Bancor Improvement Proposal for Bancor Call options
Bancor has collaborated with UMA before and a great opportunity to continue working together would be Call options. This is a BIP to launch Bancor Call Options, using the UMA protocol.
What is a Call Option and how can they benefit Bancor?
A Call Option gives the buyer the right but not the obligation to buy an asset at a specified price(strike) at a specific time period(expiry). This tool gives a person the ability to speculate on the appreciation of an asset with leverage, while limiting downside. However, the value of that option could depreciate quickly to zero, if it does not trade above strike price.
Benefits or what Call Options can do for Bancor.
If you are bullish on Bancor, you can buy Bancor Call Options for limited, downside exposure on a rally. Holders of Bancor, could collect a premium, while waiting to take profits, by minting Options and selling them. It would provide a premium, plus a way of taking profits, during a rally.
Futheremore, we believe that Bancor is the only “missing party” in the call options menu at UMA: We have Balancer, Sushi, and Uniswap. We’d like to be able to co-market this product and build a stronger relationship between Bancor and UMA.
Risk and concerns for the Bancor community.
The ecosystem fund would lock up Bancor tokens, into UMA audited contracts to mint Calls. As a sponsor and LP, the ecosystem’s “risk” would be that if Bancor goes over the strike price, it would be selling Bancor into the market as the price climbs. This is a “right way” risk for the foundation. This is less about foundation earning, and more about the foundation having a capital efficient way to provide a service to Bancor token holders.
UMA would suggest the foundation pull liquidity before expiry(1 week) otherwise call options can expire “out of money” and create strange situations with regard to impermanent loss. When foundation pulls liquidity, the outstanding Call Options would essentially be untradeable and only redeemable if in the money on expiry date.
UMA proposes, to use some Bancor tokens from ecosystem funds to provide liquidity for Bancor call options, with a strike price of X and expire at X date, which will be set at time of Call Option release. The SuperUMAns can help you decide on those X factors which can be similar to other Call Options already running off the UMA protocol. The Bancor and UMA will have occasion to work together and cross promote our coordination efforts.
Call Options on UMA are fully collateralized, this means that to mint 1 call option there needs to be 1 BNT locked as collateral. To provide $2M in liquidity for options priced at 10% of the current token price will require $20M in BNT.
UMA’s contracts have been audited by Open Zeppelin and currently secure $200M TVL without incident.
Here are some economic considerations from Kevin, who is our treasurer and the goldman guy:
Well it’s generally a benefit for the project’s tokenholders. It creates a liquid call options market that their token holders can benefit from. The treasury itself just gains some trading fees which may not be much. The more complex component is the project sells vol into the market and that acts to dampen price volatility.
As for risks the project will lose some tokens if the market rallies past the strike but effectively they are rewarding people who are bullish their project. And the project actually loses less than just outright selling the option just the impermanent loss from it.
If the Bancor community supports this BIP, the UMA team of SuperUMAns, are eager to support implementation of the UMA protocol in regards to this BIP. The required governance proposals are already being passed in the UMA Protocol, so it should take little time on Bancor Call Options using the UMA protocol.