Hegic, What’s the Magic?

Hegic is not the first nor the only on-chain options market, as there are competitors like Opyn, but it’s doubtless the most popular one today. Over the last few days of cryptocurrency hype, $14m (value of underlying) of options were trading on 3 Jan 2021.

As of now, there’s a total of $90m liquidity in Hegic and over $25m open interests, making Hegic the largest on-chain options platform.

(Source: https://duneanalytics.com/slash125/hegic-v2)

Hegic’s model is peer-to-peer, and it has simplified the option purchasing and writing procedure. For buyers, one can choose a few parameters, put/call, lot size, strike price, and 5 choices of holding period ranging from 1 day to a maximum of 4 weeks. Price of the option is arbitrarily determined by the formula premium = sqrt(period) * IV * strike / price (for put, and conversely for call). IV is implied volatility, which is feed from an oracle.

For writers, Hegic is not a market place like Deribit where buyers and writers are matched according to the options. Rather, Hegic puts all writers into two pools (one for BTC and one for ETH). All writers of each pool collectively write options for that pool, regardless of buyers’ parameters; i.e., if one becomes a writer of the Hegic BTC pool, he and other writers will collectively deliver the exercised options, for both put/call directions and durations.

So writers of Hegic are blind-folded, as they will not know what kind of options might be purchased in the next minute and they will have to write it unconditionally. It might not be the best offer for a writer — but this is an elegant design, just like AMM for trading. It’s simple and efficient, evident in the amount of liquidity and volume it garnered within a few months of launch.

Writers of Hegic are in fact volatility takers, and like liquidity providers in AMM, they might suffer temporary losses. But if the volume is large, writers should make a profit, if you believe that the market is efficient — there should be an equal amount of put and call in a reasonably long time frame. And writers are rewarded for taking volatility. But yes there might be a loss at times.

For investors who believe in the Hegic’s business model, its platform token HEGIC is available and HEGIC can be staked to receive the 1% settlement fee of options. Fees are collected in wBTC or ETH. From Oct to now, a total of $2.58m fees have been collected.

To stake HEGIC to earn the 1% settlement fee, one needs to stake a 888,000 HEGIC, currently about $186,480 in value. Currently there are 138 lots of HEGIC (1 lot is 888k) staked, making the total staked value to be $25.7m. Calculating the earnings for the last two weeks (roughly $30k) and the amount staked, the return on stakers is about 30%.

Whilst $186,480 is not a small amount, there are pooling services like zLot, allowing investors to pool HEGIC together to stake. However, these service providers are not official and not audited.

HEGIC has mining rewards for option buyers and writers. Reference can be made here: https://github.com/jmonteer/hegic-resources/blob/main/docs/Hegic%20FAQ.md#options-on-hegic (Jmonteer is not the anonymous founder but joined the project as a developer recently.) As of now:

During Phase I (10/10/2020–10/10/2021), 50% of rewards will be released (602,250,000 HEGIC).

  • Rewards will be released on a daily basis in a linear fashion (i.e. up to 1,650,000 HEGIC per day)
  • 80% of daily rewards (1,320,000) will be distributed to LPs in proportion to the liquidity they provide. This is split evenly (660,000 HEGIC per Pool) between the wBTC Pool and the ETH Pool.
  • Up to 20% of daily rewards (330,000) will be distributed to Options purchasers relative to their position size and duration (please refer to the ‘How many rewards do I receive?’ sub-section below for more detail).

Just like AMM, it’s hard to compute the total return of HEGIC mining by providing liquidity, as there will be a contingent loss. For mining of HEGIC by buying options, the rewards are way smaller than the costs of these options. So there’s no way to arbitrage here.

Total supply is 3,012,009,888 HEGIC, mostly emitted in the first 4 years.

  • 3% will be used in IBCO, its initial offering
  • 22% will be used to provide liquidity in the official website (a Bancor-like protocol for buying and selling HEGIC at a linearly progressive rate)
  • 5% will be allocated to provide liquidity to a DEX liquidity pool
  • 40% will be distributed as rewards to Hegic Protocol users (option holders and liquidity providers)
  • 10% will be allocated to the Hegic Development Fund. This amount is subject to linear vesting (read below) among 48 months after IBCO end date (12/09/2020 19:00:00 UTC)
  • 20% will be allocated to reward Early Contributors (read below). This amount is subject to linear vesting among 24 months after IBCO end date (12/09/2020 19:00:00 UTC)

(Serenity Team, 5 Jan 2021, Twitter: https://twitter.com/SerenityFund)

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The Serenity Fund

Zero market risk and stable return - risk neutralised cryptocurrency fund.