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Options Protocol Brings ‘Insurance’ to DeFi Deposits on Compound

Trustless insurance has arrived on decentralized finance (DeFi). At least on the Compound protocol, the collateralized lending platform that runs on ethereum. 

The new product, from a company called Opyn, allows people to take out options on stablecoin deposits, allowing users to hedge against the risk of a catastrophic event wiping out Compound’s books.

“You can make a claim at any time. You don’t have to prove anything to anyone,” Zubin Koticha, one of the three co-founders behind the new product, told CoinDesk.

The decentralized web may have reduced the need to trust intermediaries, but that doesn’t mean there isn’t risk. As the broader DeFi market grows past $1 billion in committed crypto, users need ways to manage that risk just as in the old market. 

To that end, Opyn is the beginning of a blockchain-style solution analogous to those found in traditional financial markets. As it happens, derivatives are so big in those markets that it’s somewhat ridiculous even to repeat their estimated market size.

Meanwhile, Compound is the third-largest DeFi app on ethereum, as measured by DeFi Pulse. Users can earn interest on funds they deposit into the protocol, and they can also borrow against their deposits.

Compound has been stable since launching in late 2018, but no one disagrees that this world of DeFi is still tiny and hasn’t really been tested in the fires of true panic. If more serious investors are to start using Compound, they will want a way to hedge.

Multicoin Capital’s Kyle Samani told CoinDesk one of the perks of DeFi is the ability to make applications work together without having to ask permission (also known as composability). But this feature might yield surprises.

“We don’t yet have enough evidence to know that they work as intended 100 percent of the time. And so, the more that users layer these protocols together, the more systemic risk grows,” Samani said.

“There is certainly a non-trivial amount of risk in the ecosystem, as a lot of smart contracts present substantial surface area for bugs or attacks to occur,” Autonomous crypto fund founder Arianna Simpson told CoinDesk. She said the industry is working on this challenge, citing Nexus Mutual as a company that already provides insurance services for smart contracts.  

On risk, Koticha says he’s talked to a lot of people in the space about their fears of depositing on Compound.

The computer types fear a bug or a hack, knowing that smart-contract languages can be very touchy. Financial types fear a liquidity event. For example, what if everyone just decided to close their deposits all at once? 

Opyn’s first product will offer a hedge, what financial types call a “put option,” which will guarantee that a user can recover most of their lost capital if Compound has a disaster. 

“Options are great oracles of volatility and risk in traditional markets,” Koticha said.

Koticha declined to name the project’s investors. 

How it works

Opyn isn’t offering insurance in the traditional sense. There will be no credit check or claims process or even proof the person owns the asset being insured (more on that further down).

In fact, starting out, Opyn isn’t even going to ask users to submit know-your-customer (KYC) forms.

The team’s ethereum-based Convexity protocol can make all kinds of options, Koticha said. For now, it’s simply making put options to protect Compound users. 

To explain that first product, we need to back up and talk about how Compound works. If someone makes a deposit onto Compound, of say, 100 DAI, they get cDAI tokens back. cDAI tokens appreciate in the user’s wallet at whatever rate the underlying asset is appreciating. This makes deposits on Compound tradeable. 

For simplicity’s sake, let’s say that 1 DAI equaled 1 cDAI (it doesn’t, but let’s say it does). With Opyn, someone pays a small fee to buy an oToken. That oToken would be good for a year (for now). At any time, any holder of an oToken could turn in their cToken and their oToken and get back (for example) .95 DAI (there will always be a little bit of a haircut).

The advantage for insuring these deposits is guaranteed free money in exchange for staking ETH as collateral. How much the user earns will be determined by the market. New oTokens will be sold via Uniswap and the price will be determined algorithmically.  

So, for a borrower, if someone put 1,000 DAI into Compound, they could go out and buy 1,000 DAI worth of oTokens for what should be a modest fee in normal times. They’ll then feel safe for the next year knowing they can get most of their deposit back if something terrible happened to Compound.

Note: You don’t actually have to hold cTokens to buy oTokens, which has interesting implications for the market. Imagine a trader who foresaw a liquidity run on Compound. They might buy up a bunch of oTokens (a so-called “naked put”) knowing that people will sell their cTokens for pennies on the dollar if Compound got wiped. 

Of course, if they do that, the price of oTokens would start rising and other people would see that and wonder why.

“It’s an early warning signal for the community that something is not necessarily right,” Koticha said.

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Crypto Selloff, Bitcoin again below $10K

Cryptocurrency markets had a lousy weekend, especially altcoins. Bitcoin had a 5.18 percent drop to $9800, but it was the best performer. Bitcoin Cash, BitcoinSV, and EOS are falling over 20 percent, and the majority of the leading cryptos dropping over 10 percent.  Ethereum tokens also took a hit, with ZRX(-19.3%), REP(-18.8%)OMG(-18.6%), and BAT(-18.21) among the worst performers during the weekend. Worth Noting that FFT* gained 8-66 percent and also moving strong FUN(+26.19%), POWR(+18.1%), FSN(+24.65%) and MX(+50.4%).

