How does Seaweed Finance, HECO's first options platform, empower the DeFi ecosystem?

Produced | Odaily

Editor | Hao Fangzhou

Produced | Odaily

In the past two years, the popularity of encrypted derivatives is obvious to all, and futures transactions continue to hit new highs. At the same time, options, as an emerging derivative, have also received a lot of attention.

Especially with the development of decentralized finance, DeFi options represented by Opyn and Hegic have begun to emerge.

It should be noted that DeFi derivatives are currently in their infancy. According to Bit-Z data, although the current total trading volume of DeFi derivatives is growing rapidly, it only accounts for 0.01156% of the trading volume of exchange derivatives, far from reaching the stage of competing with CEX derivatives.

On the afternoon of March 23, Seaweed Finance Chief Technology Officer Coke was a guest at the Odaily Chaohua community, explaining in detail how Seaweed Finance, HECO's first option platform, empowers the DeFi ecosystem?

Coke said that the current centralized options have problems such as overpricing, which makes options lose the significance of avoiding risks and leverage, and makes them unattractive to users; in addition, on-chain options are very restricted by the bottleneck of blockchain infrastructure. It is more difficult for users to use it for development based on Ethereum. Therefore, Seaweed Finance chose to develop based on the emerging public chain Heco, and improved the traditional BSM pricing model, and adjusted it according to the volatility smile curve, making DeFi options more efficient and available.

“The vision of Seaweed Finance is to make options trading safe and easy for everyone,” Coke explained.

The following is a community interview, organized by Odaily:

Odaily: Since many friends are not familiar with options, I would like to ask you to introduce to us how Seaweed Finance’s options work, and what are the risks and advantages?

Coke：This question is very good, and it points out the pain points of the existing encrypted derivatives market - most trading users are very familiar with spot and futures, but in the traditional financial market, they will not be needled, and they are more risk-averse Options with stronger attributes and leverage attributes are not involved.

There are two main reasons. The first is that the pricing of options in the encryption market is unreasonable, and the core of risk control is to balance the cost of income and risk control, so high option pricing will make the hedging function meaningless. The second point is that the option products on the existing trading platform are too difficult to operate for non-professional traders, and various complicated pricing tables bring too much confusion to non-professional traders. Regarding these two points, our team has made very rigorous considerations and repeatedly tested and iterated Seaweed products.

Regarding the first point, the Wall Street veterans in the team make the pricing of options on Seaweed better than other platforms. The options on Seaweed Finance use the AMM mechanism and adopt an improved version of the BSM pricing model, which will be fully autonomous in the future and support cross-chain. For the second point, we make Seaweed Finance a decentralized trading platform that allows users to have a smoother and simpler experience, allowing users to trade options as easily as ordering takeout.

In terms of risk, like all decentralized trading platforms, it is easy to be constrained by the performance of the public chain at high concurrency. But we believe that HECO will be a high-quality public chain capable of carrying high concurrency, so we chose to launch on HECO.

Odaily: How much is the demand for decentralized options? Is it mainly to attract the original centralized options users? Why did Seaweed Finance choose to cut into the options track in a decentralized way?

Coke：Seaweed Finance's vision is to allow everyone to trade options with peace of mind and ease.

In our opinion, the centralized option users in the original encryption market are a small stock market, but what we want to do is a huge incremental market for all traders. After our research, users in this incremental market are divided into two types - one is users who want to trade options in the existing market, but they have not found a platform with reasonable pricing, ease of use and deep transaction depth; the second is the future Users who have traded options and want to try, but are rejected by the high-threshold complex products of the existing platform. Our products have been greatly optimized in terms of pricing and user experience, so they are attractive to both types of users, not to mention centralized options users who are already trading options.

Choosing a decentralized way to cut into the options track is mainly designed from the perspective of users. First of all, the decentralized platform makes users feel more secure about their funds, and they don't have to worry about losing their principal due to the influence of unstable human factors on centralized management and control. Secondly, the mechanism design of the platform prevents users from worrying about liquidity risks, that is, losses caused by insufficient depth.

