[Proposal] to launch BAL call options using UMA Protocol

This is a proposal to launch BAL call options using UMA Protocol.

A brief description of a call option is:

A call option gives the buyer the right, but not the obligation to buy an asset at a specified price (strike) and a specific time period (expiry). The simplest use for a long call position is the ability to speculate on the appreciation of an asset with leverage while also limiting your downside. However, the flip side to that is the value of the option will depreciate or decay very quickly to zero if it does not trade above the strike price.

Here is an ELI5 twitter thread word a read: Thread by @thevdm1 on Thread Reader App – Thread Reader App

And here is an internal learning session with UMA presented by Kevin Chan, former treasury desk manager at Goldman Sachs New York. https://www.notion.so/umaproject/Kevin-Chan-Call-Options-a8f9e8961c80409ca27d059cf75d7f22

Proposal: Use some BAL tokens from the ecosystem fund to provide liquidity for a BAL call option with a strike price of $75 and expiring at the end of May, 2021. (These parameters are not yet set in stone, this is just a starting point.)

Benefits: If you are bullish $BAL you can buy the calls for leveraged, limited downside exposure on a rally. If you are a holder of $BAL and want to collect a premium while you wait to take profits then you can mint the options and sell them. This gives you the premium plus is a way of taking profits but only on a rally.

These options are also great incentive tools, and could eventually be used as liquidity mining payouts. They align incentives because the recipients have a vested interest in good token outcomes, and it protects the treasury from sell pressure in the event of a flagging price.

Second-order benefits:
Balancer governance was recently airdropped UMA’s KPI Options tokens which will appreciate in value as UMA’s TVL increases. Creating these BAL call options will have the effect of increasing UMA’s TVL.

The Balancer and UMA communities will have an occasion to work together and cross-promote our coordination.

Risks: The ecosystem fund would lock BAL tokens into UMA’s audited contracts to mint the calls. As a sponsor and LP, the ecosystem’s “risk” would be that if BAL goes over the strike price, it will be selling BAL into the market as the price climbs.

This is “right-way” risk for the foundation. This is less about the foundation earning money, and more about the foundation having a capital efficient way to provide a service to its token holders.

We suggest that the foundation does pull liquidity before expiry (~1 week) – Otherwise, the call options can expire “out of the money” and create strange situations with regard to impermanent loss. When the foundation pulls liquidity the outstanding call options would essentially be untradable and only redeemable if they expire “in the money” on May 31st.

Scenario 1: Price moves from .50 to $2 and the foundation pulls liquidity, and BAL call expires valueless → Foundation walks away with more BAL.

Scenario 2: Price moves from .50 to $2 and the foundation pulls liquidity and the option expires “in the money” → Foundation will be awarding some amount of BAL to option holders.

Steps forward: If the community supports this proposal, the UMA “Super Umans” are eager to support implementation of this proposal. The required governance proposals are already being passed in UMA, so it should take very little time on the Balancer to launch BAL call options using UMA Protocol.team’s side.

12 Likes

Thanks @Deadcoin. Well written proposal!

I really like the additional flexibility and utility the call options would provide. The minimal risk as well as upside here makes this seem like a no-brainer to me.

Teamwork and Money Legos! I always like the idea of additional collaboration.

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Would love to see this for both projects. Big thanks to @Deadcoin for putting in the legwork here. If you take the time to read through the proposal you can clearly see how it can be really beneficial to BAL holders

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Welcome to the community! I like the KPI options too. Think it is a great idea and hope it moves to a vote. Would really get people excited and bring the community together to work at and achieve the same goal(s). Good stuff, I agree.

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Welcome to the community, great to have you here! Really great ideas in the Discord chat today and those KPI options sound sweet! UMA is always coming up with cool stuff. I know UMA has a few expiry tokens they always pool on Balancer ,at least the ones I had minted. Hope to see Balancer and UMA working together in the future. What an alliance to have.

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Protocols like BALANCER are the real OG, having them available on KPI Options would be a boon for both.

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Call options are literally a WIN-WIN-WIN scenario for both UMA Protocol, Balancer and for the people that will get their hands on those call options.
I would love to see this.

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I’ve LP to about 6 different pools on Balancer. Ironically, I learned about Balancer from minting on UMA and then LPing minted tokens in Balancer pools. It would be sick if I could create call options with my BAL rewards!

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No brainer! A clear virtuous circle that can start from this. Kpi options are a great way to bet on your favourite project.

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Seeing the UMA community rally after the uTVL options release has been impressive. Would love to see that in other friendly communities like balancer.

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Thanks so much for putting this proposal together @Deadcoin! It seems everyone is excited with this idea and so am I.

The UMA team+community has always been working closely together with the Balancer team+community and I’m sure there are still many things we could collaborate on. These options are a great example of the beauty of composability across DeFi.

Would it be possible for you to maybe change the strike price to $100 given recent BAL prices climbing? That’s just an idea, you are the experts here so feel free to keep it at $75.

In order for the Balancer community to vote, it would also be important to clearly state how much $BAL will be needed for this proposal and how more practical implementation details. Who will handle the BAL once the Ecosystem Fund makes it available? Is it a multisig? If so who are the signers?

Also, the call options will be added to a Balancer pool with what other token and what weights? More details here would also be good: having that liquidity on a Balancer pool is another clear win for Balancer in this proposal.

Thanks and looking forward to knowing more!

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HI @Fernando thanks for your reply and your support!

Yes, Balancer and UMA are two peas in a pod, this isn’t our first or last collab :slight_smile:

Ok - We agree that the strike was suddenly too low (congrats!) – Kevin, our options man over here, thinks $90 is the sweet spot, so let’s meet in the middle there.

Now as for amounts here is what we had in mind, although it’s flexible:

UMA will put up $500,000 worth of BAL that we have in our treasury, and would ask an additional $1,000,000 in BAL from your ecosystem fund. This should give us very good liquidity for the options.

As for who handles it, this is something we’d have to work out. Of course UMA has a multisig of core team members, but it would probably make the most sense for your own side to mint the options and contribute the liquidity. We’d be happy to get on a call or write up a list of steps – shouldn’t be more than a couple of transactions.

Please let me know if we need another proposal submitted for the above, and any other details or considerations I’ve missed. Cheers!