OptionBlox & YieldBlox - DeFi Protocols for Financial Derivatives and Lending
With the introduction of the Turing Signing Server (https://tss.stellar.org/) solution, the Stellar Development Foundation has made it possible to develop DeFi(decentralized finance) protocols on Stellar. Our organization, Script3, is using this technology to create OptionBlox and YieldBlox. Platforms and DeFi protocols for facilitating financial derivatives and lending, respectively.
OptionBlox makes huge improvements in efficiency and flexibility over incumbent derivative processing platforms, enabling equitable access to derivative markets. While YieldBlox makes large improvements in efficiency over other DeFi lending protocols, improving lending accessibility. As a result, our protocols are highly compatible with the Stellar ecosystem and its mission of global equitable access to the financial ecosystem. Through the Stellar Seed Fund Competition, we hope to gain the necessary resources to launch and grow OptionBlox and YieldBlox.
OptionBlox is Script3's DeFi financial derivatives product. Current financial derivatives markets are inefficient, rigid, and have high barriers to entry. OptionBlox enables a more flexible, efficient, and accessible derivatives ecosystem. OptionBlox enables users worldwide to write, trade, and execute any derivative for less than 1 cent per contract. Derivatives are facilitated on Stellar and tokenized so they can be traded on any centralized or decentralized exchange and even stored offline. The OptionBlox offering stands on 4 key pillars that exhibit the value OptionBlox provides over other derivative processing solutions.
OptionBlox Pillar 1: Efficiency
The incumbent derivatives market suffers from a large amount of friction. It requires market intermediaries to provide access to the market, facilitate trades, and lower counterparty risk. These additional parties cause inefficiencies, which creates costs that get passed on to investors. By processing derivatives on Stellar, OptionBlox eliminates the need for market intermediaries leading to huge derivative processing efficiency improvements.
A research paper that covered Stellar-based financial derivatives measured the monetary impact of their efficiency improvements. The paper delved into efficiency gains in both transaction processing and data accessibility. Data accessibility is a huge source of cost and inefficiency in the traditional derivatives ecosystem. Additionally, the paper measured costs associated with Ethereum based financial derivatives to demonstrate Stellar’s efficiency advantage in the DeFi ecosystem. The diagram below shows the results of the research paper when applied to OptionBlox.
OptionBlox provides unparalleled flexibility, allowing users to accomplish any derivative use case. If OptionBlox’s standardized derivatives do not meet users' needs, Optionblox enables them to write OTC derivatives with custom contract specifications. Additionally, derivatives written with OptionBlox use Stellar’s Anchor system to manage a contract's underlying assets. Since the Anchor system supports any asset, our contracts also support any asset.
Tokenized Derivatives: OptionBlox also uses the Anchor system to tokenize derivative contracts, which is essential in the DLT space. Tokenization allows our derivatives to be traded on any cryptocurrency exchange and stored anywhere. This flexibility is essential due to the fragmentation of the DLT space. It also serves to decentralize OptionBlox further
In addition to improving trading and storage flexibility, tokenization allows users to write partial derivatives. This enables users with different levels of wealth to use derivatives while still allowing OptionBlox to retain standardized derivative sizes. Example: Our Ethereum options are standardized to have an underlying of 1 ETH to preserve contract volume. If a user wants to write an ETH option but cannot provide the entire 1 ETH underlying, our partial derivative capability allows them to write a fractional derivative. They can provide us with a fraction of 1 ETH as their contracts underlying and receive a proportional fraction of an ETH option token.
OptionBlox Pillar 3: Accessibility
OptionBlox uses DLT to make considerable improvements in derivative ecosystem accessibility. The decentralized nature of our system means OptionBlox is accessible to anyone with an internet connection. This is a substantial improvement over the derivative ecosystem's current state, where only a small portion of the world has efficient ecosystem access. The traditional derivative ecosystem’s dependence on central parties makes it impossible for it to serve a broader market. Since OptionBlox uses DLT to facilitate derivatives instead of central parties, it does not suffer from these limitations and can truly enable equitable global access to the derivatives ecosystem.