72H Crypto Heat Map

The Market capitalization dropped $28.8 billion during the whole weekend, which represents a 9.31 percent drop. The drop happened with a heavy volume of about $70 billion in a 24H period. As bitcoin was performing better than the rest of the market, its dominance grew to 63-68 percent.

Crypto Market Cap and Traded Volume

Hot News

Craig Wright warns Bitcoin and Bitcoin Cash to stop using the Bitcoin database if they want to avoid a lawsuit, claiming that both may be violating the original terms of the original EULA and MIT license.

“As the creator of Bitcoin, I maintain the sui generis rights to any copy of the database created from Genesis in January 2009. I shall not be relinquishing the ownership. I will be licensing it, and have already engaged in a process.” (Source: cointelegraph.com)

Technical Analysis – Bitcoin

Bitcoin 4H

Bitcoin dropped below $10K on Saturday, and continue doing so on Sunday and Monday’s early morning. In the 4H chart, we can see that the price is approaching the lower side of the ascending channel and that the $9,730 level seems to act as support. Currently, the price is moving below the -1SD Line, in what looks like a descending wedge. Right now, the price is in a support area; thus, we need to observe the resolution of the fight between buyers and sellers to control the movement of the price.  The critical levels to keep are $9,730 to the downside and 9950 to the upside.

SupportPivot PointResistance
9,7309,950 1,068
9,50010,300
9,15010,500

Ripple

Ripple 4H

Ripple has been dropping very hard in the last few days, and its price lost 19 percent since its top made last Saturday. Currently, the price went back to the consolidation area, previous to its last run-up.  The $0.274 and $0.266 levels are essential to hold the price. If that does not happen, it would be the end of the bull run of this asset. The price is below its -1SD Bollinger line and the MACD in a bearish phase; thus, it is better to be in the sidelines.

SupportPivot PointResistance
0.26600.2900 0.3000
0.25000.3150
0.23700.3380

Ethereum

Ethereum 4H

Ethereum had an incredible run up last week, which drove its valuation from $217 to $288, a 32 percent move up. During the last weekend, it is retracing part of its gains, as it was highly overbought. The price needs to create a bottom to resume the trend from there. Currently, it is moving in the $250 level, under the -1SD Bollinger line, and touching its 50-period SMA.  We see also that the upward trendline still holds. Thus, we still think this is a healthy correction and that ETH still has room to move up. Another break of the $263 level would bring strength to the buyers.

SupportPivot PointResistance
249263 275
238290
230300

Litecoin

Litecoin 4H

Litecoin has dropped hard at the weekend and has erased almost all the gains made in February. The price is moving quite bearish, and now it is entering into what was the consolidation region made at the beginning of February. We have to wait for the price to make a bottom here.  We still maintain the upward bias, as its 200-period SMA is still pointing upward, but the current situation is not. We can see that the bearish candlesticks show a strong volume. Maybe this is a bottoming volume, but, as said, we need to see it create a bottom and the price move to the upper side of the Bollinger bands.

SupportPivot PointResistance
71.375.7 78.4
6980
66.883.5

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We Think 10-Minute Settlement Is Slow but That’s Crazy, Feat. CoinDesk Research’s Noelle Acheson

CoinDesk Head of Research Noelle Acheson joins the Amun State of Crypto crew to discuss the advantages, disadvantages and eccentricities of crypto markets, exchanges, settlement and more.

Listen or subscribe with Apple Podcasts, Spotify, Pocketcasts, Google Podcasts, Castbox, Stitcher, RadioPublica, IHeartRadio or RSS.

In this deep-dive conversation, the group discusses the differences in the market microstructure between the crypto asset industry and traditional capital markets. The guests drew from their experience within traditional capital markets to explain the intricacies of the crypto market micro-structures and price discovery.

Listen or subscribe with Apple Podcasts, Spotify, Pocketcasts, Google Podcasts, Castbox, Stitcher, RadioPublica, IHeartRadio or RSS.


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Crypto Analyst Says This Ethereum-Based Altcoin Could Go Parabolic Even As Bitcoin (BTC) Rises

Crypto analyst Nicholas Merten expects a bull run to clock enormous gains for altcoins.

On a new episode of Datadash, Merten says Chainlink (LINK), an Ethereum-based token that powers the decentralized oracle network, is now on the cusp of a parabolic run.

“The major thing that I’m correlating this to is the early phase of the 2017 rally. We’re starting to see a lot of the plays that are going to be similar to Ethereum – kind of the frontrunners in the market – and become some of the new large-cap plays that really lead in this cycle – are really starting to showcase and shine here. And I think Chainlink is one of them.

We’ve gotten above the resistance range here – the only question now as to whether or not this is going to hold. And what I would like to see even more is not only more volume here, in the sense of Chainlink, but also I want to see this continue climbing higher.”

At time of writing, Chainlink is the biggest gainer among the top 15 cryptocurrencies.

Currently valued at $4.42, it’s up 13.61% in the last 24 hours, according to CoinMarketCap. Bitcoin is up 0.72% at $10,240, Ethereum is up 5.93% at $280.4 and XRP is up 4.71% at $0.334.

Source: CoinMarketCap

Merten adds,

“We could start to see a really parabolic run here where prices could continue to climb higher even as Bitcoin is getting a good amount of price action over the next couple of weeks.”

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