Decentralized Finance (DeFi) is increasingly used to create financial derivatives on blockchain, but the lack of stable digital basis assets currently implies considerable risk. We propose a stable coin mechanism as the fundament of the DeFi system. The platform can issue stable coins through matchmaking tradeoff.
An option smart contract, a typical financial derivative based on the stablecoin, gives its owner the right to receive a specified amount of underlying assets in exchange for basis tokens during the period before expiration at a specified price (strike price). The transaction that uses this right is called an “exercise.” An anti-option contract gives its owner the right to receive the “non-exercised” part of the deposited underlying and the “exercised” part of basis token after the expiration date.
The significance of this decentralized and programmatic derivative lies in the underlying asset not being held by any entity or intermediary. Instead, it is governed by scripts running on blockchain and will only be executed according to predetermined business logic. This will mitigate third-party risk and guarantee transparency. These problems were never fully solved by the financial markets until blockchain technology came along. Countless opportunities exist with this product, and many other derivatives and financial tools can be added to the ecosystem once we have built up the core capability.
This project has strong commercial prospects as digital currency and digital assets have been gaining increasing popularity as part of asset portfolios in recent years. DeFi is deemed to be the future financial model and the platform is best realized through blockchain technology. A well-designed stablecoin and trading mechanism will fuel the platform and ensure its robustness. Various financial products can thenceforth be “spun off.”