Talking Crypto #59 - Lianne Li from Divergence
Primer: Join Gabriel Haines as he interviews Lianne Li from Divergence Protocol, an upcoming binary options protocol. Learn from Lianne what makes Divergence unique when compared to other options protocols.
Origins
Founding member of Divergence
Background in commodities derivative research before joining crypto industry in 2017
Used to be the Research Lead in Huobi
Commodities Research
Director of research at the CPM group
Primarily focused on commodities such as metals and energy
A Bitcoin Exchange set up shop right next to her office and she dismissed Bitcoin thinking that it cannot compete with gold
Discovered Ethereum in 2017. Ether was classified as a commodity and she has never ever seen a commodity like that before:
Used as a medium of exchange
Used as fuel for the world computer to facilitate everything from games to the lending market
Making The Jump To Crypto
Had some reservations making the jump
Was out of job back then. Visited friends in Beijing and had the opportunity of meeting the Director of Research at Huobi Research
In 2020, been actively yield farming and experimenting with different strategies with her current co-founders and her team
Wanted to be a part of the ecosystem and help grow a protocol to bring options on-chain
Divergence Protocol
How It Works
Divergence V1 aims to create an efficient, AMM-based binary options market
Binary options provide a fixed payout at expiration
Can think of their structure as a yes, no statement
Before a trade, the user will know what is the maximum payout and maximum loss
Hardcoded the value of a binary call and put option to always add up to 1 collateral. 1 collateral can refer to any ERC-20 token (e.g. wrapped asset, stablecoin, etc.)
Example:
What will ETH price be at 8 AM UTC tomorrow?
Bet 0.5 USDC
If correct, the option will be worth 1 USDC
If wrong, you lose 0.5 USDC
AMM model adopted from the Uniswap constant product model. Made some changes and there is a constant product for each side (calls and puts)
Constant product is calculated from the number of options and the amount of collateral on that particular side
When transaction occurs on one side, the product of that side is held constant whereas the product on the other side would change
No Black-Scholes Model involved in their protocol
Protocol Features
For everyone. Anyone can create a pool
Gives users a lot of flexibility in terms of managing their DeFi-native volatility exposures
More capital efficient than other protocols
No overcollateralization required
No liquidations involved as they reserve the max claims for all options sold on their platform
Will They Introduce Traditional Options?
Current focus still on binary options as there is great potential for a liquid options market
There is arbitrage opportunities between the different options protocols
On-Chain VS Off-Chain Options Markets
DeFi options market work very differently when compared to traditional CEXes
In CEXes:
Quotes are promptly updated by the exchange engine
An options chain for every single options product
Bringing the options chain on-chain will require a lot of gas due to the heavy computation overhead
Complicated to do an analysis of the cost. Besides the percentage commission being charged, one also needs to analyze the bid-ask spread that is posted on the orderbook of an off-chain market
Cost structure is very different
Off-Chain Markets (e.g. Deribit)
Aggressive market buyers have to pay the spread
During high market volatility, likely to see a huge spread
On-Chain Markets (e.g. Divergence)
Structure adopted from Uniswap
Slippage is transparent
No orderbook frontrunning
Attracting Users To Provide Liquidity On Divergence
They provide a greater ability for users to customize their financial positions
Ability to create a lucrative options pool with plenty of active trading going on
Holders of the DIVER governance token will be able to vote on future directions of the platform and to enhance their yield
New Products In The Pipeline
Launching their protocol on different Layer 2s
Developing volatility indices and index derivatives
Yield vaults that deploy various volatility trading and arbitrage strategies
Their Passion With Options
Options provide people with many different ways to express their views in the market
Compared to spot or futures, options provide a parabolic payoff
Projects That She Likes
A huge fan of Curve and Sushi. Currently finding ways to work with them
Considering launching their DIVER token on SushiSwap's Miso
For NFTs, she likes Bored Apes
How Listeners Can Take Action
Follow their social media
Upcoming launch on Kovan testnet
Will be launching a trading competition on the testnet in preparation for their launch on Mainnet later in Q3
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