Yielding away
This weeks Market Huddle episode with Kris Sidial reminded me about Decentralized Option Vaults (DOV) that a few market making firms (e.g. QCP Capital) are having a very fond time taking the other side off.
The crypto world seems to have given the volatility bug to tradFi markets (e.g. those double digit percentage drops on various big name stocks over past weeks) and in return has begun to take up big chunks of playbook of structured products that in my layman eyes reminiscent of tradFi's short vol times. As with anything experimental in crypto world that promises to provide some sort of yield; DOVs have seen a massive uptake. Of course, no market maker will take the other side unless they are going to be able to make something from it - and this we can clearly see in OCP's pleasant market updates as well as how well every Friday european morning crypto volatility seems pinned.
Some interesting reading regarding DOVs:
g_vol
galileo
I am all for having more avenues to earn some yield for my magical internet money however if the past decade in this world has taught me something from abundance of my losses; other than patience for right price, its to keep an eye on market narratives & watch the lop-sided positioning from perspective of yield hunters (and thus market makers who are also out to make money thus have tendency to eventually go blind with greed).
They all got saved very recently by someone (@Tree_of_Alpha on twitter) who was kind enough to reach out to Coinbase to report a bug[1] that truly would have had an eye-watering impact on crypto markets if any other shadowy characters were the discoverers.
Nevertheless, if statistics on crypto exchanges (e.g. Binance) are to be believed and are of any indication then there is indeed a weird continuous build up of open interest on stable-coin margined BTC contracts that are now reaching 160k coins. Lastly, biggest crypto derivatives exchange, Deribit, is slowly inching (with an initial upgrade this week) its way to providing stable-coin based wallet with my hope to finally provide futures / options contracts against it soon. That should shine a reliable light on this dynamic and allow one to monitor for that lop-sided positioning within DeFi world's DOVs.
incomplete account balance checks allowed someone to send in a sell order for an asset they didn't hold - e.g. hold 9mm SHIB and send an order for 9m BTC instead - watch the order book get wiped. ↩︎
Frank Chaparro
