ON–057: DeFi (Part 2)

Coverage on Index Coop, Hegic, PoolTogether, and Nexus Mutual.

Feb 5, 2021

④ Hegic

Contributor: Tempted, Hegician at Hegic

  • Hegic is a decentralized options protocol, designed to provide users with a non-custodial, simple and flexible options trading experience. Hegic’s bi-directional liquidity pool design is one of its key innovations that allowed option traders for the first time to access to deep liquidity on-chain.
Source: Dune analytics

Hegic’s founder and developer, Molly Wintermute, recently released Hegic’s first quarterly report detailing the achievements of Hegic’s first 3 months. Below, I’ll build on the report to include data and exciting developments since January!

Hegic options traders have now amassed $204.3m of volume spread across >3,500 options in just 4 months. This has been evenly spread across WBTC and ETH options, $103m and $97m respectively. Through this period, Hegicians have been overwhelmingly bullish with calls accounting for 76% of total volume.

Source: Dune analytics

In January, Hegic secondary market (H2M) launched, developed by jmonteer in partnership with CryptoSamurai. H2M is a secondary market AMM that provides options holders a way to to extract some of the extrinsic value of options by selling into a liquidity pool before expiration!

Options volume from Hegic has resulted in $2m of fees (conservatively) for Hegic staking lot holders. Since staking lot holders earn fees in WBTC and ETH, they have likely realized more value than the $2m mentioned.

Source: Dune analytics

As is the case in markets, when longs win, shorts lose. Hegic liquidity providers (LPs) are sellers of options, and as such are short volatility. With WBTC and ETH volatility high, coupled with the bullish bias of option purchasers (calls), LPs have experienced losses to date, amounting to 11.7% for WBTC LPs and 8.2% for ETH LPs. Currently, LPs receive rHEGIC (IOU for HEGIC paid upon Hegic reaching volume milestones), which compensates risk for their early contribution to Hegic. Note: LP USD value is likely higher since WBTC and ETH have increased over 200% since Hegic v888 launch.

With some LPs leaving after the $100m phase 1 reward milestone was achieved, Hegic’s current TVL now sits just below $60m.

Source: DeBank
  • However, a new version of Hegic is currently in the works and will include an upgrade to the liquidity pool which will allow for LPs to opt in to auto hedging. This will improve the experience for LPs that do not currently hedge outside of the system when put/call ratios are skewed and/or when volatility is high.

About the editor: Spencer Noon is an investor at Variant.