6SR Options Trading Platform

dkaups718

Image header:

Project title:
6SR Options Trading Platform

Summary:
A system which uses the power of the Stellar decentralized exchange, multi-signature transactions, and smart contracts to provide a safe and secure options trading platform for any asset.

Category:
Applications, Tools, Infrastructure

Goals:

Provide a secure web application where traders can a) perform options operations (buy/sell open and buy/sell close) and b) exercise in-the-money contracts at any time.
Develop an usable user interface
Deploy our own horizon node to handle network requests without risk of throttling
Do not require users to provide a private key for funding; all assets not held in escrow remain 100% in user control.
Use Stellar smart contracts and multi-signature to secure escrow accounts.
A simple management system for the creation of assets, markets, and accounts.
Long Term Goal: implementation of PUT contracts.

Timeline:
Times given from the receipt of funding ->

3 months: A running proof-of-concept that requires private keys and trust of the site owner.
6 months: Remove requirement of private keys, giving users 100% control over their owned funds and contracts.
9 months: Implementation of multi-signature escrow accounts, giving users control over those accounts after contract expiration.

Description:
Options trading is usually reserved for high-dollar exchanges and requires large initial buy-ins. Using Stellar blockchain technology, we can create a system that opens these markets up to the public, provides a secure way of maintaining control over your accounts, and also ensures that contracts are executed only when they should be.
The 6SR Options Trading Platform allows users to trade CALL options on supported assets. Upon expiration, the system automatically assigns options which are in the money. The user also has ability to execute a contract at any time before the expiration. We can accomplish this with Stellar primarily by using multi-transaction operations (then if one fails, they all fail, which is what we want). We also use Stellar asset creation to create the market for each option (e.g. a BTC Call $9000 expiring on 2020-08-31). Options trading involves risk and is not for everyone. With precision and attentiveness, profit is gained. There are many ways to make money trading options on this platform. the simplest one is the same as any other asset: buy low sell high. However, since an option expires at a known date (unlike a stock, for example), extra care must be taken. Here are two other ways to make money in this system:

Receive a type of dividend on owned BTC assets. Normally, people who are long term investors in BTC just get to watch it sit there. Now, by selling out of the money call options, they can receive payments on their balance. The risk is that their BTC is called away, in which case their profit would still exist, but be slightly limited.
Profit from market volatility without the full cost. A user can purchase a contract for a fraction of what it takes to purchase the full asset. For example, a user can purchase 1 in the money call option for one bitcoin for 10 USD. The price of bitcoin often fluctuates 100 USD within a few days. With proper timing, the user could sell it for twice or more what they paid. This is a form of leveraged buying without the risk of loans or margin accounts. The risk is that you have to hold the contract to expiration, because you don't have enough money to purchase the asset. In this case you do lose money, but your loss is limited. With any market, it is likely that some will profit and some will lose. But with this options market, it is at least possible for everyone to profit. We at 6th Street Radio wish you responsible trading, and high profits!

Links:

A bare-bones application is up at https://trade.6thstreetradio.org . The UI is plain HTML and is not responsive. A working UI is one of the goals. Automated user registration is not available for legal reasons.
Additional information for end users can be found at https://trade.6thstreetradio.org/about.html.
There is no open source code repository at this time. If we receive community funding, we will open source the project and alter our business case.

Tags:
Options, sdex, blockchain, trading platform

tyvdh

You'll need to update the original post to include the image as it will be automatically pulled into the voting / review app.

dkaups718

tyvdh done. Thank you!

ddombrowsky

I'm a developer on this project, and here are some questions I've received about it:

How do escrow accounts work?

A new account is created with an initial deposit of 2 XLM from the user creating the account. It is initially set up with 1 signer being the system, and the user cannot control the funds. If a contract is executed, then the system moves funds out of the escrow account and deposits the purchase price into the users primary wallet. There is also a timed transaction to relinquish signing power back to the user, set to execute 24 hours after the expiration of the contract. This transaction can be downloaded by the user and kept off-line. This means if the contract is not executed, and the entire system goes away, the user can still retrieve their funds from escrow after the contract has expired with NO additional action required by the system.

What makes this project unique for the stellar ecosystem?

There aren't a lot of systems that make heavy use of multi-signature transactions, or timed transactions. This system depends on both.

How do you get people to use it?

It is best to have liquid markets, this is true. However, options markets can exist solely as contracts between actors, and still be efficient. An options contract has intrinsic value, therefore even if there is only 1 contract traded, it is still of value to both the buyer and the seller.

John

ddombrowsky

Please follow the basic rules of designing a simple web application.

dzham

I haven't looked into the details of how this would be implemented, but I did implement a basic call option smart contract in about half a day after we talked about it on Keybase.

