Squeeth With Me Crypto Options and Derivatives Alexis Gauba

hey everyone i'm alexis from open and very excited to chat with y'all about sqweep uh so sqweep is a nice funny word you may not have heard of it before but by the end of today i promise you'll know exactly what a squeak is and you can tell all your friends so we're actually first going to start by talking a little bit about options and then we'll get into sqweep why it exists how it came to exist and how it actually works okay so why do people use options people don't typically just use these instruments for the sake of using these instruments they're trying to achieve something and with options people are usually looking to get leverage earn yield or be able to hedge themselves and there are a couple different types of options we've got call options and we've got put options for today i'm going to focus on call options and i'm going to start by just talking about what a call option is i know options get thrown around all the time so let's start by making sure we all understand what they are so i'm gonna start with this kind of fancy definition and then we'll break it down so a call option is the right but not the obligation to buy an asset which we call the underlying at a given price which we call the strike price on a certain date which is our expiry date and that's a mouthful but let's go through an example so we can fully understand what's going on here so let's say that eth price is three thousand dollars right now and i'm feeling super bullish i think at the end of february ethan is going to be five thousand dollars i think we're gonna have a massive bull run and i'm very excited about it so what can i do to monetize that view well what i can actually do is buy this call option instrument i can go out into the market and pay something called a premium in order to buy this call option and remember how we talked about that thing called a strike price well i i expect that ethan is going to be five thousand dollars at the end of the month so maybe i choose a strike price of something like four thousand dollars so what does that mean that means at the very end of the month if eath is five thousand dollars and my strike price is four thousand dollars i can buy it at four thousand dollars using my call option even though it's five thousand dollars on the market so that lets me buy each cheaper than what it's actually trading at so now why would i do this instead of just buying each straight up right now why would i buy this call option instead well remember how i paid a premium to get this call option that premium could be something like say like a hundred dollars so what i'm doing is i'm spending a hundred dollars right now because i think at the end of the month east is going to be five thousand and my strike price is four thousand so at the very end of the month if my strike price is four thousand i can use that call option to buy eat that four thousand dollars sell it on the market for five thousand dollars and earn that payoff of a thousand dollars even though all i spent was a hundred dollars up front for this premium and so that's why people like to use call options instead of potentially you know just buying eth straight up so yeah if eath price hits 4000 or goes above 4000 at the end of the month i can still buy my eath for four thousand dollars even though it's trading higher on the market so going back to our definition just to put all the pieces together eth is the underlying asset that's what i'm buying my call option on my strike price is four thousand dollars my expiration date is february 28th the end of the month and the critical part is that i have a choice i can decide if i want to buy eth for four thousand dollars at the end of the month so if it's trading above four thousand it's at five thousand dollars then i wanna use this option to buy ethe cheaper at four thousand but on the other side say we have some sort of like bear situation eath goes down to like a thousand dollars am i forced to buy eats for four thousand dollars answer is no i have a choice so i would only want to use this option if eath goes above four thousand dollars and that choice this right not obligation is a really cool part of options because then if i've bought this call option the maximum amount i can lose on it is that a hundred dollars that i paid for it but i stand to gain more and more as eath goes up in value and so that payoff looks like this this blue line here this kind of flat line is like my max i can lose that's the premium that i paid and then as eath continues to go up i continue to earn more because i can always buy eth for four thousand dollars even if it's trading higher on the market and so that gives us this really nice property of limited downside and unlimited upside and we have a fancy word for this in derivatives land called convexity so if you ever hear people saying convexity now you know that it pretty much in its essence means limited downside and unlimited upside and so that's a really nice property that you get by buying options so now you might be thinking okay like this is awesome like i want to buy an option and get convexity who in the world is going to be selling that to me who doesn't want limited downside and unlimited upside and so now we can look at kind of the other side of the payoff which is selling a call option and the reason that people take this other side of the trade and sell call options is because they're earning that premium that 100 that you spent they get that and so if someone thinks hey i don't actually think eth is going to move that much there's no way it's going to hit 4 000. then they might feel like this is a bet that they're willing to take to earn these kinds of steady premiums and so that's kind of what the two sides of these option trades typically look like on one side someone is getting optionality they have a choice this right not obligation on the other side people are earning premiums and they are basically getting paid to take the other side of this trade if eth goes above four thousand dollars and someone uses their option exercises their option the person selling the option does not have a choice they are forced to pay out and so they are paid for taking that okay so what are the problems with options why am i here talking about sqweep so there's a couple different problems that we've seen with defy options the first is that these options have experience like we talked about i can only use it up until the end of the month so i have to come and think about hey like i think i expect each to go up by the end of this month but what about in four weeks and what about in six weeks so that's a lot of thinking for me to do and then to add to the amount of choices i have to make i could also have multiple different strikes i could think eath is going to be above 4 000 or maybe 3500 or 5000 and so now i have all of these different combinations of strikes and expertise and to make things even more difficult all of these strike expiry combinations need to have their own liquidity pools and so now i'm looking at tons and tons of liquidity pools i have to form liquidity around all of these different series and that gets pretty challenging and so we were like okay how do we solve these problems with options so we went to the forest it was a bunch of