Create a Thetanuts AMO to provide liquidity directly to Thetanuts' options vaults

Governance Proposals AMOs
1

Summary

Create a Thetanuts AMO to provide liquidity directly to Thetanuts’ options vaults.

Background and Motivation

Thetanuts is a multi-chain crypto derivatives platform, offering organic yield opportunities for users and daos alike to earn sustainable returns. Options markets are still in their infancy with only $1 billion in TVL while spot dex’s have nearly $70 billion in TVL. In traditional markets, derivatives such as options are anywhere between 8x-20x more liquid than their spot counterparts. There will be several catalysts needed for the same to happen with options markets in DeFi, but one necessary component will be having sufficient liquidity. Frax is in a unique position to supply the capital necessary for Thetanuts’ vaults given its proven record of stability, cooperation, and innovating protocol design. A collaboration with Thetanuts would lead to increased demand for Frax while improving the TVL of Thetanuts.

In this collaboration, Frax will be deployed in Thetanuts version one index product to sell a variety of puts (example, eth puts and wbtc puts) that aggregate to a single index token. This enables Frax holders to generate outsized risk adjusted base yields in Frax, resulting from top market makers such as Alameda, QCP Capital, Ledgerprime, Genesis, GSR, and Wintermute actively participating in Thetanuts option vaults.

tindex graph
tindex graph1280×536 37 KB

|||Cumulative Return (%)|
|Thetanuts v1 ETH Puts Index (green) |50.6|
|Thetanuts v0 (Blue)|30.1||
|DeFi option vault 2% AUM fee 10% performance fee (red) |22.1||

This product differentiates Thetanuts from its peers and benefits Frax holders because:

  • Thetanuts creates a high yield risk adjusted scenario estimated at ~50% for 2021 via its index because users are no longer seeing their risk concentrated on a single strike and tenor. This can be observed from the back test.
  • Thetanuts does not take fees on its base vaults. This ensures that Frax holders continue to receive the highest base yield in the DeFi options space.
  • Thetanuts index product will be multichain unlike current defi option vaults which are available for access only on their source chain creating a superior user experience.

Additionally as the collaboration grows, Frax will gain traction as a standard for settlement in the dealing of financial derivatives. Thetanuts benefits as it is able to build out a comprehensive options market by having vaults on varying strikes and tenors for various assets. This would be a critical step in creating a full service decentralized options trading platform. For these reasons, a collaboration between Frax and Thetanuts will be mutually fruitful.

Proposal

Create a Thetanuts AMO and authorize up to $10m of liqudiity for use in the AMO.

For: Create the Thetanuts AMO

Against: Do nothing

3 Likes
2

I’d support this proposal. Creates an opportunity to capture some organic yield. What does everyone else think?

1 Like
3

Writing options is known to be profitable in the long run, so this sounds like a good strategy for Frax to pursue. It would also be great for FRAX users to be able to use FRAX a collateral for put-writing-strategies.

Can you explain a little about how trustless the protocol is? How are the options sold at the backend? Are the options committed onchain? etc.

2 Likes
4

A Request For Quote (RFQ) is submitted by the Manager Function for each vault to whitelisted marketmakers which include QCP Capital, Alameda, Ledgerprime, Genesis, GSR, Wintermute, etc. The winning bid interacts with Thetanuts smart contracts to submit the premiums. When options are out-of-the-money, at the point of expiry, the strategy is rolled. If options are in-the-money (ITM), the smart contract cash settles the vault with the marketmaker, after which, the vault rolls the strategy. Thetanuts has executed this model for ~7 months with no hiccups.

on your point about how this vault could be good for Frax holders. Thetanuts has conducted a survey amongst the notable marketmakers, by and large, they are supportive of Frax to be used as collateral.

This product is not for everyone. As demonstrated in the graph, it is not risk free yield. The ideal user is someone who is using the product generate yield over a long period of time. Premiums accrued over time usually act as buffer against ITM options. Usually, 3 months or more, to see noticeable differences.

Further, the proposal only covers the base yield that users will earn in more Frax and excludes any token yield, etc. that is likely to be added on top of the basic vaults.

3 Likes
5

Pretty confident - in the future- that Frax will be a scalable and sound stable coin that will be widely adopted for DeFi use cases. This sounds like a good proposal.

6

LedgerPrime here. Big supporter of this and Thetanuts in general; we’ve known the team for a long time and trust their expertise in derivatives and risk management to create product that will be beneficial for the overall community.

1 Like
7

This is Stelian of HyperChain Capital, seed investor Thetanuts. We are of the view that sustainable organic yields for stables is the way forward. The DeFi Option Vault clearly identifies a source of consistent yield providers (Market makers) who match with yield hungry liquidity providers who sell volatility through the vaults to them. Our team is bullish that Thetanuts with its new product can scale with Frax to provide Frax holders with a high base yield and be a champion for the ecosystem as Anchor has been for Terra/Luna.

