Check out app.fireflies.ai for an excellent transcription tool.

Hello, everyone! This is Chris from Eve Exchange. Today, I’m going to host the inaugural episode of “Options Trading 101” as part of our EVE University series.

In today’s session, we’ll delve into the following fundamentals:

What are options and how they stack up against futures or perpetuals?

What is the role in traditional finance (TradFi)?

How are options unique place in the ever-evolving crypto landscape and very short into into how eve works.

In part two, I’ll guide you through the process of creating basic options contracts on Eve and how to trade them.

While you might be tempted to skip ahead to part two, I strongly recommend that newcomers to options trading and those new to the concept to not jump ahead.

History of options trading:

Believe it or not, options have a history dating back to ancient Greece. In those ancient times, there lived a brilliant mathematician named Thales, he had a visionary idea: cornering the market, not in the oil for our cars, but in olive oil.

Thales, armed with mathematical calculations, astrology, and a keen sense of market dynamics, predicted a bountiful olive crop on the horizon. His theory rested on the assumption of a high demand for olive presses. To capitalize on this prediction, Thales faced two options. He could either purchase all the olive presses in the region, effectively monopolizing the market, or he could strike deals with the owners of these presses. Thales opted for the latter.

He embarked on a journey across Greece, forging agreements with influential oil mill proprietors. What unfolded next confirmed Thales’s foresight: Greece witnessed an abundant olive harvest. Farmers looking to convert their olives into oil had no choice but to turn to Thales, who held the leases for the coveted presses. As a result, Thales raked in profits, securing his place in history as the pioneer of recorded options contracts.

Why were these contracts referred to as options? It’s because Thales paid an upfront sum, known as the premium, for the right to use these presses. Crucially, he had the option but not the obligation to use them. If, by chance, his prediction had gone awry, and there was no olive production that year, his sole loss would be the premium.

Since that era, options have become a versatile financial instrument, allowing traders to speculate on a myriad of outcomes, encompassing the entire realm of finance. Options can be created for almost anything, making them a cornerstone of modern financial markets.

Options Today

The world of options is vast and all-encompassing, spanning from stocks to commodities like rice, futures contracts, and even bonds. What’s truly fascinating is that options account for a staggering $500 trillion in notional value traded annually. This astronomical figure can be attributed to the fact that options cover nearly every financial asset in existence, including, as you may recall, olive presses.

However, the crypto landscape tells a different story. In crypto, options haven’t experienced the explosive growth witnessed in traditional finance (TradFi). Instead, the perpetual swap product has taken center stage. Perpetuals have proven immensely profitable for exchanges, generating substantial revenues. They have become the go-to trading choice for many, given their high leverage capabilities, often ranging from 50x to 200x.

Perpetual trading, though, is not for the faint of heart. It’s a high-stakes, highly leveraged directional trade. A small price movement can lead to the liquidation of a trader’s position, resulting in substantial losses. It’s a high-stress environment, with a substantial portion of traders facing significant losses.

How Options Differ

Let’s pivot to options and explore how they differ from futures and perpetual products. With perpetual products, it’s essentially a highly leveraged bet on the price direction of an asset. Suppose you believe that Bitcoin’s price will rise. However, you lack the $250,000 required to trade ten Bitcoin. Not to worry — exchanges allow traders to provide margin, enabling them to trade with extreme leverage, sometimes between 50x and 200x.

Let’s say you opt for 200x leverage with your $2,000. Here’s the catch: Bitcoin’s volatile nature means that even a slight price movement can wipe out your margin, leading to contract closure and the loss of your $2,000.

Options offer a fundamentally different approach. When you purchase an options contract, you pay a premium, and that’s it. Your primary concern becomes time. For instance, if you believe Bitcoin will surpass $25,000 but lack the funds to purchase it outright, you can buy an options contract giving you the right to buy one Bitcoin within a specified timeframe, say 30 days. This right comes at a cost — the premium, which might be around $1,500 in this case.

If, within those 30 days, Bitcoin exceeds $25,000, your option is “in the money.” Even if the price dips below $25,000, you’re still in a favorable position because time is on your side. Time is a critical component in options trading, as a longer timeframe increases the likelihood of the price moving in your desired direction and thus those options are more costly.

This type of trade is known as a CALL option, signifying your belief that Bitcoin’s price will rise. Conversely, the seller of the call option may anticipate Bitcoin’s price to fall but is content with receiving the upfront payment. Sellers may employ more intricate strategies, such as selling both calls and puts.

