Summary
Allow users to create option contracts for UST
Motivation
The main motivation is bringing back liquidity to the chain by offering a trading instrument that is important in the financial world and doesn’t really exist on exchanges. The profits are supposed to fund the repeg of UST and burning of LUNC
Proposal
User 1: Looking to protect/hedge his UST position to minimise his exposure to price fluctuations or simply make a profit.
User 2: Looking to earn additional income by offering to buy UST at a pre-defined price in the future and earning a “premium” as a result.
The idea is basically a simplified version of an options contract. Example: User 2 has 100 BUSD that he is willing to use as collateral. He chooses his option contract to expire in 7 days and is willing to buy/exchange 5000 UST for his 100 BUSD, basically equating a market price of $0.02/UST. The metrics here (time and price) can be chosen by the user and aren’t predefined. He will also charge what is known as a “premium”. Example: He might want a premium of 5% on the position. Now let’s say User 1 has 5000 UST and expects price to drop in the next 7 days. He pays User 1 5% of the amount of UST he wants to insure and now buys the right to sell his UST to User 1 at a price of $0.02. This means he will pay 5000*0.05 = 250 UST to user 1 (this is non-refundable) while the remaining 4750 UST are “insured” against a negative price drop. The BUSD of user 2 are now frozen until the contract expires.
Let’s say price drops to $0.01 => User 1 can now still sell his UST @$0.02 to User 2, whose frozen BUSD now is moved to the account/wallet of User 1 and the UST is moved to the account/wallet of User 2. User 1 has no loss in this situation. If User 1 decides to execute the option, he is charged a 1% transaction fee by the network that goes towards burning UST/LUNC.
If price rises to $0.03 on the other hand, User 2 will have earned the premium. In this case User 1 won’t sell his UST to User 2 because he would otherwise lose money.
The reason why I suggest the introduction of option trading with UST and possibly even LUNC is to get liquidity on chain. I would imagine this in the form of “pools” that any user can create. These pools are all separate from each other as they offer different pricing for the options, based on time, strike price and premium. Interested parties can choose the pool that fits them.