HackMoney Summit | Squeeth with Me: Crypto options & derivatives

[Music] so i want to bring on alexis here to talk about squeak uh for those of you who don't know what sweet is um i won't spoil this for you we'll have alexis uh give that intro so without further ado let's welcome alexis on stage good to see you alexis how's it going hey good to see you going well excited to squeeze well perfect oh the stage is yours amazing okay awesome yeah so i'm really excited to be here excited to chat with everybody about squeeze you're probably wondering what a sqweep is um and by the end of this talk you'll know you'll be able to tell all your friends that you're squeezing um so today we're going to kind of start off by talking about options what they are like how they work then we'll dive into some of the problems with options and how squeeze came to be in the first place um and then we'll talk about what squeak is and how it works uh so let's dive into it so first of all why do people use options well people typically use options for one of these three things they're either looking to get leverage or in yield or to hedge themselves and when we built out you know the first options in d5 open this is what we noticed people were using options for it wasn't just like options for the sake of options but for one of these three like specific things um and we'll come back to this so now what is an option there are two main types of options there are put options and call options and today i'm going to focus on call options so we'll chat about what call options are first talking about this kind of fancy formal definition um but then we'll really break it down go through an example and try to just wrap our heads around what this actually means so the definition of a call option is something that gives you the right but not the obligation to buy an asset which we call the underlying asset at a given price which we call the strike price on a certain date which is the expiry date now that's a mouthful of a definition let's break it down so let's take an example let's say that eath price is currently 3 000 but i'm feeling really bullish i think that by the end of the month eighth is gonna be five thousand dollars and i'm really excited about that then what i can do is i can buy this call option and what this call option basically tells me um and is that hey like at the end of the month i can buy eth for our price which we call the strike price no matter what the price of eve actually is in the market so i think that youth is going to be 5 dollars at the end of the month so maybe i buy a call option with a strike price of four thousand dollars now what that means is say we get to the very end of the month and either is trading at five thousand dollars instead of having to pay five thousand dollars to buy eth i can just use my call option and buy eth for four thousand dollars so even though ethan's trading at five thousand dollars on the market this call option lets me buy it cheaper than the market at four thousand dollars so that is kind of what is really powerful about call options um and the cool thing is if i were to buy eth right now i'd have to pay three thousand dollars but if i were to buy this call option i pay some sort of premium say that premium is like a hundred dollars then i'm paying a hundred dollars right now for the right to buy eat that four thousand dollars at the end of the month um and so i can actually just pay a hundred dollars right now to be able to buy each cheaper than the market at the end of the month if i'm feeling really bullish um so so yeah basically kind of just what we talked about i'm bullish eth i think ethan's gonna go up beyond four thousand dollars so if eath price goes up beyond that i can still buy that eat that four 000. so kind of mapping that back on to the definition that we talked about our underlying asset is eth that's the asset that we're thinking about here the one that we are saying hey i think this particular asset is going to be above um four thousand dollars four thousand dollars is the strike price that's the amount that i'm trying to buy this underlying asset for even if the market price is greater uh february 28th is my expiry date so i can do this you know on february 28th at the end of the month of february um and i actually have a choice this is actually really really interesting so you might be thinking okay eath goes up to five thousand dollars at the end of the month why wouldn't i want to buy eve for four thousand dollars when you know for cheaper than it's on the market at five thousand but what if we go the other way and have some sort of like bear situation where ethan's at two thousand dollars then do i still have to buy eth for four thousand dollars am i locked into this price and the answer is no if eth goes down you don't have to use your call option you have the choice to use your call option so if you went down i probably wouldn't use this call option i wouldn't buy you that four thousand dollars but if you went up to 5 000 then i'd want to use it um so you have this nice choice which is that right not obligation that we talked about so what does this look like well the cool thing here is you actually have limited downside and unlimited upside so i'm paying a hundred dollars to buy this call option if eth goes down and i don't want to use the call option then all i've lost is this a hundred dollars and if eath goes up i just keep making more and more and more as the eth price goes up say youth price goes up to eight thousand i can still buy it at four thousand um so that gives us this really really nice property of limited downside and unlimited upside and we have a fancy word for this property so if you've ever heard the word convexity all people are trying to say is a limited downside and unlimited upside so that's that's what people are talking about when they say convexity and it's this really nice property that you get here okay cool um so now you might be thinking well that's great unlimited upside limited downside like i want that so who's trying to sell this to you who is taking the other side of this bet um well these are people that are actually earning premiums for selling you that really really nice choice that really really nice payoff um so when you buy that option for a hundred dollars that hundred dollars is going to this person on the other side of the trade that's willing to take on more risk so for them the maximum amount that they can earn is that a hundred dollars so if price goes down and you don't use your option they just get to keep that