Odaily: In addition to Seaweed Finance, there are other projects such as OPYN and Hegic on the decentralized options track. Compared with these competing products, what are the differentiated advantages of Seaweed Finance as a rookie?

Coke：Decentralized exchanges such as Uniswap, OPYN, and Hegic have actually educated the market well before, and everyone has gradually become accustomed to using decentralized wallets to open up the transaction process. Compared with competing products, our seaweed has made a greater degree of refinement, such as the extreme optimization of the UI and the simplification of options, so that users can understand at a glance without wasting too much time looking for functions and understanding complicated forms.

As mentioned just now, if the price is too high, the option will lose the significance of avoiding risk and leverage, making it unattractive to users. The reason why Crypto options are overpriced is that one of the core factors in the BSM formula is volatility, and the crypto secondary trading market has a high volatility, so directly applying the formula will make the final pricing result too high. Our team has improved the pricing model of BSM and adjusted it according to the volatility smile curve. In our opinion, option pricing is an empirical discipline, and the team's years of practical experience in traditional finance will allow us to widen the advantage gap with other platforms in pricing.

Finally, on-chain options are very constrained by the bottleneck of the blockchain infrastructure. I still remember that when Defi liquidity mining suddenly broke out a few months ago, the congestion and high handling fees of Ethereum were very honed. People’s patience and willpower . And our white paper also wrote that we had been preparing for a long time but gave up on eth, and didn't release the project until Heco appeared. The new public chain infrastructure will inject new vitality into the transactions on the chain. Choosing a better infrastructure is like standing on a better starting line.

Odaily: Options are the most professional financial product, and the team behind them is very important. Could you please introduce the relevant background and experience of the core members of the team?

Coke：The Seaweed team comes from the United States, Hong Kong and the mainland. Sandy, the main core member, was previously an executive of one of the three major exchanges. Before that, he was the CEO and financial director of a listed company, with many years of experience on Wall Street. Krabs is a former Wall Street trader, managing a fund worth billions of dollars, and has a deep understanding of the principles and structures of various economic models and financial products. Plankton is the mathematician of our team. He graduated from the number one university in the United States and designed all the economic models and risk control systems of Seaweed from scratch. In addition, we also have a CEO who does odd jobs.

Odaily: One of the core issues of options is pricing, which is related to the immediate interests of users. Many platforms choose AMM quotations, but it is easy to cause pricing deviations. How has Seaweed Finance improved in terms of pricing?

Coke：In fact, it is precisely because we discovered the pricing deviation and defects of the platform after trading on other AMM platforms that Seaweed emerged. SeaWeed will have two pricing plans to provide redundant pricing support for the platform after the product is launched, which means that both plans will run simultaneously to ensure data robustness.

The first option is based on historical volatility derived from historical price data. Of course, those who are familiar with option trading will know the difference between historical volatility and the implied volatility of actual transactions, so we will use some simple methods, such as dynamic regression analysis, to make periodic corrections to historical volatility. At the same time, we introduced a BSM model with a closed analytical formula to simplify the calculation process of pricing. Corrections are also made for the changes in the implied volatility in actual transactions caused by the difference between the exercise price and the market price in option transactions.

The second pricing assistance scheme is to directly read and summarize the implied volatility of the existing centralized exchange options through the oracle machine as an aid to the first scheme. Of course, we will find that the implied volatility of actual transactions between centralized exchanges is also quite different, but due to the relatively limited liquidity of option products themselves, the arbitrage space is also relatively limited.

Odaily: There are two types of participants on Seaweed: options traders and liquidity providers. As a liquidity provider of an option seller, the risk is greater, and liquidity may dry up in the long run. What measures has Seaweed Finance taken to improve the liquidity of options?