OptionBlox Pillar 4: Usability
We’re building OptionBlox for users of all types, from experienced traders to new users in developing countries. As such, UI/UX excellence is paramount for us. However, financial inclusion doesn’t just mean throwing an app at someone in a developing country and expecting them to figure it out. Education is crucial to truly working towards financial inclusion. Our approach to a user-friendly interface not only involves simple and sleek controls, but also focuses on educating our users about financial derivatives.
OptionBlox serves as a tier-3 blockchain app, a layer between users and the Stellar ledger. Users link their wallets to our web-app to write, trade, or execute derivative contracts. The OptionBlox web-app takes user inputs and communicates them to the OptionBlox protocol, which uses TSS(Turing Signing Server) txFunctions(smart contracts) to build Stellar transactions that carry out the users’ commands. Users approve these transactions with their wallet and receive the result of their transaction, whether that’s derivative tokens, sale proceeds, or underlying assets.
Please note, the pictured web-app is still under revision
1. User links their wallet on the OptionBlox home page
2. User clicks XLM card to navigate to XLM option market page
3. User selects the options they'd like to sell or buy
4. User confirms their trade and approves the transaction in their wallet
5. User can now view their options on the My Options page. They can also execute, sell, or cover their options from this page
OptionBlox Use Cases
Futures are contracts between two parties to buy/sell an agreed-upon quantity of an asset, called the underlying asset, for a set price at an established future time. Common uses of futures are to hedge against price movement by the underlying asset, increase leverage, and gain exposure to rates.
Sample Futures Use Case Supported by OptionBlox:
Hedging A gold miner knows that they will be selling 6000 kilos of gold in 6 months. 1 kilo of gold is currently worth $1000. The miner does not want to risk gold prices falling in the next 6 months, so they enter a futures contract to sell 6000 kilos of gold for $6,000,000 in 6 months. This “locks in” the current price of gold for them and allows them to continue their operations without any risk of prices falling.
Options are contracts between two parties, a writer and a buyer. The contract gives the buyer the option, but not the obligation, to buy or sell an asset at an agreed-upon price until the option expires. If the buyer decides to exercise this right, the option writer will act as the counterparty in the buyer's purchase or sale. Options can be either puts or calls. A call option allows its owner to buy the underlying asset at the agreed-upon "strike price." A put option allows its owner to sell the underlying asset at the strike price. Common uses of options are hedging, increasing leverage, and income generation.
Sample Options Use Cases Supported by OptionBlox:
Investing Adam wants to invest in 1000 XLM but doesn't want to hold the XLM; he only wants to be exposed to the position's upside. Using a decentralized exchange, he purchases an XLM call option contract with a strike price of $100. Until it expires, the contract gives Adam the option to purchase 1000 XLM for $100. If the price of XLM increases to $0.20, he can execute his option contract and purchase 1000 XLM for $100. Since, based on the new market price of $0.20, 1000 XLM is worth $200, he will receive the same returns he would receive if he had originally purchased 1000 XLM at $0.10. Thus, purchasing the contract allows Adam to gain exposure to the upside of investing in 1000 XLM without having to purchase and hold the cryptocurrency.
Hedging Latera holds several THUMB LLC shares but is concerned about share price volatility. To mitigate volatility risk, he decides to purchase a put option contract, guaranteeing him the option to sell 100 THUMB shares for $10,000 ($100/share) until the contract expires in 1 year. This contract protects him from any potential decline in the market value of THUMB LLC.
Passive Income Generation Carlos owns 1 BTC and plans to hold it until it reaches his price target of $60,000. However, he would like to earn some passive income with his invested capital. He sells a Bitcoin call contract with a strike price of $100,000 for $100. This strategy allows him to continue to hold his Bitcoin until it hits his price target while earning additional capital with his investment. Even better, the contract is only valid until it expires. If it is not executed and expires, he can sell another call contract using his Bitcoin holdings as the underlying asset.