Put Options

On the flip side, we have put options. A put option is suitable when you anticipate an asset’s price will decline. In this case, you acquire the right to compel someone to purchase an asset from you at a fixed price in the future.

Suppose you possess a put option entitling you to sell Bitcoin at $25,000 in 30 days. If Bitcoin’s price plunges to $10,000 within that timeframe, you stand to gain $15,000. It’s a low-stress way of trading with leverage. Unlike perpetuals, where constant monitoring is essential, options provide peace of mind, allowing you to hedge your position without the constant threat of liquidation.

Hedging:

In a crypto context, you could employ options to hedge your risk when staking assets long term. Let’s say you’re staking 100 ETH for 120 days, and the price of ETH starts soaring while you’re locked in your staking contract. A put option could be your salvation. It grants you the right to sell your ETH for a fixed price in the future, mitigating the risk of missing out on potential gains.

Or imagine you’ve invested in a new token issuance through a hot initial coin offering or initial exchange offering (IEO). You acquired the token at $0.10 per unit, but there’s a catch — you have to vest your holdings for 60 days. Now, like any project, there’s a risk that the token’s value could plummet during that 60-day period, potentially erasing a significant portion of your investment — 10%, 20%, 30%, or more. In this situation, you have a powerful tool at your disposal: options. Specifically, you can purchase a put option, granting you the right to sell your tokens at $0.10 per unit in 60 days. This way, even in the worst-case scenario, you recoup your initial investment, albeit with a minor loss due to the premium you paid for the option — a small price to pay for peace of mind. In essence, options act as insurance, providing crucial risk mitigation.

In essence, options serve as insurance, allowing you to hedge your bets while remaining invested and safeguarding your potential upside. This represents just one of the many invaluable use cases for options contracts in the world of crypto.

Options in Crypto: The Current State

Currently, options trading in the crypto sphere remains relatively limited. The predominant focus is on perpetual contracts. However, this narrow focus doesn’t do justice to the potential of options trading, as I’ve previously explained. Crypto options trading accounts for approximately $40 million in daily trading volume, with a significant portion concentrated on a centralized exchange called Deribit. Deribit primarily offers options contracts for just three assets: Bitcoin, Ethereum, and Solana, amassing approximately $20 million in daily volume, which is nothing when compared to spot or perpetuals.

The rest of the market comprises a mix of DeFi protocols and a few centralized exchanges. Despite their presence, none have gained substantial traction due to a lack of liquidity infrastructure and users that understand how options actually work.

EVE’s Unique Approach

So, what sets EVE apart? We’ve designed our platform to be exceptionally flexible, allowing you to create options contracts for virtually any ERC-20 token in existence. Whether it’s a yield token, a speculative IEO token, real estate token, or any other type, you can craft an options contract for it.

When you create an options contract, think of yourself as an insurance underwriter. You’re essentially either writing a put or a call option, in return you get a fee upfront. Interestingly, when you’re writing options contracts, your viewpoint may differ from when you’re buying them. For example, when you write a put option, you might believe the asset’s price will rise, while writing a call option could imply an expectation of a price drop. However, your ultimate motivation may be collecting the premium for these options.

EVE simplifies the process. You load the tokens into one side, write the contract, and it becomes available for trading. The contract enters the order book, where other users can purchase it from you. You receive the premium, and they gain the rights defined in the contract. Importantly, all contracts are collateralised, meaning you must have the tokens available to create the contracts and they must be held in the smart contract till the option expires or is closed by the buyer for a profit.

In our next video, we’ll delve into the practical aspect of trading options on EVE, providing more insights into various scenarios you might encounter.

As the first on-chain DeFi based OTC options trading protocol, Eve Exchange opens up new possibilities for traders and investors. Users can now create put and call options contracts for any ERC20 token. What’s more, these options are fully collateralized, eliminating the risk of default and ensuring a secure trading environment.

What are options?

Options, as a financial instrument, can be a powerful tool for traders and investors, but they can also be somewhat confusing, especially for those who are more familiar with spot or futures trading. In this article, we will delve into the world of options, how they work, and why crypto traders should consider incorporating them into their trading strategies.

Options are classified as derivatives, meaning their value is intrinsically linked to the price of another asset, such as a token. These options can either be cash-settled, where the trader receives payment in cash, or physically settled, where the trader receives the actual underlying token. The flexibility of options makes them versatile and attractive to different types of traders.

