How to Realize Options Trading in Decentralized Finance

 

You should read our blog in order to benefit from the Q&A session, that all we will learn new techniques to strengthen our possibility in FinTech.

 

In today's article, we will share an informative question and answer with you. We have a few questions on how to execute options trading in decentralized finance. Now let's move on to these...

 

Question 1: I realized that hedging and speculation are the two main features of options. Do you think the decentralized platform Hegic exists to promote sustainable investment?

 

The answer: This question allows for different levels of interpretation, given the wide spectrum of what "sustainable investment" can mean, and I think we can approach the question in three different ways.

 

Environmentally speaking, ETH has proven to be much more responsive to ecological considerations compared to Bitcoin. At the same time, it can be expected to gain even more ground in the future. Economically speaking again, its high volatility prevents it from being used as a medium of exchange, so it's a direction we'll have to see if it will continue to a much more mature ETH market. In the way of governance, assuming that its protocol maintains to work as its founder intended, I consider that Hegic is a sustainable investment vehicle worldwide due to its decentralized nature.

 

As far as I can go in my research, there is evidence to show how options trading affects the pricing of the underlying, while classical considerations in options pricing do not consider an interaction between options trading and price evolution of the price of the underlying. If options trading is shown to reduce the volatility of the underlying asset, I think it could positively contribute to the role Ethereum plays in sustainable investment.

 

Question 2: What are the potential risks and errors in this decentralized derivatives trading platform Hegic's smart contract?

 

The answer: The potential risks of using the Hegic Protocol are detailed in an article written by Hegic himself. In order to summarize, the risks inherent in the protocol design include possible losses input options as a liquidity provider and inability to withdraw when liquidity pools reach their maximum, and loss of profits when you forget to exercise your options as it is not automatic. Another potential risk arises from errors in currency price feeds provided by Chainlink.

 

On the other side, bugs are practically used to any smart contract from any DeFi protocol. For Hegic in particular, we faced how this issue affected the protocol hours after its launch when a bug in its code locked $28,000 worth of user funds in the platform's smart contracts.

 

Question 3: What are the pros and cons of decentralized Options Apps compared to centralized ones? Do you think traditional options trading platforms will migrate to the blockchain in the future? What is the logic behind this trend?

 

The answer: As far as I know, the advantages of decentralized options are inherited from the general advantages of DeFi over Central Finance. So, we can say that it is unauthorized and unreliable. However, DeFi Options platforms may have various challenges or technical limitations. First, speaking of expensive gas fees that make frequent trading unsustainable, second, options pricing is complex and there is no unified approach. Third, the options market cannot exist without a reliable price feed from Oracle. These are some of the issues that need to be addressed to make it a more attractive approach to blockchain.

 

Question 4: What is your motivation for researching FinTech and blockchain and why did you decide to become an analyst in FinTech businesses? Can you provide a case where you have applied expertise from your previous professional experience to research in FinTech?

 

The answer: To be honest, after withdrawing from my academic career in Physics, I was quite open to the job market. As I was curious about many topics, I found many possibilities. But, the key criteria for my new job were that I could apply my knowledge on a topic that was both exciting and modern, and that I could find the right people to work with. It turns out that FinTech is most of these and more! At the same time, I met a great team with a similar background in Physics and a leader in line with their business values. 

 

I have not yet used my expertise to do research in the FinTech field. I first learned how my background could be applied to study finance when I was doing a master's degree. At the time I was working on studying the transport of heat in the solar corona, a highly chaotic system that could be modeled as a stochastic process. Later, my advisor told me how stock and option prices follow a stochastic process, which immediately drew my attention to the subject. I've also learned several Machine Learning methods during this time and discovered that they can be applied to stock and options pricing.

For example, there are several scientific papers showing how the Appropriate Orthogonal Decomposition Method, one of the machine learning methods, can be used for pricing options, which is the same method I use when analyzing temperature maps of the solar corona. So, there are many connections and ways I can use my physics and math background with the finance industry.

 

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