the open team with dan and dave from paradigm and we were like all right how do we solve these problems and then in the forest in a nice sunny clearing we found a squeep and sqweep solves these problems with options squeeze has no experience no strike price and that lets us get this one liquidity pool we only have to build liquidity around one asset so squeeze maintains this nice property of convexity that we talked about with options you still have limited downside and unlimited upside but you remove these problems that we talked about so now let's look at squeak let's try to understand squeak a little bit better and then kind of understand what you can do with squeeze so this blue line here is the squeak payoff you can see it looks kind of similar to a call option it kind of goes like this except it's more curvy than the call option we looked at before so we still have this unlimited upside and we have limited downside and but there are a couple different ways that we can think about squeeze so first let's think about the name squeeze so squeeze actually stands for squared eath so each squared eats to the power of 2 and that's the blue line here it's literally e squared the x squared graph from like math class it's it's just a parabola the parabola that you're kind of used to um and so that gives us this nice kind of property of the unlimited upside and limited downside and another way you can think about it is as perpetual leverage without liquidations so the red line here is 2x leverage and you can see that if eat isn't moving that much squeeze and 2x leverage are performing about similar but if ethan moves a lot in the upward direction sqweep that does better than 2x leverage and if heath moves down a lot you you cap your kind of downside with squeeze whereas you get liquidated with 2x leverage so that's a bit of a mental model about how long squeeze works you can think about it as like a perpetual call option you can think about it as similar to 2x leverage but better on the upside better on the downside um and so that's kind of how you can think about long squeeze now again you must be thinking who in the world is going to take the short side of squeeze um and okay so before i get into that another way to think about long suite is kind of to compare it and so um yeah who in the world is going to take the short side they have to get paid for that and so with options you pay a premium in order to get access to that option so we've got our premium but with squeeze you pay funding so funding similar to other instruments like perpetual swaps so squeeze is similar to perpetual swap and that you're paying funding it's similar to a call option that you have convexity so you can see that squeeze and call option payoffs are both curvy but when you're looking at 2x leverage or perpetual swap they're straight um cool so yeah when you when you go to to be short squeak you're basically earning funding for taking on that position and when you're short squeaked you're taking a similar kind of view as to selling a call option where you're making the bet that eth isn't going to move too much and so you'd be able to just like sit there and earn funding if ethan does move a lot that's when you'd be looking at losses if you're going short squeeze and when you go short squeeze from a mechanism perspective how does that work well it's kind of similar to maker dow you have a vault you put down some eth collateral and then you mint some short squeeze and then you sell it so you have to be thinking about things like your collateral about your collateralization ratio your liquidation price the short side of squeak that does have liquidations the long side does not so that's kind of a lot to think about and so in order to deal with that we built this thing called the crab strategy and the crab strategy lets you go short squeeze um in one click you don't have to be thinking about the amount of collateral you're putting down you don't have to think about your collateralization ratio the strategy kind of automates that for you and remember how i said that when you're going short squeak you have to put down some eath collateral well short squeeze aims to kind of hedge out that eth price exposure so what you're trying to do is just earn funding without taking into account kind of that eighth price exposure that you get when you're going short squeeze and so with crab you're trying to earn a return in us dollars versus earning your return in eath this is also called like a delta neutral kind of position for those that are familiar with the term okay and there are actually some other fun ways that you can use squeeze squeeze trades on uniswap v3 and we just have one squeeze pool it's very nice you don't have all these fragmented pools and you can actually be a uniswap lp and earn or earn fees for that and you actually get some cool payoffs for being a unit swap lp so for those familiar with uniswap when you're going to swap alping you need to put two tokens into a pool so for us that's squeath and eth and there are a couple different ways that you can get squeeze to put in the pool way number one is you can buy squeeze from uniswap and then way number two is you can put down each collateral into a vault and mint some squeeze and so we can look at the payoffs for both situations so when you're buying squeeze and taking some eath and lping it on uniswap v3 you actually get something really interesting your payoff is each to the 1.5 x leverage so this blue line is kind of your uniswap buy an lp payoff and the red line is 1.5 x leverage and you can see that it's kind of similar it's basically like slightly less curvy squeeze if squeeze is each squared buying an l ping is the is eats to the 1.5 so what you're doing is you're giving up some of your upside that you get from squeak in return for earning the trading fees on uniswap so that's what buying an l ping looks like and then mint and lping looks a little bit more like a long eat kind of position so you mint some squeeze um you put it in the lp pool you start to be you know thinking about your collateralization ratio and liquidation price but you're able to earn trading fees while taking on this position that looks a little bit more like a long eighth position there's also a lot of stuff that anyone can build with squeep um you can build different strategies like the crab strategy you can build lp strategies kind of like the ones we talked about there's a couple fun things that i won't be able to get to today but would love to chat about more later you can actually use squeak to hedge like an ethe usd uniswap lp squeeze can be used as a volatility oracle there's lots and lots of fun stuff you can do with something like squeeze and if you want to chat about it more you can find us on discord at discord.

open.com you should totally try squeak out at squeep.open.co and then let me know how it goes like dmv on discord twitter dme we're always trying to improve the thing so let me know how it goes and then if you want to build squeeze with us we're also hiring at jobs.open.

com and i think we'll have a couple minutes for questions but first we have a little treat for everyone and the title of this talk is called squeeze with me so i encourage you all to squeeze with thank you now we have a cup time for a couple questions yes [Applause] okay you