Call options and put options are the two main types of options available in the market. A call option grants the holder the right to buy a token at a specific price, known as the strike price, before a predetermined expiration date. As the token’s price rises above the strike price, the call option gains value, offering the opportunity for profit from upward price movements. The maximum risk for the call option buyer is limited to the premium paid to acquire the option.

On the other hand, a put option provides the holder with the right to sell a token at a predetermined price, the strike price, before the expiration date. As the token’s price falls below the strike price, the put option increases in value, offering the potential for profit from downward price movements. Similar to call options, the maximum risk for the put option buyer is confined to the premium paid to purchase the option.

Some examples:

Call Option use case

Let’s say you’re interested in investing in a cryptocurrency, let’s call it “ABC,” but you’re not sure if its price will go up in the near future. However, you believe there’s a chance it might increase in value.

Instead of buying CryptoABC directly, you can decide to use a call option to speculate on its potential price increase. You purchase a call option for ABC with a strike price of $100 and an expiration date of one month from now.

Now, there are two scenarios that can happen:

Outcome 1: ABC’s Price Goes Up: If the price of ABC rises above $100 before the option expires, your call option becomes valuable. You can exercise the option, meaning you buy ABC at the lower strike price of $100 and then sell it at the higher market price, making a profit.

For example, if CryptoABC’s price reaches $150, you can exercise your call option and make a $50 profit per unit of CryptoABC.

Outcome 2: ABC’s Price Stays Below $100 or Decreases: If ABC’s price doesn’t rise above $100 or even decreases, your call option will expire worthless. In this case, your maximum loss is limited to the premium you paid to purchase the call option.

Using call options in crypto trading allows you to potentially benefit from price movements without having to buy the cryptocurrency outright. It gives you the opportunity to speculate with fixed downside and unlimited upside.

Put Option use case:

One compelling use case for put options in the crypto market is when dealing with tokens that are subject to vesting schedules. Vesting is a common mechanism used in the crypto space, particularly for tokens distributed through ICOs or token sales. In this scenario, an individual may receive a substantial number of tokens as part of their compensation, but they are unable to sell or transfer these tokens immediately due to the vesting schedule. The tokens will gradually become available over time.

During the vesting period, the individual may have concerns about potential price declines and the inability to sell their tokens to mitigate losses. To address this issue, they can use put options as a risk management tool. By purchasing put options with a strike price at or below the current market price of the token, the individual gains the right to sell the tokens at the higher strike price in the event of a price drop. This strategy effectively protects them from further price declines during the vesting period.

However, if the token’s price remains stable or even increases during the vesting period, the individual may choose not to exercise the put options. In this case, their maximum loss is limited to the premium paid for acquiring the put options, offering a level of financial security and peace of mind.

Eve Exchange facilitates the trading and creation of both put and call options, all on-chain and 100% managed by smart contracts without any third parties.

Options provide crypto traders and investors with valuable tools to manage risk and optimize their strategies in the market. As the Eve Options OTC Trading V.1 system enters its beta phase, the crypto community can look forward to further enhancements and features in the near future.

Eve Exchange provides a suite of P2P trading tools. Our aim is to empower traders and crypto to earn, trade, and spend all within one fully decentralised, non-custodial web3 ecosystem.

Some have asked us, what can Eve Exchange be used for specifically?

Here are just a few things you can do:

Live right now

Trade unlimited pairs. For example, sell EVE but accept MATIC, ETH, USDC, LINK, or whatever token you want. You can make unlimited pairs.

Source liquidity: Let’s say you are a small-cap token and don’t want to dump your token but need liquidity. Offer your community a discount from the market price and select the vesting option. The buyer gets a great price in return for waiting a vesting period, while the seller has found the needed liquidity.

Trade tokens without slippage: Using the Chainlink price oracle you can sell & buy tokens at the real market price, avoiding slippage, front running and impermanent loss.

Run a crowd-sale: Make a token and sell it with different vesting and discount levels. No more airdrops, frustrating vesting contracts or any headaches, easy as it should be.

Get a subscription: Eliminate your trading fees by buying a monthly or annual subscription with EVE Token. All tokens used for subscriptions are burned.

Participate in governance: Log into the Eve Dao, and make suggestions for the growth and improvement of the project.

Stuff you can do in mid-April:

Using options and lending you can:

Earn income: Selling fully collateralised put and call options.

Make leveraged trades with no fear of margin calls: Your risk is limited to the amount paid for the options premium, while your upside is unlimited.

Hedge while staking: Let’s say you are staking in a long-term contract the token you are staking just hit an ATH, you wish to protect your upside so you buy an option that gives you the right to sell your asset at a fixed price in the future.