Coke：Undoubtedly, in the same way that Dex LP bears the risk of uncompensated losses, the party that provides liquidity on Seaweed will also receive additional Seaweed points incentives for compensation. The idea of ​​this should be similar to the idea of ​​Compound/Uni. Therefore, the party as a liquidity provider can actually receive three benefits: the benefit from the option premium provided by the option buyer; the Seaweed points received every day; the additional benefits obtained as its owner after receiving Seaweed points .

At the same time, seaweed finance may adopt a volatility slightly higher than the market average to price products to protect the interests of liquidity providers. It should be noted that the volatility slightly higher than the market average will not make Seaweed Finance lose its competitive position. As we mentioned before, in contrast to the option products of centralized exchanges, they have higher implied volatility. The difference is also huge, but this does not prevent some people from trading in some option products with seemingly ridiculously high implied volatility.

Odaily: In terms of risk control, how does Seaweed Finance prevent option sellers from selling out their positions, resulting in the failure of the buyer to cash in their profits? What are the margin requirements?

Coke：Due to the leverage characteristics of the option product itself, Seaweed Finance currently adopts the 110% liquidation line rule. At the same time, the buyer will automatically reduce the corresponding position after the seller triggers the liquidation line. At the same time, we will consider adding a position reduction measure with a penalty mechanism in the later stage-that is, to provide the seller with a right to reduce the position midway or leave the market, but correspondingly, a certain amount of penalty measures need to be paid to the option buyer. Of course, this mechanism is still We didn't make the final decision to introduce a similar mechanic in the design.

Odaily: Many users reported that there is a relatively large threshold for option trading, and the user experience of UI and other products is not good. In particular, many projects are based on Ethereum, and the gas fee is high. How has Seaweed Finance improved in terms of user experience?

Coke：In fact, our initial product was also developed on Ethereum. With the ordinary transaction data on the chain, the single transaction fee has also increased from $0.1 to the peak of $100. At the same time, due to congestion, the transaction Latency and other concurrency issues. Under this premise, we migrated our products to the Huobi HECO platform.

HECO is technologically innovative, especially after adopting HPOS, the transaction fee has been greatly reduced, making higher frequency transactions possible. And as we all know, option calculation and pricing is an extremely cumbersome process, so the low cost of calculation is conducive to the deployment of new pricing models.

At the same time, in terms of UI, we save users from the inefficient understanding time, and only need to enter the amount they want to buy and the time of option to complete the transaction. The AMM mechanism and the BSM pricing model automatically calculate the option quotes. Compared with other options platforms, SEAWWEED users do not need to worry about counterparty risks, nor do they need to compare prices, and truly achieve one-click option trading.

The products launched at the end of the month are more inclined to European options, and then we will develop a new options trading platform to increase the secondary liquidity of options and the effective utilization of user funds.

Odaily: For users, security is very important, especially in the recent thunderstorms of many projects on HECO. What security measures does Seaweed Finance take? Which companies supervise and complete code audits? Have you set up some bug programs to reward "white hats"?

Coke：We are a project that wants to develop in the long term, so we have set very high requirements in terms of security. From the perspective of partners, the current smart contract has completed the security audits of two professional organizations, Armors and Certik. With the development of our products When it goes online, we will invite more global first-line security agencies to provide audit services for the platform to ensure the security of users' assets. At the same time, the community is also encouraged to help us find code errors. Therefore, the project has set up a large enough bonus, with the highest bonus being as high as 100,000 US dollars.

Odaily: Can you introduce Seaweed Finance’s governance token SWF and its economic model? What is the application scenario and value embodiment of SWF in the Seaweed Finance project ecology?

Coke：When designing the economic model, the consensus of our team is to make SWF price and platform value can promote each other as much as possible to form a positive stimulus.

Regardless of whether users participate in HBTC, HETH and HT option transactions on the Seaweed platform, or by providing the liquidity of the corresponding options, they can get SWF rewards. 45% of the tokens will be mined in this way, and the mechanism will be used to encourage more users to participate in the use of the platform.