Motivation for OptionBlox
Equitable Access to Financial Derivative Markets
Decentralized Ledger Technology enables the disruption of the traditional financial ecosystem that suffers from inefficiency and fails to serve so much of the world. In traditional financial markets, wealth comes with better market access and cheaper pricing. Financial derivative markets are especially prone to this effect; a study published by the IMF showed that more sophisticated parties receive significantly better prices in derivative markets. With OptionBlox, we strive to even the playing field. Whether users are hedge funds or farmers in Venezuela, OptionBlox will enable them to utilize any derivative and give them holistic access to global derivatives markets.
Equitable access to efficient derivative markets is crucial to attaining global economic equality and fostering global economic growth. A study published in the Journal of Risk and Financial management demonstrated this. The study found that financial derivatives serve as hedging tools for businesses and help drive market efficiency. We hope that by creating equitable access to financial derivatives, OptionBlox will foster economic growth across the globe.
Citation: Hong Vo, Duc; Van Huynh, Son; The Vo, Anh; Thi-Thieu Ha, Dao. “The Importance of the Financial Derivatives Markets to Economic Development in the World’s Four Major Economies.” Journal of Risk Financial Management. 2019. DOI= https://www.mdpi.com/1911-8074/12/1/35
The current derivative ecosystem is inefficient. Writing and executing contracts costs 1000X more than what is technologically possible. The incumbent ecosystem is held back by contract intermediaries that add unnecessary friction. In the incumbent ecosystem, a single derivative contract involves not only the contract parties, but also a derivatives exchange, a central clearing party, and a derivatives broker. These contract intermediaries exist to lower counterparty risk and match buyers and sellers. OptionBlox uses Stellar to accomplish these directives, removing the need for intermediaries. This significantly lowers ecosystem costs and increases efficiency.
Despite the current ecosystem’s inefficiency, volume in options has been increasing in retail spaces like on Robinhood and other platforms, showing the increasing demand for derivative products. We expect these numbers to continue increasing due to expanding market accessibility, of which OptionBlox will be at the forefront. OptionBlox will compete in the current market with higher efficiency and capture the expanding market with improved accessibility. Overall, OptionBlox drives necessary innovation in the derivatives ecosystem. It improves accessibility and flexibility by bringing efficiency in line with what is technologically possible. This innovation is necessary to meet the needs of an expanding derivatives market.
YieldBlox is Script3's DeFi lending protocol. Lending is a proven DeFi model, as can be seen by the popularity of lending apps on Ethereum. Unfortunately, the inherent inefficiencies of Ethereum limit the usefulness of these applications. YieldBlox provides a DeFi lending protocol that leverages Stellar's efficiency to allow users to lend and borrow on-ledger while paying fees much lower than 1 cent.
YieldBlox is bringing decentralized lending to the Stellar Ecosystem. Decentralized, on-ledger lending promises to improve trading and payment liquidity on Stellar and provide a way for ecosystem participants to utilize their capital to generate yield efficiently.
Efficient Yield Generation
The modern lending industry has long failed to serve the individuals actually providing capital to their lending programs. The average bank account interest rates in the developed world are lower than 1%, while banks make 6-22% lending out consumer deposits. YieldBlox removes lending intermediaries like banks from the equation allowing lenders to fully realize the value their capital is generating. This model is a large part of why Ethereum based DeFi lending platforms have been so successful. Unfortunately, those lending platforms cannot serve a global economy due to the massive transaction fees incurred by operating on the Ethereum network. By building YieldBlox on Stellar, we have circumvented that issue and can facilitate lending for less than 1 1000th of a cent per loan.
Generating Liquidity on Stellar
The Stellar network struggles with liquidity. Stellar DEX liquidity is much lower than Ethereum DEX and Liquidity Pool liquidity. One reason for this is the lack of decentralized lending in the ecosystem. A lending protocol would enable traders and market makers to borrow additional trading liquidity resulting in more efficient ecosystem capital utilization. Improving capital utilization makes payments and trading much more efficient. In addition, a lending protocol inherently improves payment liquidity by allowing anchors and other financial entities in the ecosystem to borrow the payment destination currency and instantly settle payments while awaiting the origination currency. This borrowing liquidity improves payment efficiency and reduces the need for immediate market efficiency.
