- Sega Finance is a DeFi protocol that developed smart contracts for exotic options.
- DeFi derivatives is still in its early stages, with a $3 billion market compared to traditional finance's $22 trillion market.
- DeFi currently faces issues of lack of product innovation, on-chain liquidity, and decentralization.
- Exotic options solve these issues by allowing for more product innovation, driving liquidity, and offering a trustless, permissionless operation.
- Exotic options are conditional options that offer flexible payoffs and can track the performance of a portfolio.
- They also allow for packaging smaller tokens with larger tokens to drive liquidity and offer flexibility in settlement options.
- Trading exotic options increases the volume of derivatives and drives liquidity in the ecosystem.
- Exotic options smart contracts have the potential to be a killer use case for institutions and can offer trustless, permissionless operations for continuous settlements.

- Traditional financial markets require manual operations and cost around $108,000 per trade
- Smart contracts eliminate the need for manual operations and reduce operational costs by over 50%
- Exotic options smart contracts can solve DeFi issues and decentralize the ecosystem
- Sega is the market leader in DeFi options, trading over $300 million in volume
- Their mission is to create safer yields in volatile markets through structured investment strategies
- They have launched on Ethereum, Solana, and Arbitrum, doubling their user base
- They are working on a v2 contract with features like restaking and early withdrawals
- They are seeking partnerships with institutions and decentralizing their backend.

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Keynote: DeFi Derivatives: Exotic Options on Smart Contracts

Speaker:
Arisa Toyosaki, Co-Founder and CEO @ Cega

Stage: KuCoin Stage

#token2049 #cega #defiderivatives #exoticoptions #smartcontracts

Good to see everyone here early in the morning.

My name is Arisa and I'm the co-founder and CEO of Sega Finance.

We are a DeFi protocol that developed the first smart contracts that handles exotic options, which are these types of conditional options that allows you to structure a variety of investment strategies.

So kind of compared to the previous talk, this is going to be a bit more technical, but today I would love to talk about exotic options and why they solve existing issues in DeFi.

Oftentimes, people think that DeFi derivatives has kind of existed around the same amount of time as Bitcoin.

But what people do not realize is that we are actually in a extremely early stage of DeFi.

DeFi derivatives has only existed for 3 years, whereas Bitcoin has existed for over 15, and in traditional finance DeFi derivatives is a, not DeFi derivatives, derivatives is a $22 trillion market, whereas in crypto right now, DeFi derivatives is only $3 billion.

And so this means it is an extremely early market and there is a ton of opportunities and Sega is 1 of the first movers in this space looking to create new technology that allows for better user benefit.

DeFi currently has a lot of issues because it is such a new market.

For a lot of you here who have touched DeFi products, I'm sure you have experienced some of the issues here.

The first 1 is a lack of product innovation.

In the last cycle, what we've seen is a lot of products or a lot of protocols kind of taking the best ideas in the market and just deploying them on different chains.

And we've just seen that people were not being very innovative with their products.

And because of that, there were a lot of Ponzi schemes, inflationary token rewards, many issues where the user benefit and the utility of DeFi protocols did not actually give the users a real return.

And then the second issue was the lack of on-chain liquidity.

So because DeFi is such a new field, there's a low market maker appetite in actually providing liquidity for these products, and because being on on-chain, there is actually a huge difference between the pricing of things off-chain.

A lot of market makers are sometimes not getting the best deal on-chain, and so they're not really excited about trading things on-chain, and there's also the issue of transparency.

On-chain trading has too much transparency for some market makers and because of that there is a lack of liquidity.

And then lastly there's a lack of decentralization.

So smart contracts have obviously been this incredible technology that was developed that allows for a permissionless, trustless, autonomous execution of financial transactions online.

However, there is no proven institutional use case for smart contracts because the entire traditional financial system still runs on a very paper-based contract and people are fine with it because the amount of time and the amount of resource required for paper-based contracts in traditional finance does not necessarily change that much by changing into smart contracts, and so most institutions and market makers still prefer over-the-counter transactions, And so DeFi really is missing this killer use case and how we should really make smart contracts a part of the existing system.

And so my thesis is this, Exotic option smart contracts actually solves all 3 of these DeFi issues.

It solves the issue of product innovation.

It solves the issue of on-chain liquidity.

And it also solves the issue of decentralization.

Now, you might be asking why, and the answer to all of these problems is exotic options.

So the next part, I'll go through how does DeFi exotic derivatives actually solve these issues?

So first of all, I mentioned in the very beginning what an exotic option is.

An exotic option is a conditional option.

And if you are familiar with options and financial products, An option is a type of financial contract that gives you the right but not an obligation to buy or sell an asset at a certain price at a certain time.