1 Like
8

A technical question about the multi strike/tenor vault. Since the vaults will always have some longer duration options open, how are the entry and exit prices determined?

9

i see a chart, i see number go up … so must be good :slight_smile:

10

I dont really get your question fully so i’m gonna take a stab and interpret what you mean. There might be two interpretations to this point.

  1. Entry and exit price of the stronghold index token is based on the AMM liquidity that is supplied by the Protocol team. The fair value of the stronghold index is the based on the aggregated value of the underlying + premiums accumulated in the sub-vaults.
  2. When direct deposit is initiated. tokens are distributed to various vaults according to the various weights defined by the index. At point of deposit, price of underlying is the spot price. For withdrawal, the ‘exit price’ is the price of the proportionate value of underlying + premiums post settlement. If OTM, great. if ITM, some loss is recognised. A claim can be done after.

i hope i got it right

11

Hey everyone, I just posted the snapshot here. Go vote! Snapshot

12

Thanks for your reply.

  1. I like using an AMM for most entry/exits. Most users will likely use the AMM.
  2. When new vault tokens are minted or redeemed an exact valuation of the option portfolio is needed, so these entries/exits happen at a market conform price. The options held are not very liquid, so how are they valued. Do you use Black Sholes?
13

  1. You’re absolutely right most users will use the AMM. This is a behaviour we observe from wallet analytics on different vaults for different projects based on deposit sizes.

  2. The individual option vaults are not tokenized. In this frax AMO, we are aggregating several sub vaults and minting an Index token that represents its fair value. It is not using black scholes.
    each vault can be expressed as: Value of underlying + aggregated premiums accumulated.
    Therefore the value of the index position is: value of underlying + total aggregated premiums accumulated across all sub-vaults.

i hope this was useful, more product explanation content will be launched on Thetanuts Medium in the next two weeks

14

Hi! This is a well-reasoned proposal, but I would strongly suggest voting against this proposal for a variety of reasons.

1. Thetanuts is closed source.

Thetanuts has a history of secrecy, and their code has been closed source since the beginning. Even if audits are done, we cannot verify that the contracts which are deployed match the codebase which was audited.

In my opinion, being open source should be the minimum bar for what Frax deploys funds into.

2. Opaque and unproven index construction

This proposal implies that funds will be deployed into Thetanuts’ v1 ETH Puts Index (a.k.a stronghold index). This proposal, as well as Thetanuts’ documentation, has zero details about how this index is constructed or how it will work, beyond “selling a variety of puts (example eth puts and wbtc puts)”.

3. Performance, or performance art?

Although this governance proposal displays a backtest of this strategy throughout 2021, this is just a backtest! Since Thetanuts has been live for 7 months, we must look at historical performance over this period to get a sense of how the current products are doing (this does not even account for the unreleased index product).

However, Thetanuts’ website does not show historical performance for any of their vaults. For example their ETH Put-Selling and WBTC Put-Selling do not show any performance numbers — only a projected APY.

In my opinion, basic transparency should be table stakes before Frax should even consider deploying funds into any of Thetanuts’ products.

Conclusion

I believe that the lack of transparency on Thetanuts’ side from the closed source code to opaqueness on historical performance should be a strong enough reason to not deploy at this moment.

Furthermore, they are proposing up to $10m (!) into a completely untested, unreleased, and brand new product.

I suggest voting no on this one until Thetanuts improves their transparency and also has a few months of track record on their new index product.

2 Likes
15

wait, thetanuts is closed source are you serious? easiest ‘do nothing’ of my life. This strategy could be profitable, but until they open source their code I am not voting for anything. I advise everyone else to do the same.

16

Hi Frax community!
Thetanuts is closed source for now and we have done two code audits before. We are currently undergoing an audit on our deployment to ensure the operational security of our deployment contracts, such as correct deployment and ownership across the constracts’ interlocking parts.
We are defintiely committed to open source in due course and Frax liquidity approved in this governance proposal can be deployed upon the satisfaction of Thetanuts code. That being said, Thetanuts is also open for Frax core devs to have access to our GitHub in the interim.
The index composition and graphs are based on back-testing. It cannot be a definitive guide, but it is a strong reasonable indicator of its future performance. The assumptions we make in constructing the index will be validated over time and where necessary, Thetanuts will re-weight the index based on the best data we have to achieve greater diversification that is not seen in the current option vault market.
Thetanuts has been active for 7 months working with top market makers in the space and invested by Deribit, Jump Crypto, QCP Capital, Hyperchain and more. Protecting our reputation and our user funds is of vital importance, which is the reason we choose to protect or close source our IP for now.

17

It’s unclear to me the risk FXS holders take on with the AMO, there is not mechanical description of the transactions which will occur. Selling options, especially unhedged is not a profitable strategy.

18

We demonstrate via backtesting that it can be profitable over the long term. Short term, yes we agree. it might not be profitable.