YieldBlox, like OptionBlox, serves as a tier-3 blockchain app, a layer between users and the Stellar ledger. Users link their wallets to our web-app to lend or borrow. The YieldBlox web-app takes user inputs and communicates them to the YieldBlox protocol, which uses TSS txFunctions to build and approve Stellar transactions that carry out the users’ commands. Users approve their transactions using their wallet, then the web-app submits them to the ledger.
The OptionBlox and YieldBlox protocols are maintained using a decentralized governance token model. Users receive governance tokens for using the protocols and can use these tokens to submit and vote on proposals to modify the protocol the token governs. The OptionBlox governance token is called OBX, and the YieldBlox governance token is called YBX. Both tokens will be created on Stellar. For more information on how the governance protocol functions, see our docs pages: https://docs.yieldblox.com/#/Governance https://docs.optionblox.com/#/Governance
About Our Team
Script3 is the team behind OptionBlox and YieldBlox. We are a pre-seed stage startup hoping to secure our first funding from the Stellar Seed Fund. We've been building on Stellar since 2018 and had the opportunity to present OptionBlox at Meridian 2019. Since then have been continually impressed by the Stellar community. It’s an honor to be participating in the Stellar Seed Fund, and we can’t wait to see what comes next!
YieldBlox and OptionBlox will monetize by offering premium market analytics features, providing market-maker data services, and hosting a TSS. We do not charge fees to use our protocols.
Our team hopes to use resources gained from the Stellar Seed Fund to launch and expand OptionBlox and YieldBlox. Below is a list of goals beyond launching these protocols that these resources will help us accomplish.
Expand our Team To properly support OptionBlox and YieldBlox, we want to expand our team to include additional development, business, and legal resources.
Tier-1 Validator Given our protocol’s high level of interaction with Stellar and Horizon, we want to become a tier-1 network validator.
Expand Asset Support Our team wants our protocols to support most reputable anchors in the Stellar Ecosystem. We are particularly excited to add support for DSTOQ's anchored equity tokens. Imagine borrowing Tesla shares by using XLM as collateral.
Mobile Applications Our team believes that to properly serve users in developing countries, we need to launch a mobile application for OptionBlox. We may also build a mobile application for YieldBlox.
OptionBlox Hedging Tool To help the Stellar Community fully utilize derivatives, we want to create a tool that helps OptionBlox users calculate the best way to hedge their portfolios using derivatives.
OptionBlox Yield Pools Selling covered options is a great way to generate passive income using your investments. However, it is often over-complicated and difficult. We hope to develop OptionBlox yield pools where users can easily stake their holdings to generate yield by writing options.
YieldBlox Undercollateralized Loans Overcollateralized loans are not useful for many lending use cases. We want to build out the YieldBlox protocol to offer undercollateralized lending.
YieldBlox Margin Accounts Margin accounts are a form of lending. YieldBlox could enable users to open margin account and trade on the Stellar DEX with up to 5x leverage. We hope to add this functionality shortly after YieldBlox's launch.
We're hoping that the Stellar Seed Fund will provide us with enough resources to operate for one year, in which time we will launch and work to complete the above roadmap. The funding requirements outlined below would enable us to pay 3 developers (Protocol, Back-End, UX), pay 1 designer and contract design work, pay for content and marketing, host a TSS and Tier-1 Validator, and pay for IT expenses. Any additional funding we receive will be used to hire additional resources and pay for additional marketing, which will allow us to launch and expand faster.
* The USD valuation of the award in XLM is calculated using the CF Stellar Lumens-Dollar Settlement Price on the date of transfer as administered, maintained, and reported by the cryptocurrency index provider CF Benchmarks Ltd. (using the ticker “XLMUSD_RR”) (available at https://www.cfbenchmarks.com/indices/XLMUSD_RR)