FinNexus’s FNX token will serve as the sole collateral for this ambitious DeFi options model, the first in the industry, on Ethereum.
This July, FinNexus launched the first iteration of the FinNexus Protocol for Options (FPO) v0.1 on Wanchain, where it is currently operating with around $500,000 in collateral denominated in FNX and WAN tokens.
FPO v0.1 is a great protocol for doing what is normally done with traditional financial options in a decentralized and trustless way. Our first protocol in the FPO facilitates the minting, trading and exercising of cross-chain options contracts.
As we mentioned previously in our comprehensive Coinmonks post on decentralized options platforms , FinNexus aims to create a universal options protocol.
By universal, we mean both universal support for any underlying asset and universal support for a variety of innovative models for issuing options.
While these models will initially launch on Wanchain and Ethereum, our innovative new combined version of FPO will soon expand to live on a broad network of different blockchains.
We have already announced our collaboration with Elrond in this regard, and we are actively looking for other Layer-1 chains that want to explore the possibility of bringing the utility of FinNexus protocols to their ecosystem.
Following on the heels of FPO v0.1, we are now ready to present to you the first of many innovative models built on FinNexus’s expanding network of protocol clusters – The FinNexus Protocol for Options – Pooled Liquidity (FPO v1.0).
In an earlier post this week, Noah Maizels introduced us to the Universal Options Protocol .
He mentioned the advantages of a DeFi pooled liquidity model compared to more traditional financial methods for backing options positions. Today, I want to dig deeper and provide more detail on the specifics of how the FinNexus Multi-Asset Single-Pool universal options protocol works.
What is FPO v1.0?
One of the core aspects of the original FinNexus Vision is building a series of protocol clusters that could power a fully interoperable marketplace for hybrid decentralized / traditional financial products.
The FPO protocol cluster is the first step toward making that vision a reality. It lays the groundwork for this emerging market of innovative assets.
FPO v1.0 stands for ‘FinNexus Protocol for Options – Pooled Liquidity’. It is a decentralized, non-custodial protocol for underwriting, trading and exercising options with pooled liquidity.
The protocol will launch first on Wanchain, followed shortly by Ethereum, and will be accessible through a single interface that supports both blockchains.
In addition to providing a high rate of return with relatively low risk for option writers, this model is also very attractive to option buyers.
Buyers will be able to benefit from the wide variety of option types offered by the pool and will be able to design unique strategies that suit their needs.
Buyers can also combine customized option terms in a variety of ways, enabling the creation of complex and powerful strategies.
The model is easily scalable and is limited only by the amount of capital included in its collateral pool.
Simply put, the elegant mechanisms of FPO v1.0 serve to benefit both liquidity pool contributors (liquidity providers, or LPs) and option buyers / traders. No other DeFi options protocol currently has our Multi-Asset Single-Pool (MASP) model, which we believe is the best way to unite a fractured liquidity landscape for on-chain derivatives and thus ensure the best possible trading experience for our LPs and other users.
A universal options protocol
FPO v1.0 is a universal options protocol that enables the creation and trading of options on any type of underlying asset based on collateral held in a single liquidity pool .
While FPO v1.0 will initially support options for BTC and ETH, there is no limit to the types of options that can be created with the protocol.
Any asset can be an underlying for FPO v1.0 options, including cryptocurrencies from any blockchain, fiat currencies, commodities, stocks and virtually any asset with a reliable on-chain price feed.
Under this version of our protocol, assets do not need to exist in token form on-chain. The options are synthetically derived from the price itself.
The basic bullish / bearish options introduced with version 1.0 serve as the foundation for many other combinations of options strategies (straddles, strangles, etc.).
FNX token holders will be able to create their own unique portfolio tailored to their individual risk / return requirements. As we expand the asset universe, these tools will become more important when building bespoke strategies.
The pooled liquidity of FPO v1.0 allows users to buy options directly through the protocol smart contract without individual counterparties.
It is important to note that, in the current build of FPO v1.0, a separate liquidity pool must be maintained on each respective chain. FNX tokens on each respective chain will serve as collateral for the liquidity pools, which will reside one per chain.
Let’s take a closer look at FPO v1.0.
The differences between FPO v0.1 and FPO v1.0
Our marketing team is pretty upset with us for not coming up with cool names to highlight the differences between these two protocols within the FinNexus Protocols for Options (FPO). But we don’t care. We can name them after some Greek gods or cities or something at a later date, once we have refined each of the protocol clusters to the point where we can claim they are out of beta. Here we highlight the key differences between our tokenized model (FPO v0.1) and our pooled options model (FPO v1.0).
In the following chart, we break down the key differences in graphic form.
I hope you can see how the structure on the left promotes liquidity fragmentation and is woefully gas-inefficient.
As Ethereum has moved toward ever-higher gas fees, and we now rarely see a Safe Low gas fee of <100 gwei, we felt it was important to design a system that was both gas- and capital-efficient. We believe FPO v1.0 is an elegant solution to today’s most pressing blockchain problems on Ethereum.
How does the FNX liquidity pool work in FPO v1.0?
The unique MASP system, Multi-Asset Single-Pool, is a revolutionary concept for FNX token holders to gain exposure to a variety of bespoke cash-settled options positions across a range of assets, initially BTC and ETH.
You’re probably saying: “Wow, that’s a mouthful.”
For the less financially inclined, here is a chart describing the different roles in the pooled system – Option Buyers and Pool Participants (LPs) – as well as the different actions – selling, exercising and contributing or withdrawing FNX.
Basics of the pooled options model
- FPO v1.0 will first be available on Ethereum and Wanchain. It can also be deployed on other chains.
- A single collective pool is created with FNX tokens (on Wanchain, WAN coins are also accepted as collateral). The monolithic pool then acts as the seller of all options. The protocol may accept other crypto assets as collateral for the pool in later versions and / or on different blockchains.
- Options will not be tokenized. Rather, they will be recorded in smart contracts.
- The initial underlying assets are BTC and ETH, but they can be extended to any asset. The long-term vision for the FinNexus Crypto Supermarket includes the tokenization of bespoke options positions on any cryptocurrency, stocks, physical assets, index or really any asset with a dynamic price.
- Options will be American-style and may be freely exercised or traded at any time before expiration against the single liquidity pool on the chain where the exposure is held. Understandably, some restrictions will be added in the early iterations here to control risks.
- Pool shares are tokenized and sent to pool participants as certificates.
- The pool size is measured by net value in USD, which changes according to the distribution of premiums, the monetary value of options, exercising, selling and other associated features.
- Buyers can choose the option characteristics according to their needs. The associated premium will be calculated using algorithms in the smart contracts, dynamically and automatically.
- Protocol security will be maintained by setting the collateral level high enough to protect against black swan events. This collateral ratio has not yet been determined and will likely be experimented with to find an optimal level.
- FNX in the pool can be withdrawn at any time, provided the liquidity is not fully locked by existing options contracts. Again, some restrictions may be added in the first version.
So, as we continue on our “Fin”-exus journey, this pooled options model, what we call MASP or FPO v1.0, at least for now, will become increasingly important to the FinNexus vision.
We hope you will consider joining us and that you will follow our project through our social channels below.
Stay tuned for more information later this week about FNX options!
FinNexus is building a set of open finance protocol clusters that will power hybrid markets trading both decentralized and traditional financial products. The flagship product to launch is a fully decentralized bitcoin (and other cryptocurrency) options model that will live on both Wanchain and Ethereum.
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