Ep 38 Hegic case study
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TLDR below. This is not financial advice.
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Hegic is a peer-to-pool option trading protocol that allows users to trade in options in a decentralised way.
Hegic works quite simply with the participation of two components, writers and buyers:
Buyers: who need to call or put option on Hegic. Buyers can customise parameters of Options such as expiry date, strike price.
Writers: Who sell call or put options to make a premium and to become a writer on Hegic users simply need to provide liquidity to the Hegic Pool.
1. Objectives of HEGIC
One of the objectives of any business is to earn revenue otherwise you won't start a company.
In HEGIC, liquidity providers are basically option sellers. Previously, you could only be an option seller if you had a lot of capital. If I have a little money, I can't exactly have the same benefit. Instead, we can pool all this liquidity together and provide a way for users to be hedging or speculating on the assets that are available. Then we can distribute the benefit to the liquidity providers and users, so this is a value add to liquidity providers. There's a new avenue or a new source of income from becoming a liquidity provider which is your premiums.
There is also a value add to users because now there's more options and alternatives to be finding the best avenue and to get returns or profits and this is very useful because in economics every time there is an increase in opportunities or alternatives available then there is a marginal increase.
2. How HEGIC works
In general think of it as something similar to Uniswap. In Uniswap your pool will be something like let's say ETH and USDC for example. In HEGIC you just have one asset let's say ETH. You add liquidity into the pool and what we want to do is to get all these little smaller guys with some capital put them all together.
With Uniswap people can trade and exchange so if I have ETH and I want to change it for USDC or if I’ve USDC and want to change it to ETH. I don't have to go around asking people and then pool together the exchanges from every little guy. Instead, I put all the things inside a pool and then we just trade.
With HEGIC it's also similar because we pool all the ETH together and instead of trade and exchange we issue option contracts.
We can do both call options and put options so let’s say we are the seller because we have enough liquidity and enough assets available to be selling call options and put options. Buyers pay the premium to the liquidity pool and whoever that provides liquidity gets to have a share of this premium. Similarly in Uniswap when you trade and exchange you have to pay transaction fees which goes back to liquidity pool.
What Else Did You Miss?
Economics Design of HEGIC
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HEGIC is an options protocol in the DeFi space. It has grown tremendously and there's huge growth in the space as the derivatives market continues to mature.
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