And exotic options are actually conditional options where you can indicate certain things like, for instance, a barrier where if during the duration of the trade, if you do not touch this pricing barrier, the option never realizes, or the opposite where if you touch the barrier, the option disappears.

You can also add things like mid-term, mid-expiry settlements, lots of different types of payoffs.

And so the payoff at maturity for exotic options does not just depend on the underlying price at maturity like a normal option, but you can just structure it in so many different flexible ways.

And so this allows for a much larger number of product innovation because you can create so many different types of payouts.

For instance, you can make KPI based payouts, you can average out the volatility so that you're not taking as much risk, or you can also create things that are much more affordable for people to enter since crypto options in general are pretty expensive.

There are so many ways that you can create product innovation.

And then you can also create, you know, you can track the performance of a portfolio rather than just 1 underlying.

Something called a basket option is actually a combination of a variety of underlyings.

And what the value of this is, you can actually structure options with, say, a larger cap token like ETH, but also a smaller cap token, and you can combine those 2 together in a basket and drive the market capitalization of the smaller cap token.

And so this packaging aspect also allows to drive liquidity for smaller tokens in the market.

And then lastly, this is also a flexibility thing, but you can change the matter of settlement between cash or physical delivery and this is appetizing for market makers who may not necessarily want to have ownership of too many illiquid tokens but if you have things like cash settlement where you are tracking the price of an illiquid token, but actually buying and selling in USDC, for instance, it also allows to drive for smaller cap liquidity and just allows generally for more market maker appetite.

And so the second part about on-chain liquidity, we talked about how the flexibility drives liquidity, but it's also just the fact of trading these exotic options.

A lot of you may understand the word hedging, which is the activity of trying to de-risk the position in your book.

So if you are a market maker and you're taking a position that you need to hedge out, exotic options requires the most number of instruments to hedge out.

So when you trade 1 exotic options trade, you are actually hedging that position with vanilla options, perpetual futures, and the spot market.

And so by having just 1 exotic option position, you are actually increasing the volume that is being traded in vanilla options, in perpetual futures, and in the spot market.

And so there is this flywheel of driving the volume of derivatives that drives the entire liquidity of the ecosystem, that drives even more value into derivatives and volume.

And so it's this amazing flywheel cycle of just creating more and more volume.

So the more exotic options trade that we actually do in the market, the larger we can actually drive the size of the ecosystem and its liquidity.

And lastly, we talked about a lack of decentralization in this field and in a killer use case for institutions.

So I think the value of having smart contracts and exotic options smart contracts actually could really start with an institutional use case.

Exotic options on-chain allows for a trustless, permissionless operation, and this is incredibly important because right now for vanilla options, you only have to settle once and it is at the end of the trade, But for some exotic options trade, you are actually doing the settlement multiple times a day or continuously, like a streaming payment.

In a traditional financial market, you actually have around 20 people for each trade running these settlements manually and checking the level of the trade every single day.

So an average traditional financial structure takes around a $108,000 US dollars to run and with smart contract all of that is 0.

Even if you add some physical manual oversight into the checking of these settlements, you're still saving over 50% of the operational cost.

And so the value really here is that exotic options could be the first institutional smart contract use case to alleviate the existing high operational cost.

And it also naturally makes the entire ecosystem more decentralized because it becomes trustless and permissionless on a smart contract.

So we really believe in this future of exotic options smart contracts solving DeFi issues.

And at Sega, we have created the world's first exotic options smart contracts.

We are currently a market leader in the DeFi options space.

We have been live on Ethereum, Solana and Arbitrum offering structured investment solutions.

To this day, we have traded over 300 million dollars in notional volume.

We have been the number 1 DeFi options protocol on Solana and number 2 to number 4 across all chains.

Our max TVL has been a little shy of 50 million dollars and we are the first protocol to really believe in this future of using smart contracts to create more product innovation, more on-chain liquidity, and also a more decentralized future.

Our mission is currently to create safer yields in volatile market environments.

So our products allow for a USBC deposit that runs advanced structured investment strategies that earns you anywhere from 8% to 160% APY.

And it also has principal protection anywhere from 30% to 90% of the market movements.

We recently announced our launch on Arbitrum, which has doubled our user base and has seen great success.

We also have launched the eStakers Vault just last week, which tracks a portfolio of Lido, RPL, and Steep.

We're also excited to announce that we're currently working on a v2 of our contract, and this v2 contract will have things like restaking.

So right now it's a USDC strategy with USDC returns, but we're actually allowing you to stake things like SPIF or REIF, which allows you to get an even better return on your liquid staking derivatives.

We're also looking at implementing early withdrawals.

So an issue in DeFi is that there's a lot of lockups, but we're actually creating a secondary market for our LP tokens so that you're able to trade the LP tokens in a liquid market.

