In this discussion, Grant from blocmates hosts Tempesto and Alberto from Smilee Finance.
The main discussion was around Smilee Finance and how they leverage DeFi for option products.
Read our notes below to learn more.
Team
Alberto mentioned that he started dabbling in crypto in 2013, but it wasn't until 2017 that he began trading and investing in the space.
He initially approached the industry as a trader and investor, but in 2019-2020, he and Tempesto decided to deep dive into the DeFi space and build something to reduce the inefficiency and fragility of the ecosystem.
Tempesto, on the other hand, has been an options trader for almost eight years, starting in a hedge fund in London and then moving to a large bank in Milan.
He got into crypto via Ethereum in 2016 and was fascinated by what could be done on top of Ethereum with smart contracts and other features.
Together, Alberto and Tempesto decided to create Smilee Finance as a long-term vision to support the building of new blocks and reduce inefficiency and fragility in the DeFi space. They are working to create customizable products that are capital efficient and can be used by both hedgers and speculators to bet on volatility.
What is Smilee Finance?
Smilee Finance is a decentralized finance (DeFi) platform that aims to provide innovative financial products for users in the DeFi space. The platform was founded by Alberto and Tempesto, who come from traditional finance and options trading backgrounds.
The platform's primary product is "Weekly Impermanent Loss Insurance," which allows liquidity providers to hedge against impermanent loss risk.
Liquidity providers are typically individuals who provide funds to liquidity pools on decentralized exchanges (DEXs) such as Uniswap or SushiSwap, earning a share of the trading fees generated by the pool.
However, if the price of one of the tokens in the pool changes significantly, the liquidity provider can suffer a loss that is not offset by the fees earned, resulting in impermanent loss.
Smilee Finance's insurance product allows liquidity providers to mitigate this risk by offering a weekly insurance product that provides protection against impermanent loss.
The product has two opposite payoffs - if the market moves a lot during the week, the user makes a profit, and if the market doesn't move, they pay a fixed premium.
The insurance product can be used to hedge existing liquidity positions or as a standalone product for users who want to bet on volatility.
In addition to its insurance product, Smilee Finance is also working on creating other customizable products, such as plain vanilla options, variant swaps, and insurance products.
These products can be created by setting the payoff function for the derivative, which can then be traded on the platform.
How to use Smilee?
There are two types of users for Smilee: liquidity providers and users who want to hedge their liquidity or speculate on volatility.
For liquidity providers, they can participate in the Real Yield Vault which allows them to provide liquidity as if it was on Uniswap or SushiSwap. They can also hedge their liquidity on Uniswap by buying a weekly impermanent loss (IL) product.
This IL product provides two opposite payoffs for impermanent loss, meaning that when the market moves, the user can make a lot of money, but if it doesn't move, they will pay a fixed premium. The product has a weekly expiry, which makes it one of the most capital-efficient products in DeFi.
For users who want to hedge their liquidity or speculate on volatility, Smilee provides derivative products such as plain vanilla options, variant swaps, and insurance products.
The Smilee engine allows for the conversion of liquidity into these volatility products, and the payoff function for the derivative can be customized.
In addition, Smilee is working to gather liquidity on one side and allocate it to further improve the yield for liquidity providers. The goal is to make the platform accessible for both sophisticated and average users by making it easy for anyone to provide liquidity and earn a return.
Want more Notes like this?
We create 10+ of these Notes every day for our members and you can access 2-3 notes per day for free on our site.
Sign up for a FREE Revelo Intel account here
How to speculate on Volatility?
Users who want to speculate on volatility can do so by purchasing derivative products such as plain vanilla options, variant swaps, and insurance products.
These products are designed to hedge against or bet on price movements, allowing users to profit from market volatility.
For example, let's say a user expects the price of ETH to increase over the next week. They could buy a call option on ETH with a strike price of $2000, which gives them the right to buy ETH at $2000 in the future.
If the price of ETH does indeed rise above $2000, the user can exercise the option and make a profit.
On the other hand, if the price of ETH stays below $2000, the option will expire worthless and the user will lose the premium paid to purchase the option.
Smilee's products provide users with a way to speculate on volatility without having to hold the underlying asset, making it more accessible for users with limited capital.
How to buy Impermanent Loss Options?
In Smilee Finance, users can buy Impermanent Loss Options (ILOs) as a way to hedge against impermanent loss when providing liquidity to DEXes like Uniswap. ILOs are a type of derivative product that can help liquidity providers reduce their exposure to impermanent loss.
To buy ILOs on Smilee, users first need to provide liquidity to a supported DEX like Uniswap.
They can then go to the Smilee platform and select the ILO product they want to purchase. ILOs come with a weekly expiry, so users need to select the expiry date that they want to buy.
When purchasing ILOs, users pay a fixed premium upfront, and their payout depends on the magnitude of impermanent loss experienced during the selected time period.
If there is no impermanent loss, the user loses the premium paid, but if there is a significant amount of impermanent loss, the user will receive a payout that offsets their losses from providing liquidity.
How other protocols can use their platform to create custom options for their own users
Essentially, Smilee can create derivative products based on any asset that has liquidity, whether it's a cryptocurrency or something more traditional like a bond or a stock.
For example, if a DeFi protocol wanted to offer its users the ability to trade options on its native token, it could partner with Smilee to create a custom option product with specific terms and conditions.
Smilee's platform could then provide the necessary infrastructure to enable trading of those options, including automated market making and risk management.
By using Smilee's platform, protocols can offer their users new ways to engage with their assets and potentially increase liquidity.
In addition, the flexibility of the platform means that protocols can tailor the options to suit their specific needs, whether that's limiting risk exposure or targeting a particular audience.
Protocol Integration
Smilee can be integrated into existing decentralized exchanges like Uniswap or SushiSwap to provide impermanent loss options to liquidity providers. This could help attract more liquidity to the platform, as users would have more options to hedge their risk.
Additionally, Smilee could be integrated into yield farming protocols or other DeFi applications to provide a hedging mechanism for users. This would give users more control over their risk exposure and could help improve the overall stability of the DeFi ecosystem.
The founders also mentioned that they are actively working on partnerships and collaborations with other DeFi protocols, which could lead to more integration and adoption of Smilee in the broader DeFi ecosystem.
Check out these important links
Want more Notes like this?
We create 10+ of these Notes every day for our members and you can access 2-3 notes per day for free on our site.
Sign up for a FREE Revelo Intel account here