hundred dollars they're happy but if each price goes up and you exercise your option they're forced to basically like take that other side to sell it to you at 4 000 even though it's trading higher on the market and they earn a premium for taking on this risk while you the option buyer has a choice about whether you want to use your option this option seller has no choice they are forced to take the other side of your trade and they get paid for that so for people that think hey there's no way it's going to hit five thousand dollars at the end of the month i'm willing to take on this risk then they can earn this kind of steady premium for selling you this call option okay now what are the problems with defy options what have we seen so far um and there's a couple problems that have popped up that we've seen as we've been building defy options one is that there are tons of different expertise that you can have for these options so we were talking about a call option that expires at the end of the month but you could have an option that expires at the end of the week at the end of two months at the end of three weeks you could have literally any experience and so that means that you need to constantly be thinking about that you can only use your option on that expiry date and then maybe that expert date comes around and you're like hey like i still want this choice then you have to manually kind of roll over your option to the next expiry and then you have to make that choice up front like hmm do i think it's gonna hit 5000 at the end of this month no maybe the end of next month no actually next week um and so there's kind of a lot of choices that you have to make and if choosing expertise wasn't enough you also have to choose your strike price so maybe you think 8 is going to go up to 5 000 or maybe 3 000 or maybe 3 500 and then you have all of these different strike prizes and when you take all of these strike price and expiry combinations those are all individual markets so the four thousand dollar call expiring at the end of this week is different from the four thousand call expiring at the end of the month is different from the 3 000 call expiring at the end of next month and so you end up with liquidity fragmentation because you have all of these different separate markets that you have to build liquidity around and that makes things really difficult and so we were like okay there's all of these problems with d5 options right now how do we solve them so we went to the forest the literal the literal forest um and we were like hmm how how do we solve these problems and it was there in the forest that we found squeaf and sqweep solves these problems sqweep is like a call option in terms of its payoff you still have that really nice unlimited upside and limited downside but you have no expertise no strike prices and that means you could have one liquidity pool so we're building liquidity around one instrument we're taking out all of those choices and those and those things that you have to think about and you're still able to get the heart of what you're getting with a call option but in a much more liquid and simple way so what is squeeze well long squeeze is very similar to a call option this blue line here is squeezed and you can see that you have this unlimited upside and limited downside it's like a call option but it's more curvy so the call option is kind of like that and squeeze is like even curvier so um it kind of gives you like this this convexity but but in a better and more perpetual form um and so that's kind of one way to think about sweep like a call option but with no strike price and no x-ray um but there are also a couple of other mental models that can be useful to help us understand squeeze so just starting with the name what does the sweet name mean well it's squared if squeep um and so this blue line here is a is literally the right side of a parabola like if you were to take x squared and plot it on a graph that's what this blue line is so we literally are taking 8th price and squaring it and that's kind of this blue line that you get here you can also compare it to something like 2x leverage um and you can see that kind of compared to 2x leverage when eat goes up you do better with squeak than with 2x leverage when it doesn't move that much you're kind of getting about the same payoff and when eat goes down you get liquidated with 2x leverage but you don't would squeeze and so another kind of way to think about it is as perpetual leverage without liquidations so those are kind of a couple mental models think about squeeze to start to wrap your head around it um we see that it's got similar properties to the call option in terms of that limited downside unlimited upside got that nice curviness which you don't get with the kind of 2x leverage or perpetual swaps you have no liquidations similar to a call option but your payment you're kind of paying a continuous payment which is a little bit more similar to perpetual swaps versus like a one-time premium that you pay with a call option so some mental models about how to think about squeeze so now you're probably thinking okay like that's great now i get like this perpetual call option thing i have even more unlimited upside and limited downside who's taking the other side um and pretty similar to going short a call option the person on the other side is willing to take on some risk in a return for earning fees so in this case they are earning those continuous funding payments for being short squeezed and kind of taking the other side of that position and the way this works from a mechanism standpoint is actually very similar to something like maker dao if i wanted to go short sweep i could put down some eath collateral into a vault and then i could mint some sqweep the same way i would like put each collateral into a vault and mince and die um and then to go short squeeze i would sell that squeeze that i just minted on uniswap so squeeze trades on uniswap v3 if i wanted to go long squeeze i would just buy the long sweet erc20 token uh from uniswap um and if i'm going short squeeze i'm selling that same erc20 on uniswap and so that's kind of how things are working behind the scenes now why is this relevant we'll get into that in just a second so uh we have this crab strategy um because when you're going short squeak like i mentioned it's similar to maker dale dalek you're putting down collateral into a vault you're minting squeak and so that means you need to be thinking about things like your collateralization ratio and your liquidation price it's