The New Freshmen

Welcome to your first day of a long 4 year journey. If you didn’t already know, my name is Michael Southworth and I am going to be your guide to the wonderful realm of High school. Before you get too…


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Automated Option Trading on Blockchain

In my previous article, “Is Crypto the Better Financial System We Were Opting For?” I outlined my disillusionment with some of the current Web3 trends.

One such trend is earning made-up tokens either through liquidity pools, DAOs or other systems. Said tokens may or may not appreciate in value, but the majority don’t.

One of the ways to earn in-kind is to lend your coins and earn interest. So if you lend BTC, you will receive interest in BTC, but the yields of a lot of decentralised lending protocols aren’t as sparkling as they used to be.

You could be looking at centralised alternatives like Nexo and Celsius, if you are happy to give up ownership of your crypto.

Or you could stake your tokens, if they are proof of stake.

Another, newer way to get more of the coins you really want is by investing your money in Option Vaults. If you use liquid staking options, for example staking Solana on Lido, not only can you stake, you can also earn yield on top of the stake.

I’m not going to go into the technicalities, but in a nutshell, an Option is a contract that gives the buyer the right, but not the obligation, to buy an asset at a certain price and at a certain date you decide, hence the term “Option".

On the other side of the trade, the seller sells the contact, thinking that the price set by the buyer won’t actually happen. At the very least they get the money the buyer paid for the contract, aka the premium. One money making strategy by the seller of the Option is then to collect premiums.

There are a lot of strategies around Options, which are beyond the scope of this article. But there are two you’ll want to get yourself familiar with: covered calls and put selling, as those are the two strategies that the protocols I am going to talk about currently employ. YouTube will be your friend here.

Note that you don’t actually need to know how these two strategies work to invest with these protocols, but if you are investing in a product you don’t understand, then you might need to rethink your investment strategy.

You don’t need to worry about deciding the pricing and the expiry of your options, or anything like that, you just put your coins in their vault, and they will execute the strategy for you. Every week you will get more of the coin you invested.

What’s more, this is not dependent on a governance token which you’d have to sell and convert back to the coin you actually want, and it doesn’t matter if 100 or 1000 people are in the vault, the yield is not diluted like in liquidity pools, not does it dry up.

Both Tap Finance and Friktion offer Covered Call strategies and Put Selling strategies.

To put things simply, if you want to earn more Bitcoin, you’ll put your money in the Bitcoin Covered Call vault.

If you want to earn more USD (USDC in this case), you put your USDC in the put selling vault.

Think of these protocols as the robo-advisors for Options on the Blockchain. They even accept staked Solana in their Covered Call Vaults, which also helps secure the network.

Their Options expire after a week. At the end of each weekly epoch, the proceeds are then autocompounded for the next epoch. This also means that any deposits and withdrawals will also happen at the same time, so if you want to withdraw you need to wait for the end of the epoch. To the same token – see what I did there – when you deposit money you will need to wait for the start of the new epoch.

So what’s the catch? The strategies in both protocols have been back tested, but you need to trust that the algorithms and the protocols are choosing the right strike price for the options. If they don’t, you might lose capital.

A flash crash could also result in a loss, as they are unpredictable. For example nobody would ever set a strike price to be 1% of the entire value of Bitcoin, unless something funny went on, and they somehow knew the price would go to almost 0 at a specific date and time.

The protocols are undergoing audits, but the developers and community managers are very active on their respective Discords. You never know, but it doesn’t look like you are going to get rugged, at the very least.

Systemic risks, such as regulatory risks, might also apply, but those are not specific to these two protocols.

If you have been feeling that DeFi recently haa been a playground for Ponzis, whales and VCs, rejoice because you are not the only one feeling that way, and new, high quality protocols ARE coming to the rescue.

Like we have seen before though, be wary of the copycats and scams that will inevitably copy successful protocols, promising similar or better results and then making off with your money.

Always do your own research. The amount of people I see asking basic questions covered by the documents on the protocols' websites is baffling. Read what a project is about, spend some time on their Discord, go the web and check other forums.

Eventually you’ll find the gems.

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