And then lastly, we're making our contract upgradable.

So on the infrastructure side, we've been putting in a lot of work to make our solidity code much better and to also allow for our contracts to be more upgradable and versatile for future products.

This is also something we're really excited to work on some partnerships with institutions, and super excited to announce that in any of my future talks.

And we're also decentralizing our back end, so so many of these new updates are coming very soon.

So if you are interested in the vision of a safer yield in a volatile market environment and the future of exotic options smart contracts solving these issues in DeFi, please check out sega.fi.

Our Twitter is sega underscore fi and my personal Twitter is Arisa Toyo.

I will be also entertaining any questions off stage after this.

If you have any questions, please do come.

Thank you so much for listening to me today.


Speaker 0: Hi, everyone. Good to see everyone here early in the morning. My name is Arisa and I'm the co-founder and CEO of Sega Finance. We are a DeFi protocol that developed the first smart contracts that handles exotic options, which are these types of conditional options that allows you to structure a variety of investment strategies. So kind of compared to the previous talk, this is going to be a bit more technical, but today I would love to talk about exotic options and why they solve existing issues in DeFi.

So let's get started. Oftentimes, people think that DeFi derivatives has kind of existed around the same amount of time as Bitcoin. But what people do not realize is that we are actually in a extremely early stage of DeFi. DeFi derivatives has only existed for 3 years, whereas Bitcoin has existed for over 15, and in traditional finance DeFi derivatives is a, not DeFi derivatives, derivatives is a $22 trillion market, whereas in crypto right now, DeFi derivatives is only $3 billion. And so this means it is an extremely early market and there is a ton of opportunities and Sega is 1 of the first movers in this space looking to create new technology that allows for better user benefit.

DeFi currently has a lot of issues because it is such a new market. For a lot of you here who have touched DeFi products, I'm sure you have experienced some of the issues here. The first 1 is a lack of product innovation. In the last cycle, what we've seen is a lot of products or a lot of protocols kind of taking the best ideas in the market and just deploying them on different chains. It's called forking.

And we've just seen that people were not being very innovative with their products. And because of that, there were a lot of Ponzi schemes, inflationary token rewards, many issues where the user benefit and the utility of DeFi protocols did not actually give the users a real return. And then the second issue was the lack of on-chain liquidity. So because DeFi is such a new field, there's a low market maker appetite in actually providing liquidity for these products, and because being on on-chain, there is actually a huge difference between the pricing of things off-chain. A lot of market makers are sometimes not getting the best deal on-chain, and so they're not really excited about trading things on-chain, and there's also the issue of transparency.

On-chain trading has too much transparency for some market makers and because of that there is a lack of liquidity. How do we drive this liquidity? And then lastly there's a lack of decentralization. So smart contracts have obviously been this incredible technology that was developed that allows for a permissionless, trustless, autonomous execution of financial transactions online. However, there is no proven institutional use case for smart contracts because the entire traditional financial system still runs on a very paper-based contract and people are fine with it because the amount of time and the amount of resource required for paper-based contracts in traditional finance does not necessarily change that much by changing into smart contracts, and so most institutions and market makers still prefer over-the-counter transactions, And so DeFi really is missing this killer use case and how we should really make smart contracts a part of the existing system.

And so my thesis is this, Exotic option smart contracts actually solves all 3 of these DeFi issues. It solves the issue of product innovation. It solves the issue of on-chain liquidity. And it also solves the issue of decentralization. Now, you might be asking why, and the answer to all of these problems is exotic options.

So the next part, I'll go through how does DeFi exotic derivatives actually solve these issues? So first of all, I mentioned in the very beginning what an exotic option is. An exotic option is a conditional option. And if you are familiar with options and financial products, An option is a type of financial contract that gives you the right but not an obligation to buy or sell an asset at a certain price at a certain time. And exotic options are actually conditional options where you can indicate certain things like, for instance, a barrier where if during the duration of the trade, if you do not touch this pricing barrier, the option never realizes, or the opposite where if you touch the barrier, the option disappears.

You can also add things like basket. You can also add things like mid-term, mid-expiry settlements, lots of different types of payoffs. And so the payoff at maturity for exotic options does not just depend on the underlying price at maturity like a normal option, but you can just structure it in so many different flexible ways. And so this allows for a much larger number of product innovation because you can create so many different types of payouts. For instance, you can make KPI based payouts, you can average out the volatility so that you're not taking as much risk, or you can also create things that are much more affordable for people to enter since crypto options in general are pretty expensive.

