DeFi Derivatives: Exotic Options on Smart Contracts - TOKEN2049 Singapore 2023

hi everyone good to see everyone here early in the morning my name is Arissa and I'm the co-founder and CEO of Sega Finance we are a D5 protocol that developed the first smart contracts that handles exotic options which are these types of conditional options that allows you to structure a variety of investment strategies so kind of compared to the previous talk this is going to be a bit more technical but today I would love to talk about exotic options and why they solve existing issues in defy so let's get started oftentimes people think that defy derivatives has kind of existed around the same amount of time as Bitcoin but what people do not realize is that we are actually in a extremely early stage of defy D5 derivatives has only existed for three years whereas Bitcoin has existed for over 15. and in traditional Finance D5 derivatives is a do not defy derivatives derivatives is a 22 trillion dollar market whereas in crypto right now D5 derivatives is only three billion dollars and so this means it is an extremely early market and there is a ton of opportunities and Sega is one of the first movers in this space looking to create new technology that allows for better user benefit defy currently has a lot of issues because it is such a new market for a lot of you here who have touch D5 products I'm sure you have experienced some of the issues here the first one is a lack of product innovation in the last cycle what we've seen is a lot of uh products or a lot of protocols kind of taking the best ideas in the market and just deploying them on different Chains It's called forking and we've just seen that people were not being very Innovative with their products and because of that there were a lot of Ponzi schemes inflationary token rewards many issues where the user benefit and the utility of D5 protocols did not actually give the users a real return and then the second issue was the lack of online liquidity so because Defy is such a new field there's a low Market maker appetite in actually providing liquidity for these products and because being on on chain there is actually a huge difference between the pricing of things off chain a lot of market makers are sometimes not getting the best deal on chain and so they're not really excited about creating things on chain and there's also the issue of transparency on chain trading has too much transparency for some market makers and because of that there is a lack of liquidity how do we drive this liquidity and then lastly there's a lack of decentralization so smart contracts have obviously been this incredible technology that was developed that allows for a permissionless trustless autonomous execution of financial transactions online however there is no proven institutional use case for smart contracts because the entire traditional Financial system still runs on a very paper-based contract and people are fine with it because the amount of time and the amount of resource required for paper-based contract in traditional Finance does not necessarily change that much by changing into smart contracts and so most institutions and market makers still prefer over-the-counter transactions and so defy really is missing this killer use case and how we should really make smart contracts a part of the existing system and so my thesis is this exotic option smart contracts actually solves all three of these defy issues it solves the issue of product Innovation it solves the issue of on-chain liquidity and it also solves the issue of decentralization now you might be asking why and if the answer to all of these problems is exotic options so the next part I'll go through how does defy exotic derivatives actually solve these issues so first of all I mentioned in the very beginning what an exotic option is an exotic option is a conditional option and if you are familiar with options and financial products an option is a type of financial contract that gives you the right but not an obligation to buy or sell an asset at a certain price at a certain time and exotic options are actually conditional options where you can indicate certain things like for instance a barrier where if during the duration of the trade if you do not touch this pricing barrier the option never realizes or the opposite where if you touch the barrier the option disappears you can also add things like basket you can also add things like um you know midterm mid expiry settlements you know lots of different types of payoffs and so the payoff at maturity for exotic options does not just depend on the underlying price at maturity like a normal option but you can just structure it in so many different flexible ways and so this allows for a much larger number of product Innovation because you can create so many different types of payouts for instance you can make kpi based payouts you can average out the volatility so that you're not taking as much risk or you can also create things that are say much more affordable for people to enter since crypto options in general are pretty expensive there are so many ways that you can create product innovation and then you can also create um you know you can track the performance of a portfolio rather than just one underlying that's another value of an option something called a basket option is actually a combination of a variety of underlyings and what the value of this is you can actually structure options with say a larger cap token like eth but also a smaller cap token and you can combine those two together in a basket and drive the market capitalization of the smaller cap token and so this packaging aspect also allows to drive liquidity for smaller tokens in the market and then lastly this is