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Hegic: On-chain Options Trading Protocol

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TL;DR: Hegic is a protocol for on-chain hedging contracts (American options). The first implementation of the protocol focuses on at-the-money put options on ETH backed by a shared liquidity pool of DAI.

What’s unique about Hegic?

The DAI deposits by liquidity providers (LPs) are distributed between many hedge contracts → risk diversification, improved liquidity, and capital-efficiency.

The assumption is that the long-term returns of Hegic LPs will exceed the returns of a solo options writer.

How does it work for LPs?

LPs deposit DAI into the pool (DAI is instantly swapped to CHAI via Uniswap) in exchange for writeDAI that corresponds to their pro-rata share of the total pool.

LPs earn their pro-rata share of premium fees plus the DAI savings rate (DSR).

Buyers?

The hedge buyer sets the expiry date (in weeks) and # of ETH. The ETH/USD strike price is obtained from the Chainlink oracle.

Cost: 2% premium (per week) + 1% settlement fee. Premium fees distributed to LPs and settlement fees to HEGIC tokenholders.

Who is Hegic competing against?

  • On-chain: Nexus, Opyn → pros: protection for current ETH value and shared liquidity.
  • Off-chain: Deribit, FTX → pros: transparency and trust-minimization.

Product roadmap?

The first implementation of the Hegic protocol supports only non-tradable at-the-money ETH/DAI puts.

Going forward, the aim of Hegic is to support all the same features that centralized options exchanges like Deribit do.

How does Hegic make $?

The HEGIC token entitles its holder to both economic (settlement fees) and governance (voting) rights.

Governance pertains to e.g. premium and settlement fees, supported strike prices, hedge contracts, and pool assets. On-chain governance will be implemented after the protocol has reached 100 MAUs.

Proof-of-HODL discounts and perks:

Buyers get a 30% discount on premium fees by proving a HEGIC token balance > contract value.

LPs get priority to unlock liquidity from the pool by proving a HEGIC token balance > liquidity value.

Token distribution:

HEGIC will launch its native token on 5/5/2020. Initially, 10% of the total supply will be distributed to set up a development foundation for the protocol.

The whitepaper outlines a vesting-like (subject to milestones) schedule for subsequent token distributions:

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The authors of this content, or members, affiliates, or stakeholders of Token Terminal may be participating or are invested in protocols or tokens mentioned herein. The foregoing statement acts as a disclosure of potential conflicts of interest and is not a recommendation to purchase or invest in any token or participate in any protocol. Token Terminal does not recommend any particular course of action in relation to any token or protocol. The content herein is meant purely for educational and informational purposes only, and should not be relied upon as financial, investment, legal, tax or any other professional or other advice. None of the content and information herein is presented to induce or to attempt to induce any reader or other person to buy, sell or hold any token or participate in any protocol or enter into, or offer to enter into, any agreement for or with a view to buying or selling any token or participating in any protocol. Statements made herein (including statements of opinion, if any) are wholly generic and not tailored to take into account the personal needs and unique circumstances of any reader or any other person. Readers are strongly urged to exercise caution and have regard to their own personal needs and circumstances before making any decision to buy or sell any token or participate in any protocol. Observations and views expressed herein may be changed by Token Terminal at any time without notice. Token Terminal accepts no liability whatsoever for any losses or liabilities arising from the use of or reliance on any of this content.

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