On Friday of this week, I had the pleasure of interview Andrey Belyakov from Opium network, a decentralized derivatives platform. He was the second person ever to pitch to KARMA DAO as part of our rolling project presentation hour. Over the course of our interview, I was able to grok what Andrey and his team were building and how it would fare in our growing Defi ecosystem.
Opium Network is "universal protocol to create, settle, and trade any derivative." They've created a new standardized protocol to create any type of financial instrument such as futures, options, CDS, etc. What's novel is how they have managed to figure out a method that operates with fixed margin deposits and psuedoanonymous wallets.
Derivatives exist on the edges of traditional finance and have only become mainstream in the last decade or so with platforms like Robinhood. Options and futures are a common product now to be traded, especially for crypto markets. There's a special function derivatives convey, they trade time for money and leverage.
Futures and options contracts arose out of agriculture and industry. Farmers and factories used futures and options contracts to hedge their outputs or supply. These contracts allow the buyer or seller to choose a point in time where they will settle with the other party for the actual asset.
What get's many into trouble though is that derivatives typically have unlimited upside and limited downside. If you sell a call option and the market moves against you a great deal, you will be financially liable, even if you don't have the cash. Margin provision like this can only happen if all parties are known and can be prosecuted accordingly.
On the Ethereum blockchain, if you put up margin and the contract trades past your liquidaition point, there is no way for the other party to collect what is owed. They can't access your wallet without your express permission and token addresses are hard to identify.
Opium has a nice little solution for this problem. To buy a contract, you have to put up 20% margin and so does the counterparty. If the contract goes against you, once you hit 20%, instead of getting liquidated, the counterparty would start trading with another person who also put up 20% margin, this way the price can go beyond the hard limit for margin and still profit.
The bread and butter for Opium is spreads, which have a defined profit and loss, making it much easier to define the margin requirements. Their first product was an interest rate swap, an extremely common derivative product used in almost every bank in the world. It's just one of the many financial products that they want to build out.
It's a strange first product. I get why they made it. People are using Compound and Aave which have variable interest rates. Before COMP rates were all over the place, climbing as high as 15% and then declining to under 1%. Swap markets help control returns and mitigate interest rate volatility. But, swaps are a harder product to sell. It's not just a few clicks, now it's betting on rate movements and I doubt many people understand the fundamentals.
While I like the idea, I think Opium needs to figure out how to make their point to normies who don't have high level option experience. The biggest selling point of Defi is its ease of access for literally anyone. All they have to look at is an interest rate number and then approve a few transactions.
Options are tough and possess more risks than an interest rate, but they offer a wider variety of contract types and situational strategies. How would Opium fit into Instadapp? I really have no clue. Maybe its a question of risk, but at the same time, there must be a way to extract premium in an easy to understand manner. One idea would be to make a single token that is automated to sell option spreads and roll from expiry to expiry. Losses are limited and if you double up and create an iron condor, volatility is really the substantial risk.
Derivative volume is an order or two larger than spot. Bringing a portion of that on-chain would create opportunities for arbitrage and market making. It will be necessary to drive on-chain volume to another magnitude.
For all the positive opportunities, no one is currently making markets for these types of contract on-chain. It's not memeable, easily digestable and returns are random. I really don't know if Opium is positioned right to tackle this sector, not that they are lacking in technical development, but rather, it's a question of can the educate enough people to create substantial demand.
Opium's problem is not technological, it's UX/UI. They should take a harder look at their onboarding process and steps to purchase their derivatives. If they could educate during the sale, it could spark volume. The site fails to show me why I would need interest rate swaps in the first place. I've got my deposit with Compound, why should I worry? Opium really should address this question first.
Good UX/UI supercharged Robinhood's option trading. In just a few minutes from signup, a user could deposit money and start making complex trades. The UI was slick enough, paired with those frontrun "zero" fees, to change an average users mentality from investing to gambling.
Compound was having trouble breaking a few tens of millions supplied until they created yield farming, a meme in itself, but which has perpetuated pretty much every other Defi project to do the same. Opium could create their own yield farming tokens with their derivative contracts, I'm not sure why they haven't done it yet.
UX/UI is easily changable, but hard to master the means of conveying the information necessary to use the app. A lot of great tech teams forget the UX/I in favor of tech. I hope they focus more on making their products easier to use.
I'm very excited to see how their business plays out. The next year or two should be pivotal in understanding if derivatives trend to Ethereum's Defi or not.