a bit more of a managed position so to make that easier we built this thing called the crab strategy and the crab strategy is an automated strategy that uses short squeeze um to let you earn funding without you having to worry about the nuances and details of your collateralization ratio liquidation price etc so the strategy is managing that for you um and what this strategy is doing is its goal is to make us dollar returns you're trying to earn funding without necessarily taking a view on each so remember how i mentioned that when you go short sweep you have to put down each collateral into a vault well that means that you have some heat exposure so what this strategy does is it hedges out that eth exposure so you're just trying to earn funding um and so you can positive strategy or in the funding fees uh and not really have to think about your liquidation price or collateralization ratio of course this comes with its own risks like you're going short squeeze you're paying those rebalancing fees but it's a much simpler way to kind of take the other side of the squeak trade so those are kind of some of the fun ways to sweep but we've got a couple more ways to squeeze so like i mentioned squeeze trades on uniswap um so that means that you could be a uniswap lp for sqweep um and the main pool is the squeep eath pool um and there are a couple different ways that you can lp on uniswamp so when you're lp on uniswap you need to provide two assets you need to provide eath and you need to provide squeeze so there are two different ways that you can get that squeeze to lp with and each way gives you a slightly different path um so you could buy squeeze or you can mint squeeze like we talked about by putting down each collateral and then minting some squid so let's start by talking about buying squeeze you go to uniswap you buy some squeeze you bring some meat and you decide you want to lpa well what does that return actually look like um well turns out that's this blue line right here and the payoff of buying squeak and lping it is actually east to the power of 1.5 so the same way that squeak is eighth squared buying an l ping is actually eased to the 1.5 power which is pretty cool it's like slightly less squeaky squeeze so you're earning this kind of nice leverage payoff you're still paying funding because you're long squeaked you bought squeaf but you're also earning fees because you alped on uniswap so it's basically like you're offsetting some of that funding payment with the lp fees that you're earning on unit swap and in return you're still getting leverage but you're slightly less levered than normal long squeeze because you're kind of paying less in the aggregate so it's a nice way to still get some leverage but not pay as much and kind of not have that full each squared profile um but a nice each to 1.5 so that's kind of what buying an lping is um and then if you mint an lp you actually get like a very different kind of payoff um where you are earning the lp fees uh but you could be earning the lp fees and earning funding because in this case you had put down your eighth collateral into the vault you minted some squeeze and then you put that minted sweet and eat into the unit swap pool so now when you start you actually start with a payoff that's kind of similar to long eath but as the pool moves and people buy and sell squeeze you could end up with a short squeezed position because the amount of sweet debt that you minted could be different than the amount of squeeze in the unit swamp pool so say i put down some eath collateral and i minted 10 sweep and then i put that 10 squeeze and some eath and a unit swap well now my debt is 10 squeeze say people trade against the uniswap pool um and the amount that i have in the uniform pool at the get-go was 10 squeezed it was neutral but now people have traded against the pool and my amount in the unit swap pool is less it's like five squeeze so now i'm short five squeeze which means i'm earning funding and lp fees um so it's a pretty cool way to be able to earn both of those fees uh now of course because you do have like a vault you do have to be thinking about your collateralization ratio and liquidations um but that's like another fun way to squeeze is minting and lping on unispot so we talked about a lot of different ways that you can squeeze you can go long squeeze and get a nice 2x leverage without liquidations kind of pay off you have that unlimited upside and limited downside you can go short squeeze and earn funding to take on that risk you can participate in some of the short strategies like the crab strategy or there's tons of other really interesting short strategies that can be built we talked about the buying lping and minting and lping strategies but there's also a lot of other fun things that you can do with sleep you can actually use long squeeze to hedge an 8th usd uniswap lp position and we have some blog posts that dive deeper into that that's like a whole another fun rabbit hole you can use sqweep as a volatility oracle because squeak um kind of represents like a bunch of different options condensed into one it's like if you took the whole options chain and put it into one instrument squeak funding can actually uh give you a bit of a vault oracle which is very very exciting so we're looking at like ethics through squeeze funding which is another kind of fun topic to dive into so basically there's lots of interesting things that you can build with squeeze and if you're excited about that we've got some blog posts about those things and happy to chat more about it um and yeah if you want to try out squeak you can squeeze at squeeze.

open. if you try that out definitely feel free to ping me with any questions or thoughts that you have very excited to you know answer questions we're always trying to improve the squeeze if you want to chat about sleep or have questions join us at discord.open.com and if you want to build squeak we are hiring at jobs.open.

com um cool so it was very fun squeaking with you all if you have questions definitely hit us up on discord um and yeah thank you thanks alexis that was an amazing intro to how squid works and i'm just looking at some of the comments on the chat too and this is so clever so i'm glad that we got to do a beginner-friendly version of how all these things work sweet all right well if there's any other more questions we'll uh we'll relay them to you directly but um one comment we did get was if we can have access to the slides so if you want to send that to us after we'll share that with everybody thanks so much