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VeradiVeradict - Issue #204
In traditional financial markets, the total value of financial derivatives is estimated to be approximately 10x larger than the global GDP, dwarfing the value of regular financial markets. Because of this, there is clearly a massive upside potential for DeFi derivatives protocols. In fact, the TVL of DeFi derivatives protocols has been growing consistently, from $25 billion in late 2020 to almost $40 billion today. Such protocols include dYdX, Ribbon, Opyn, and many more. Each protocol has different offerings which range from perpetual futures trading to exotic derivatives and automated options trading strategy vaults, most of which are inspired by existing derivatives products in traditional finance.
In both traditional finance and DeFi, derivates serve the purpose of providing a suitable risk/return tradeoff on an existing asset between two parties. Such assets can be equities, bonds, existing derivatives, or even baskets of assets. In DeFi, many efforts have been made to mimic traditional finance derivatives in a permissionless way, which requires that the product is overcollateralized. However, certain protocols such as Ribbon have been making a move to allow for undercollaeralization, which opens the door for more options for risk/return profiles. Others are also making it easier to adjust risk/return profiles by offering only one side on chain and the other to market makers. Cega offers one of such risk/return profiles by offering fixed-coupon notes traded with market makers.
Pantera recently invested in Cega’s seed round.
Cega: Fixed-Coupon Notes
In traditional finance, fixed-coupon notes (FCN) are equity-linked structured notes that pay regular distributions at pre-defined intervals, where the payment of coupons are dependent on the price of the security. Essentially, this is somewhat similar to a bond in that FCNs are debt obligations with coupon payments and maturity dates. However, the principal may not be returned in full at maturity. Instead, a basket of assets with assigned strike prices is considered, and the payoff is the difference between the closing price and the strike price of the worst-performing asset, plus any coupons payments along the way. Furthermore, FCNs also have predefined “knock-out” levels where if the price of an asset within the chosen basket exceeds the price level, the FCN expires and pays out immediately, enhancing investor liquidity.
The FCN offered as a first product by Cega. Source: Cega Documentation
The fixed-coupon notes offered by Cega contains the following:
Short positions on 2-3 put options (i.e. selling puts), the primary purpose of which is to earn yield
Knock-in barriers, to provide a backstop on the downside.
Cega recently launched on Solana miannet, accumulating $10m in TVL. Cega launchd three FCN vaults: Cruise Control, Genesis Basket, and Gotta Go Fast. Cruise Control tracks BTC and ETH, and the latter two track BTC, ETH, and SOL. The difference between Genesis Basket and Gotta Go Fast is the price drop protection, otherwise known as the Knock-In barrier: Genesis Basket has a 90% price drop protection whereas Gotta Go Fast only has a 50% price drop protection, but the latter has higher APY. In particular, currently Cruise Control and Genesis Basket have approximately 10% APY and Gotta Go Fast has upwards of 200% APY. Since mainnet launch, the number of unique users has more than quadrupled in little more than a week, which marks a great success.
Cega has released the Cega Super Sanics Utility NFTs, which allow for airdrop boosts, access to highest APY vaults, and many more. After their FCN vaults offering, Cega is planning to implement more exotic options and structured products that offer an even more diversified risk/return profile. Given that they already work with promising market makers, this is much easier to do than with other projects.
- Paul Veradittakit
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IN THE TWEETS
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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. I’ve been in the industry since 2014, and the firm invests in equity, early stage token projects, and liquid cryptocurrencies on exchanges. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.