OracleSwap: An Open-Source Derivative Contract Suite
A couple of years ago, I thought it would be good to create a crypto fund. I soon discovered that as a registered US firm my options were severely limited. I could go long or short a handful of crypto names over-the-counter, but they had excessive funding rates for going long and short (eg, >12%), and required 100% margin; I could short bitcoin at the CBOE, but I had to put up five times the notional as collateral. No reasonable estimate of alpha can overcome such costs. To use popular exchanges like Deribit or BitMEX would require lying about my domicile which would violate US regulations related to investment advisors, and also diminishes my legal rights if such an exchange decided to simply not give me my money back.
Trades are transacted at the next-business-day closing price. As this contract targets long-term investors, the standard errors generated by differences in various 4 PM ET prices are minimal and unbiased (the median of several sources over different intervals within a 5-minute window for crypto, the SPX uses the close price). As an institutional investor, I always used next-day VWAP prices. Limit order books generate many complications, and provide nothing of interest to long term investors; day trading blockchain assets is predicated on delusion.
The key to market-making capital efficiency is allowing the liquidity provider to net trades. Without a token, this had to be done through netting exposures at the weekly settlement. The LP’s are basically mini-exchanges, in that long and short positions are netted. Weekly settlement can handle 200 positions in a single function call, but this can be broken up into 200-unit chunks, allowing an almost unlimited set of positions for any LP. They balance long and short demand by adjusting their long and short funding rates. The Law of Large Numbers implies larger LPs will have more balanced books, allowing them to generate a higher gross-to-net asset ratio, which implies higher returns for a given level of risk and capital; LPs are incented by economies of scale, not delusional token appreciation.
Source: http://falkenblog.blogspot.com/2020/03/oracleswap-open-source-derivative.html
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