For the economic model, we designed Elastic Price Offering to dynamically adjust the liquidity and price, and provide SWF trading depth to maintain the steady rise of SWF prices by adjusting the actual circulation;

In addition, Seaweed POT is also an integral part of the economic model. Seaweed Pot mortgages a certain amount of SWF, so that currency holders can get a share of platform transactions. The option delivery fee will be 2% of the total transaction amount, and the fee will be evenly divided into each POT. To a great extent, control the circulation at a reasonable level, ensure the continuous operation of Elastic Price Offering, and push up prices while users grow.

Odaily: For decentralized projects, many people think that DAO is the most ideal way. What do you think? How will Seaweed Finance be autonomous in the future?

Coke：The fully autonomous model in the future can ensure the diversity of platform assets, and users will not migrate due to the limited asset types; and let users have the initiative to increase the sense of participation, and the design of fully autonomous future is in line with the final development logic of the blockchain world and trends.

We are full of confidence in the future of DEFI options, and have formulated a reasonable plan for 3 years. Financial options are actually a very mature system that has been verified by the market for a long time, and the possibility of major changes in the model is very small. The early operation introduced liquidity, and then established a spontaneous network promotion through the economic model to make the project have a steady stream of demand, so the application of DAO in decentralized financial projects is very easy to achieve.

Community question 1: Regarding the price limit mechanism, restricting selling seems to be counterproductive. From the evening of March 20 to now, there is basically no purchase. What measures does the project party take?

Coke：The main purpose of the flexible auction is to allow more people to obtain the initial TOKEN in the simplest way. Before the product is launched, the TOKEN itself has no value, so I also understand that some investors will redeem it at this point in time. I also learned that some users bought our TOKEN with a loan without knowing the project mechanism at all. In fact, we do not encourage this kind of behavior, so we allow the buyer to redeem the mechanism. As the project party, we have used all the sales fees to repurchase the tokens redeemed in the auction, and we have allocated a part of the ISO funds to buy in batches.

I hope to filter out some speculators through the redemption mechanism. As an option trading platform, there will be better development in the future when DEFI finance gradually matures. Almost all excellent projects such as EOS, HT, and BNB also fall below the issue price. What's more, our redemption price is now 120% of the ISO price. In the future, we will cooperate with major DEX exchanges to introduce the liquidity of centralized exchanges, introduce traditional options trading players, guide the injection of liquidity funds, open liquidity pools and mortgage mining to promote the development of the project, and thank you all And the support of users who have been holding our TOKEN!

We hope that in the future, we can become Deribit and Bitmex in the DEFI world.

Community question 2:At present, apart from obtaining investment from well-known institutions, what other well-known projects has Seaweed Finance reached cooperation with?

Coke: We did not invest in any centralized institutions, because they will influence the development of the project. At the same time, we believe that the early community is more important than the early investors. We are willing to give our project benefits to more early participants, and Not an early investor. In terms of cooperation, the safe ones include certik and armors. We have cooperated with most of the well-known projects on HECO, and it is not convenient to disclose them for the time being.

Community question 3: Can you share your plans for going public in the future?

Coke：The product will be launched at the end of the month or early April, in line with the publicity and distribution channels. After that, it will go to DEX first, and the exchanges in communication now include many top 10 CEXs. It is not convenient for us to disclose the name of the exchange until the implementation is confirmed.

Community question 4: Will unsold coins be destroyed?

Coke：This auction is not a sale, but more like a liquidity pool built on our own platform. When the value of the token exceeds the total price of the auction, the liquidity will be automatically exhausted. This is a way to motivate the team and users to work together. We will design this mechanism more to provide benefits for early users. Liquidity is not a problem, the problem is that liquidity will only lead to selling if it is not useful. When the application is launched, I believe more people will participate.