Where does the added complexity come in? What do you see making it take nine months? I guess fungibility of the contracts would be one such issue, although maybe you could just issue a fixed number of lots, and have it backed by the same escrow contract.

ddombrowsky

dzham
The complexity comes from a few things:

There's nothing specific to track a single contract. I sell a contract to you, and you sell it to a friend, then the original stellar "smart" contract is no longer valid. It would have to be reissued. Options contracts that operate strictly in off-line, multi sig mode will have to be tracked differently than those traded on the open market.
There is also all the logic of creating the markets/assets, having a system to execute them before the expiration, as well as closing the markets (and escrow accounts) at expiration.
Lastly, user interfaces are hard 🙂

Maybe it won't take 9 months. I'm being conservative in estimates, considering, you know, that we still have to make money and pay payroll and bills and all that.

dzham

I think if you're doing European style options, and you're doing one escrow contract that you tokenize as a Stellar asset, you can have a pre-authorized transaction that opens up a market place at expiry, for holders of the asset to do the trade-in to the underlying asset. Does that make sense?

ddombrowsky

dzham
I'm not sure if I understand you completely, but it sounds like in that case, the "thing" of value would be the actual pre-signed transaction. I'm not sure that would work. It would also require a different stellar asset per escrow account, which means you couldn't get a market view of a specific option (and this implied volatility calculations and all that jazz). e.g. this couldn't exist https://stellar.expert/explorer/public/asset/USSROPT-GA65MAGLET4V6QT52PO4WD2X3YJFOZ7PTYLEMROOBGE4GWNCDLIFALYE

leob

Hi, I just came across this, looks intriguing, I've been thinking about getting into option trading for some time although to be honest I don't know THAT much about it yet, so ... just to get an idea:

Do you think I would be able to use this app if I have little to no knowledge about options trading, or would you advise me to take an Options Trading crash course first?

and another question that comes to mind:

In what way is options trading on a block chain platform like Stellar different from 'classical' options trading (with regular money that is) - pros, cons?

ddombrowsky

leob Do you think I would be able to use this app if I have little to no knowledge about options trading, or would you advise me to take an Options Trading crash course first?

Options in general aren't hard. They get complex when you get into advanced strategies like straddles, strangles, iron condors, and other strange names. That doesn't really apply here since we're only doing single call options. Put options are in the roadmap. Once those are implemented, complex strategies can be considered, but for now they aren't on the roadmap.

leob In what way is options trading on a block chain platform like Stellar different from 'classical' options trading (with regular money that is) - pros, cons?

I'd say the main difference is who's in control of the funds at any given time. Just like any of the SDEX sites (stellarx, stellarport, etc.), those entities don't actually control any of your assets. They're essentially front-ends to the publicly available data in the stellar network. That the basic idea for this also, with some additional complexity built in to allow for escrow accounts and option market creation.
The "con" to such a design might be the same as the "pro." Since the site doesn't actually control your funds, it has limited ability to fix any mistakes that you make, like sending deposits to the wrong address or fat-fingering a trade. But this is true with all of the stellar trading sites.

ddombrowsky

John
Yes indeed. It's plain HTML / jquery. We haven't spent any time on the UI yet. I'm a command-line guy 🙂

John

ddombrowsky
‌‌But users are UI guys 😁

John

ddombrowsky
It was better you could complete the program and participate in the next round because we could test your team's creativity in design and user experience.

ddombrowsky

John
Thank you for your feedback. To your point, I'm hoping that the community will judge the project on the merits of the idea (that is, a mostly trust-less way of buying, selling, and exercising options), and not the user interface.

ddombrowsky

I've gotten some questions regarding the "trustless" aspect of the options exchange. I want to clarify a few things:

As is standard operating procedure for any sdex front end, no private key is required for the wallet. Transactions submitted to the network are signed locally, probably using something like Stellar Authenticator or something similar.
Regarding the escrow accounts: since these options are "American" style, the funds at any time may be moved out of the account and exchanged for the base asset, according to the contract. This means a few things:

a) the user cannot be the only signer on the escrow account. The system must be a signer and the signing weight required must be at least 2.

b) the user must submit a pre-signed transaction containing an OTC trade with a system account, according to the amount specified in the contract (e.g. 1 BTC for 160000 XLM).
If an option is exercised, the transction in step 2b is signed and submitted by the system, simultaneously with the other end doing the same thing in reverse (e.g. 160000 XLM for 1 BTC, exchanged with a system account). This way the system is never holding funds and being trusted to do the right thing when the time comes.

tyvdh

@John "It was better you could complete the program and participate in the next round because we could test your team's creativity in design and user experience." isn't helpful feedback and this is in no way your call to make. There's a beauty and simplicity in basic UI's. https://justinjackson.ca/words.html

ddombrowsky

Another question I've received:

I'm concerned that the options are issued by the system, and not by known anchors.

There are 2 answers to that:

A possible business model is that the entity running the site can make money charging fees on withdrawals, similar to how anchors work. This would require that users trust the assets issued by the system.
In the initial version, I simply didn't create contracts priced in any asset that the system didn't issue.
There's no technical reason they can't be option contracts on BTC issued by apay.io, for example.

MisterTicot

Could someone share some resources where I could learn more about option? That project seems well-thought but leaves me a bit clueless (^.^)'

ddombrowsky

MisterTicot
Investopedia gives an overview: https://www.investopedia.com/terms/o/option.asp
This system only implements "call" options at the moment, though there is no technical reason preventing "put" options also (it's on the roadmap). Also, the multiplier for most of the contracts is simply 1, since very very few mortals can afford to buy 100 BTC at any given time.
I also give a couple "How you can profit" examples in https://trade.6thstreetradio.org/about.html .