There are so many ways that you can create product innovation. And then you can also create, you know, you can track the performance of a portfolio rather than just 1 underlying. That's another value of an option. Something called a basket option is actually a combination of a variety of underlyings. And what the value of this is, you can actually structure options with, say, a larger cap token like ETH, but also a smaller cap token, and you can combine those 2 together in a basket and drive the market capitalization of the smaller cap token.

And so this packaging aspect also allows to drive liquidity for smaller tokens in the market. And then lastly, this is also a flexibility thing, but you can change the matter of settlement between cash or physical delivery and this is appetizing for market makers who may not necessarily want to have ownership of too many illiquid tokens but if you have things like cash settlement where you are tracking the price of an illiquid token, but actually buying and selling in USDC, for instance, it also allows to drive for smaller cap liquidity and just allows generally for more market maker appetite. And so the second part about on-chain liquidity, we talked about how the flexibility drives liquidity, but it's also just the fact of trading these exotic options. A lot of you may understand the word hedging, which is the activity of trying to de-risk the position in your book. So if you are a market maker and you're taking a position that you need to hedge out, exotic options requires the most number of instruments to hedge out.

So when you trade 1 exotic options trade, you are actually hedging that position with vanilla options, perpetual futures, and the spot market. And so by having just 1 exotic option position, you are actually increasing the volume that is being traded in vanilla options, in perpetual futures, and in the spot market. And so there is this flywheel of driving the volume of derivatives that drives the entire liquidity of the ecosystem, that drives even more value into derivatives and volume. And so it's this amazing flywheel cycle of just creating more and more volume. So the more exotic options trade that we actually do in the market, the larger we can actually drive the size of the ecosystem and its liquidity.

And lastly, we talked about a lack of decentralization in this field and in a killer use case for institutions. So I think the value of having smart contracts and exotic options smart contracts actually could really start with an institutional use case. Exotic options on-chain allows for a trustless, permissionless operation, and this is incredibly important because right now for vanilla options, you only have to settle once and it is at the end of the trade, But for some exotic options trade, you are actually doing the settlement multiple times a day or continuously, like a streaming payment. And it takes a lot of operations. In a traditional financial market, you actually have around 20 people for each trade running these settlements manually and checking the level of the trade every single day.

So an average traditional financial structure takes around a $108,000 US dollars to run and with smart contract all of that is 0. Even if you add some physical manual oversight into the checking of these settlements, you're still saving over 50% of the operational cost. And so the value really here is that exotic options could be the first institutional smart contract use case to alleviate the existing high operational cost. And it also naturally makes the entire ecosystem more decentralized because it becomes trustless and permissionless on a smart contract. So we really believe in this future of exotic options smart contracts solving DeFi issues.

And at Sega, we have created the world's first exotic options smart contracts. We are currently a market leader in the DeFi options space. We have been live on Ethereum, Solana and Arbitrum offering structured investment solutions. To this day, we have traded over 300 million dollars in notional volume. We have been the number 1 DeFi options protocol on Solana and number 2 to number 4 across all chains.

Our max TVL has been a little shy of 50 million dollars and we are the first protocol to really believe in this future of using smart contracts to create more product innovation, more on-chain liquidity, and also a more decentralized future. Our mission is currently to create safer yields in volatile market environments. So our products allow for a USBC deposit that runs advanced structured investment strategies that earns you anywhere from 8% to 160% APY. And it also has principal protection anywhere from 30% to 90% of the market movements. We recently announced our launch on Arbitrum, which has doubled our user base and has seen great success.

We also have launched the eStakers Vault just last week, which tracks a portfolio of Lido, RPL, and Steep. And it has around 22% API on your USDC. We're also excited to announce that we're currently working on a v2 of our contract, and this v2 contract will have things like restaking. So right now it's a USDC strategy with USDC returns, but we're actually allowing you to stake things like SPIF or REIF, which allows you to get an even better return on your liquid staking derivatives. We're also looking at implementing early withdrawals.

So an issue in DeFi is that there's a lot of lockups, but we're actually creating a secondary market for our LP tokens so that you're able to trade the LP tokens in a liquid market. And then lastly, we're making our contract upgradable. So on the infrastructure side, we've been putting in a lot of work to make our solidity code much better and to also allow for our contracts to be more upgradable and versatile for future products. This is also something we're really excited to work on some partnerships with institutions, and super excited to announce that in any of my future talks. And we're also decentralizing our back end, so so many of these new updates are coming very soon.

So if you are interested in the vision of a safer yield in a volatile market environment and the future of exotic options smart contracts solving these issues in DeFi, please check out sega.fi. Our Twitter is sega underscore fi and my personal Twitter is Arisa Toyo. I will be also entertaining any questions off stage after this. If you have any questions, please do come. Thank you so much for listening to me today.

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DeFi Derivatives: Exotic Options on Smart Contracts - TOKEN2049 Singapore 2023