VariabL Products — Derivatives and Stable Tokens
This article is a thorough description of our derivatives trading platform and its underlying products. Main features listed below are detailed in the paper:
- VariabL market allows to open positions similar to CFDs (short/long) on the ETH/USD pair. Those positions are implemented as Trustless Zero-Sum Smart Contracts on the blockchain, with a 24h duration positions on the evolution of ETH/USD price before final settlement.
- The product allows for a limited price range, i.e. there’s a liquidation price and a max profit price for each position.
- Our products are fully collateralized in ETH and payouts, cash settlement are paid in ETH.
- We will initially launch two products with different risk profiles. They allow for multipliers x2 and x4 (i.e. price ranges: +- 50% and +-25%).
- Your position will be liquidated if the price reaches any of the bounds before 24 hours.
- The offer and demand are balanced by a premium %.
Description of the product
In VariabL’s ETH/USD derivatives market, you can create positions on the ETH/USD pair that behave as Contracts For price Difference (CFDs).
Our market allows to open short and long positions. They behave as a sell or buy order of ETH for USD at the opening of the position, and a settlement at the end. By placing positions, traders become negatively or positively exposed to variations of ETH against USD.
These positions are created by matching traders with opposite positions.
Currently, positions have a limited duration of 24 hours. Once this time has expired, positions are closed. If the trader shorted, ie. started by selling ETH, he will buy back ETH at the end of the contract. If the trader opened a long, i.e. started by buying ETH, he will sell ETH at the settlement. At the end of the position’s duration, each trader will have either won or lost a certain amount of dollars that will immediately be converted to ETH and received as such.
Our positions are thus both fully collateralized and cash-settled in ETH.
These positions are implemented as Zero-sum ETH contracts on the blockchain.
Once a trader looking for a short position and one looking for a long position have been matched for a given price and quantity, a zero-sum game begins: the profits of one trader always match the losses of the other trader(s).
The product behaves in the same manner as in classic margin trading. However, there’s a slight difference. In classic margin trading, when a position is not covered, some margin calls are made overnight. Since our products are on the blockchain, there is a potential problem of trust in this situation.
Indeed, at settlement, one trader is supposed to have a debt against the other, which cannot be legally enforced on the blockchain itself in a trustless, decentralized and anonymous fashion.
Therefore, at contract initialisation, traders must deposit a sufficient amount of ETH to cover any potential debt they could face due to their open position(s) — because there cannot be any debt. Hence, positions on VariabL are fully collateralized from the beginning, and it is not possible to add more ETH to the initial deposit nor to withdraw ETH before the position is fully settled. The total amount of ETH held in the contract is therefore constant for its duration.
For now, deposits can only be in ETH since our market operates exclusively on Ethereum and ETH is currently the only significant store of value on the Ethereum blockchain.Any final payouts are in ETH, and any P&L in USD from the position will be payed out in ETH, as if the USD payout was immediately converted to ETH.
Limited price range positions
Since traders cannot add more collateral to an open position (i.e. since our platform does not allow margin calls) there is a maximum price variation allowed before a position gets automatically and fully liquidated. This mechanism guarantees that the maximum loss in ETH, in the described zero-sum game, is already paid by both parties. This also sets an upper bound for the potential profits in one contract position. For long investors, there is a minimum ETH/USD price at which the position will be completely liquidated and where they will lose their entire deposits. But there is also a maximum ETH/USD price at which the opposite traders (the short investors) would lose their entire deposit and where the long investors would make their maximum profits allowed in their open position(s).
Our products therefore have an upper and a lower limit for the price variations covered by the required deposits.
Using this system, we could technically choose any type of contract, even some with asymmetrical price ranges.
Yet for the sake of initial simplicity, we decided to tailor two products around interesting symmetrical price ranges for both parties:
- We created a first type of contract that allows the price to vary in a range of ±50%. This requires a deposit of 1 ETH for long investors per unit of ETH placed, and a deposit of 0.33 ETH for short investors per unit of ETH placed.