also a flexibility thing but you can change the matter of settlement between cash or physical delivery and this is appetizing for market makers who may not necessarily want to have ownership of too many illiquid tokens but if you have things like cash settlement where you are tracking the price of an illiquid token but actually buying and selling in usdc for instance it also allows to drive for smaller cap liquidity and just allows generally for more Market maker appetite and so the second part about online liquidity we talked about how the flexibility drives liquidity but it's also just the fact of trading these exotic options a lot of you may understand the word hedging which is the activity of trying to de-risk the position in your book so if you are a market maker and you're taking a position that you need to hedge out exotic options requires the most number of instruments to hedge out so when you trade one exotic options trade you are actually hedging that position with vanilla options Perpetual Futures and the spot market and so by having just one exotic option position you are actually increasing the volume that is being traded in vanilla options in Perpetual Futures and in the spot Market and so there is this flywheel of driving the volume of derivatives that drives the entire liquidity of the ecosystem that drives even more value into derivatives and volume and so it's this Inc amazing flywheel cycle of just creating more and more volume so the more exotic options trade that we actually do in the market the larger we can actually drive the size of the ecosystem and its liquidity and lastly we talked about a lack of decentralization in this field and in a killer use case for institutions so I think the value of having smart contracts and exotic option smart contracts actually could really start with an Institutional use case exotic options on chain allows for a trustless permissionless operation and this is incredibly important because right now for vanilla options you only have to settle once and it is at the end of the trade but for some exotic options trade you are actually doing the settlement multiple times a day or continuously like a streaming payment and it takes a lot of operations in a traditional Financial Market you actually have around 20 people for each trade running these settlements manually and checking the level of the trade every single day and so an average traditional Financial structure takes around a hundred and eight thousand US dollars to run and with smart contract all of that is zero even if you add some physical uh like manual oversight into the checking of these settlements you're still saving over 50 percent of the operational cost and so the value really here is that exotic options could be the First Institutional smart contract use case to alleviate the existing High operational cost and it also naturally makes the entire ecosystem more decentralized because it becomes trustless and permissionless on a smart contract so we really believe in this future of exotic options smart contracts solving defy issues and as Sega we have created the world's first exotic option smart contracts we are currently a market leader in the D5 options space um we have been live on ethereum Solana and arbitrom offering structured investment Solutions uh to this day we have traded over 300 million dollars in notional volume we have been the number one defy options protocol on Solana and number two to number four across all chains our Max tvl has been a little shy of 50 million dollars and we are the first protocol to really believe in this future of using smart contracts to create more product Innovation more online liquidity and and also um a more decentralized future and we our mission is currently to create safer yields in volatile Market environments so our products allow for a usdc deposit that runs Advanced structured investment strategies that earns you anywhere from eight percent to a hundred and sixty percent apy and it also has principal protection anywhere from 30 to 90 of the market movements we recently announced our launch on arbitrum which has doubled our user base and has seen great success we also have launched the e-stakers Vault just last week which uh tracks a portfolio of Lido RPL and Steve and it has around 22 API on your usdc we're also excited to announce that we're currently working on a V2 of our contract and this V2 contract will have things like restaking so right now it's a usdc strategy with usdc returns but we're actually allowing you to stake things like Steve or Reef which allows you to get an even better return on your liquid staking derivatives we're also looking at implementing early withdrawals so an issue in Defy is that there's a lot of lockups but we're actually creating a secondary market for our LP tokens so that you're able to trade the lp tokens in a liquid Market and then lastly we're making our contract upgradable so on the infrastructure side we've been putting in a lot of work to make our solidity code much better and to also allow for contracts to be more upgradable and versatile for future products this is also something we're really excited to work on some Partnerships with institutions and super excited to announce that in any of my future talks and we're also decentralizing our back end so so many of these new updates are coming very soon so if you are interested in the vision of a safer yield in a volatile Market environment and the future of exotic options smart contracts solving these issues in defy please check out sega.fi our Twitter is Sega underscore fi and my personal Twitter is erisa Toyo I will be also entertaining any questions off stage after this if you have any questions please do come thank you so much for listening to me today