phase, with simple product structures making it accessible to everyone.  

In particular, the calculation of the option fee is based on the actual volatility of the asset, or to internalise risk management for liquidity pools.

Get the book now at book.economicsdesign.com I Pay with crypto and get 15% OFF

Financial derivatives are an important component of the financial markets, as they enable risk management. The decentralised derivatives market is expected to grow exponentially with DeFi's growth and, as a result, a widespread and robust financial infrastructure is required.  

Opium is a financial protocol for decentralised financial derivative products. Opium Protocol is completely based on open-source software and smart contracts. In addition to conforming to values from the DeFi space and possibly incorporating DeFi currency market and protocols, the Opium Protocol is designed to also incorporate into the traditional financial sector and market participants.  

Opium allows the creation, settling and trading of decentralised derivative products on Ethereum. Opium combines any Oracle with any financial tool (e.g.  Dapps can interact with Opium). Every position represented by a token can be traded, sent or stored.  

Derivative instruments built on top of the Opium Exchange always have limited potential losses and gains. Through a $ OPIUM token and a DAO, the Opium Protocol and its ecosystem will, over time, be completely governed by everyone.

Get the book at https://book.economicsdesign.com I Pay with crypto and get 15% off

In traditional finance, one of the most important pieces of derivative products can be mentioned is options. Continuing on with our #DeFi options series, we will be sharing about #HEGIC, the top #options protocol by market cap.  

A simple option is a contract that allows a holder to exercise a call or put option at a predetermined price in the future with the main purpose of minimising the risk (hedging) or speculation.  

Hegic is a peer-to-pool option trading protocol that allows users to trade in options in a decentralised way.  

Hegic works quite simply with the participation of two components, writers and buyers:  

Buyers: who need to call or put option on Hegic. Buyers can customise parameters of Options such as expiry date, strike price.  

Writers: Who sell call or put options to make a premium and to become a writer on Hegic users simply need to provide liquidity to the Hegic Pool.

DeFi and CeFi options are different. Especially since tokens are involved. Tokens are not involved equally; #HEGIC uses it for staking and governance, #OPIUM uses it as an ERC721 tradable options contract, #OPYN uses it as a collateral for underlying assets. The models and mechanisms are vastly different.   

Today, we will cover the general model of how tokens are created, the value being accrued and the how tokens are being used in these systems.

Learn more by getting the token economics book: book.economicsdesign.com

What are options?  

Options are an agreement. Remember when you were young and you told your best friend "if we are both single by 40 years old, let's marry each other." It is an agreement to execute at that time.  

Similarly, you have that for financial products. Instead of marrying, you buy or sell financial products at a specific price.   

Why use options?  

There are a few reasons to use options, mainly because it is part of a trading strategy and it can be quite cost efficient with limited risks. It depends on how you use the option.   Another way is to see option as an insurance via a long put strategy. We discuss that in the video too.   

CeFi vs DeFi  

More importantly, this is to build up towards DeFi options. How are DeFi options different? DeFi options has a protocol (and maybe tokens) to manage transactions and trade within the ecosystem. And that is what we want to look at in the next few episodes.

Learn more about token economics and DeFi by getting our book: book.economicsdesign.com 

In 2021, we will switch it up. Instead of videos in bits and all over the place, we will create a monthly theme. This helps to divide the content out into sizable chunks and digest the information much better. Too much info in 1.5h is a bad thing!

In January and February, the theme is options. Specifically, DeFi options.

In this episode, we kickstart 2021 with an episode on volatility. Volatility is important to understand what options are. Then, we can understand more about defi options.

Options is not like AMMs. There is no "general" model to it, because options can be customised in so many ways. So, tokens relating to options are also very versatile. Hence, I will need 2 months to cover options, and for you to make sense of how we can apply tokens and economics to it.

Get the book at book.economicsdesign.com

DEX, AMM and bonding curve. Again, on this topic. I swear there is a lot of other innovation in the space too, but this week, I want to share something interesting with DEXes and their mathematical mechanism. You can guess that because we're having another whiteboard session!

This week is a collaboration with block.science. And we will dive into Sifchain, a cross-chain DEX using Kosmos SDK that includes Layer 1 validation.

3 main things we will cover today:   

1. Sifchain's rebalancing model for validators and liquidity provider ecosystems  

2. How transaction fees are calculated. Specifically, we reference Uniswap's model (CMM, zero internal fee) and Thorchain (CLP, internal fees embedded) and learn about how it affects Sifchain's onchain transaction.  

3. Asymmetric addition of tokens into liquidity pool and how this is different from the other DEX out there

Specifically for fees, I want to stress that there are 2 types of fees — internal fees and external fees.

- External fees are basically zero fee swaps in Uniswap, with a fixed fee per transaction. This is good for traders. 

- Internal fees are fees embedded into the DEX swap. This is good for liquidity providers. Can you think why? Hint: because of impermanent loss!

Supplementary reading:   

1. More of the specific math models by Block.science https://sifchain.finance/wp-content/uploads/2020/11/The-Token-Economics-of-Sifchain-edited-2.0.pdf    

2. Continuous liquidity pools by Thorchain (which I will do a video some day. It's in the list!) https://docs.thorchain.org/how-it-works/continuous-liquidity-pools

In this episode, we show the TRUE power of tokenisation. 

How? Interest  earned from derivatives market and tokenise that mechanism.   

The DeFi space is getting more complicated with the derivatives market  and bringing in elements of Repo into DeFi. Whilst this is really  extremely exciting, one problem is that it gets more complicated to  understand.   

This is what I have been talking about! DeFi is the experimental field and we find the various ways to tokenise value add and bring this new model to traditional finance.   I'm so excited. 

TLDR: CoinFlex uses Repo style mechanisms to earn the interest rates  from perp derivatives. The returns are real and is rewarded to FlexUSD  token holders. Thus, FlexUSD becomes an interest bearing USD on crypto.  Think of Aave, but instead of P2P, it's derivatives to spot.   

Next step:  

1) Start creating #FlexUSD here: https://coinflex.com/user-console/register?shareAccountId=1890  

2) Allow the bot to do its thing and earn interest via USDC   

Happy holidays 😉  

In this episode, we learn in an "Explain Like I'm High-School" style of 

As much as I want to say DeFi and crypto is easy to enter, it is not  easy to fully grasp and understand it. 

First you need to understand  technology. Then to understand math, finance and economics.   

This podcast is to help you bridge the learning gaps. A subscriber (shout out to Magnus) mentioned that a general ELI5 episode would be good  to run through the few common terms.    

Here, I've picked up 15 terms that are commonly used. Instead of giving  you the "just google what it means" term, this is an ELI5 explanation  with human explanation. That's the best way to learn, in my experience.    

15 terms we run through and explain:    

*General Classification*  1) Layer 1 2) Layer 2 3) Dapp    

*DeFi General Terms*   4) DeFi 5) Money Lego 6) Compostability   

*Scalability Problem + Solution*  7) Scalability 8) Sidechain  9) Roll-ups   

*More Technical Elaboration*   10) ZK roll-up  11) Optimistic roll-up 12) ZK-SNARKS   

*Other Terms*  13) Quadratic Funding 14) Flash loans 15) Front Running

My textbook for economics and math of defi and token engineering it now out for preorder! Get it at https://book.economicsdesign.com/home/