- The second type of contract allows the price to vary in a range of ± 25%. This requires a deposit of 0.33 ETH for long investors per unit of ETH placed, and a deposit of 0.2 ETH for short investors per unit of ETH placed.
Note that by construction, the leverages of these contracts are not symmetrical. Indeed, with leverage being defined as the ratio between the quantity of ETH shorted/longed and the quantity of ETH in deposit:
- for ±50%: leverage is 1 for long and 3 for short;
- for ±25%, leverage is 2 for long and 5 for short.
Examples:
- Example 1 — Settlement after 24h — long: A long investor opens a position for 1 ETH at $90 and locks 1 ETH of deposit (i.e. long x2) and the price reaches 100$ after 24h. At settlement, the price is 100$: he has made a 10$ of profits and will receive the equivalent amount in ETH, ie 0.1 ETH. He can also withdraw his 1 ETH of deposit and thus receive in total 1.1 ETH at the end.
- Example 2 — Settlement after 24h — short: A short investor opens a position for 1 ETH at $90 and locks a 0.33 ETH deposit (i.e. short x2). The price reaches 100$ after 24h. At settlement, the short investor has lost 10$, i.e. 0.1 ETH. He can withdraw the remaining deposit and thus receives in total 0.23 ETH at the end.
- Example 3 — Forced Liquidation before 24h — short: A short investor opens a position at $90 and deposits 0.33 ETH (i.e. short x2). The price reaches $135 after a few hours (less than 24 hours). Instantly, the short investor’s position is liquidated at 135$. He has lost $45, i.e. 0.33 ETH. His loss is fully covered by his deposit and therefore he loses it entirely.
- Example 4 — Forced Profit before 24h — short: A short investor opens a positions for 1 ETH at $100 (i.e. short x2) with a deposit of 0.33 ETH. The price reaches $50 after a few hours (less than 24 hours). Instantly, the short investor’s position is closed: he reached his max profit of 1 ETH and withdraws his deposits. He receives a total of 1.33 ETH.
Characteristics of the product
An interesting characteristic of those products is the fact that the limits will allow traders to double (or lose the entirety of) the amount deposited in terms of USD value.
The first product has a USD RETURN MULTIPLIER of 2; if the price changes ± 50%, it is equivalent to a ±100% return in USD.
The second product has a USD RETURN MULTIPLIER of 4; if the price changes ± 25%, it is equivalent to a ± 100% return in USD.
Other characteristics
Premium
In order to balance offer and demand, positions can be placed with a premium price. This premium is a positive or negative fee attached to an order. A trader who acts as a market maker can set up a specific premium representing the additional cost he’s asking or giving for this trade.
Example: If every trader wants to long, short investors can ask for a positive premium. If they choose a premium of 1% for instance , it means that if they are matched, they will be able to open a position by sending 1% less deposit than normally required and that their counterparts, long investors, will have to send a bit more deposit than normally required.
Multiple quantities
For the first version of our product and because of our current off-chain/on-chain order-matching technology, we had to implement standardized quantities for the orders.
Example: for Long x2 positions, quantities have to be a multiple of 0.6 ETH. This limitation will be removed once we implement more advanced order-matching technologies.
Margin trading and hedging, a first step towards Stable Tokens
Our derivatives are the first product that individuals or businesses can use to hedge themselves against currency risk on the ETH/USD pair.
Since opening a short position is similar to selling ETH for USD at the beginning of the period and settling the position at the end, it acts as a wonderful tool to hedge yourself during a bear market. In practice, if you open a short x2 on VariabL for a deposit of 0.33 ETH (that covers 1 ETH of underlying assets) and at the same time you hold 0.66 ETH, your whole portfolio will behave as if you sold 1 ETH for USD at the beginning of the period and bought back ETH at the end.
This portfolio, composed of 0.33 ETH of short x2 and of 0.66 ETH, is thus similar, in ETH, to a stable USD token. VariabL has therefore deployed since several months the first stable USD token available on the Ethereum blockchain that is not fully collateralized in USD — a technological breakthrough!
For more information and updates, join us on slack, subscribe to our newsletter and follow us on our social medias (Twitter,Facebook). We are looking forward to meeting you!
