Bringing the benefits of offchain trading & CEXs to the onchain world of DeFi is one of the main problems that projects are trying to solve.
Cega is taking a stab at this problem as it pertains to the options sector, allowing users to deposit funds to be used in offchain strategies by a diversified group of market makers.
Over and out ⬇
Background on Cega
Cega is a structured investment protocol, specializing in exotic options.
It allows users to access specific types of strategies and provides offchain leverage trading through a series of market makers.
This sector has seen significant growth over the past 8 to 12 months.
The platform currently holds ~$15M in TVL, and ~$339M in notional volume traded.
The Sega team includes Adam Bowi, one of the founding members of Tracer (now known as Mycellium), a perpetual swaps and derivatives market. In August 2022, he joined Sega as the Lead BD.
Cega uses exotic options to cater better during different market conditions.
Adam believes the product is more mature and offers higher yields compared to other protocols.
Yields available on Cega’s most popular vaults
The ability to bridge the gap between on-chain participants and off-chain strategy providers attracted Adam to join Sega.
DeFi is often segregated from the rest of the off-chain crypto economy where exchanges have deep liquidity and tight spreads.
Cega aims to bridge this gap by allowing on-chain participants to access more complex strategies offered by off-chain market makers.
Cega provides solutions that allow users to participate in complex strategies that were previously only available off-chain.
Some of Sega’s products are purely smart contract-based, where Options premiums are paid into the Smart Contracts by market makers bidding on Vault strategies.
The transparency of these Smart Contracts provides assurance to users about the allocation of funds.
Cega: Behind the Scenes
For products with a lending component, capital put into the smart contract is lent out to market makers for a specific duration.
Cega works with market makers under ISDA (International Swaps and Derivatives Association) agreements, ensuring payment commitments and security.
He adds that the use of traditional finance mechanisms like ISDA agreements adds an extra layer of security for users. The use of ISDA agreements strengthens Sega’s ability to ensure user security during challenging situations like crashes or unexpected events.
It provides reassurance to users that their funds will be prioritized and paid back in full.
Managing Risk In Offchain Market Making
One solution for managing risk in offchain market making is a CFD (Contract for Differences) -like structure where onchain participants’ funds remain on-chain while entering into a contract with offchain market makers who post a bond as collateral.
If the market makers fail to return the funds as agreed, their bond is taken and returned to the person, unlocking their collateral.
Another approach mentioned involves using ISDA agreements and collateral agreements to manage credit risk based on risk profiles desired for users.
Cega has no collateral agreement with market makers but conducts balance sheet checks using Credora, a platform for analyzing institutional credit to ensure that the protocol is dealing with reputable entities.
Integrating DeFi Products with Offchain Market Making
There is potential to build decentralized engines that can match orders, price them, and settle them on-chain.
While settlements for Cega are already happening on-chain, pricing through bidding and auction processes currently occurs off-chain.
The goal is to integrate these processes completely on-chain, although it requires significant infrastructure development beyond what is currently available.
Transition To Ethereum And Arbitrum
It’s worth noting that the project transitioned from Solana to the Ethereum and Arbitrum ecosystems.
At the start of the year, there were doubts about Solana’s survival, making it challenging to sell their product as most funds were on Ethereum.
Bridges that provided access to Solana, were breaking down, further hindering adoption.
The Infamous Wormhole Exploit for ~$320M took place just a couple months following the collapse of FTX, creating more uncertainty for the future of Solana
According to Adam, moving to Ethereum allowed for better user engagement, but the company still maintains Salana-based contracts that continue to generate volume.
In fact, the project has gained recent traction on Solana due to speculation about airdrops for Solana projects.
Cega launched on Arbitrum in July, attracting users who found it cheaper to use due to lower gas fees.
There is a consideration for integrating interchain messaging or LayerZero solutions to enable routing through different Vault deposit Smart Contracts.
This would allow offchain market makers easy access regardless of where deposits occur, creating a more chain-agnostic experience.
Understanding Dragon And Elephant Strategies
The names “Dragon” and “Elephant” represent specific strategies within the products.
He adds that Dragon strategies involve selling call or put options at a certain percentage above or below the initial price.
For example, an ETH Dragon strategy sells a call option 5% above the initial price, while a USDC Dragon sells a put option 5% below.
The price reaching 105% or 95% of the initial price is known as the strategy’s strike level.
Dual Currency Strategy
The Dual Currency strategy is the newest to be added to the platform, involving cash-secured puts using USDC as collateral.
If the price dips below the specified percentage, users can swap into $ETH at the end of the term. This strategy allows users to accumulate $ETH effectively while earning yield.
Dual Currency Strategies have a similar payoff structure to covered calls and cash puts.
The strategies involve selling Options and converting currencies based on specific conditions.
Future Possibilities And Collars
Cega is open to exploring new collaterals and exotic option structures for future products.
Currently, the project has strategies around majors, including $BTC, $ETH, $stETH, $wstETH, $SOL, $AVAX, $OP, $ARB, $LDO, & $RPL.
Deposits are made in $USDC, $ETH, or $stETH.
Collars, which involve setting up limit orders with upper and lower bounds, may be considered in the future based on demand.
Future Developments And Market Makers
The project’s new V2 version allows for quicker development of new products.
The prioritization of new products depends on user demand and market trends. The platform aims to meet user needs while ensuring efficient execution through strategy executors.
Currently, there are around 10 market makers onboarded on the platform.
More market makers are being onboarded under agreements to enhance competitiveness.
The presence of market makers creates a competitive environment similar to a Payment For Order Flow (PFOF) system.
This helps to ensure efficient execution and liquidity on the platform.
Market Makers And Payment For Order Flow
Market makers execute trades on behalf of users based on their desired product and strategy.
The Robinhood-style PFoF system has become popular, where trades are broadcasted and market makers then compete to fill them.
This system has proliferated in recent years, making execution more competitive.
The bidding process is kept transparent through blind auctions to prevent collusion among market makers.
This security measure aims to protect users and the yields they receive.
Prices resulting from these auctions are displayed after the trade day.
Long-Term Vision For Cega
Cega aims to provide the best markets and products for users across different market conditions.
The goal is to keep adding new strategies and onboarding more executors into the system.
However, efforts are focused on the current product suite with exotic option structured products before moving on to other strategies.
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