Earn yield: Earn event-driven yield on USDC deposits. USDC pool depositors get paid 15% yield in EVE tokens and earn 20% from all profitable trades, entirely risk-free. Join a staking pool while being able to write options contracts from staked assets earning your more income.

Coming later this year:

Affiliate system: tell your friends about Eve and we will reward you with EVE tokens and a % of fees.

Marketplace: Buy and sell anything on our P2P marketplace. Fully decentralised with escrow contracts making your transactions safe.

About Eve Exchange
Eve provides users with features that enhance and simplify non-custodial trading while improving opportunities. Eve DeFi provides next-generation spot, options, and multi-coin yield products with cross-chain support. Best of all, users can use a subscription to eliminate trading fees a first for any DEX.

Learn more about Eve Exchange by visiting eve.exchange or reading our user documents at https://eve-technology.gitbook.io

Eve Exchange Integrates Chainlink Automation to Power p2p spot and options trading.

We’re excited to announce that Eve Exchange a non-custodial suite of DeFi trading tools including p2p spot and options products, has integrated Chainlink Automation.

Eve Exchange is leveraging Chainlink Automation to securely and cost-efficiently trigger the execution of options settlement and create fair automated pricing updates. Furthermore, the use of Chainlink Automation eliminates the need for dual asset trading pools, eliminating MEV attacks and impermanent loss.

Eve decided to use Chainlink Automation to power our market-making function because it is the most reliable Web3 automation service. The Chainlink Automation Network is operated by the same pool of time-tested, provably reliable node operators that help secure tens of billions of dollars in DeFi, even during record levels of network congestion and extreme volatility. The proven infrastructure of Chainlink helps ensure that every trade is executed on time in a trust-minimized manner, giving users additional guarantees that it will function exactly as intended.

Eve DeFi provides next-generation spot, options, and yield products with cross-chain support. Users can use a subscription to eliminate trading fees.

Using Chainlink Eve eliminates the need for users to lock two assets in order to make a market. Chainlink pricing establishes a fair price for all assets allowing users to avoid impermanent loss and MEV attacks. Chainlink also serves as a trigger to automatically settle trades based on user-programmed conditions.

Chainlink Automation is a decentralized service purpose-built to manage tasks on behalf of smart contracts. Chainlink Automation leverages decentralized, hyper-reliable, and economically incentivized automation nodes to wake up smart contracts when they need to perform critical on-chain functions, which usually take place at regular time intervals (e.g., every day at the same time) or based on external events (e.g., when an asset hits a specific price).

Some of the notable features of Chainlink Automation include:

• Highly reliable, performant, and decentralized automation — Chainlink Automation ensures transactions are identified and confirmed quickly even during periods of heavy network congestion by leveraging Chainlink’s battle-tested transaction manager.
• Time-tested infrastructure that helps save costs — Chainlink Automation enables us to eliminate in-house automation infrastructure costs, reduce resources spent on DevOps, and increase speed and efficiency.
• Built to enable faster scaling — Chainlink Automation enables us to scale faster and avoid the challenges that come with building and maintaining the infrastructure needed to reliably automate across multiple chains.
• Unlocks new use cases — With smart contract automation, we’re able to explore new use cases and unlock capabilities that would otherwise not have been possible.

About Chainlink
Chainlink is the industry-standard Web3 services platform that has enabled trillions of dollars in transaction volume across DeFi, insurance, gaming, NFTs, and other major industries. As the leading decentralized oracle network, Chainlink enables developers to build feature-rich Web3 applications with seamless access to real-world data and off-chain computation across any blockchain and provides global enterprises with a universal gateway to all blockchains.

Learn more about Chainlink by visiting chain.link or reading the developer documentation at docs.chain.link. To discuss an integration, reach out to an expert.

About Eve Exchange
Eve DeFi provides users with features that enhance and simplify non-custodial trading while improving opportunities. Eve DeFi provides next-generation spot, options, and multi-coin yield products with cross-chain support. Best of all, users can use a subscription to eliminate trading fees a first for any DEX.

Learn more about Eve Exchange by visiting eve.exchange or reading user documents at https://eve-technology.gitbook.io

Eve DeFi is now live!

Smart Trade — Fully live with all features. You can make orders, take orders, set up limit orders, discounts and vesting periods.

Subscriptions — Fully live with all features. If you own an EVE OG NFT, the wallet holding the NFT will trade without fees for life. A monthly subscription is priced at 2,000 EVE, a year subscription is priced at 18,000 EVE, and all tokens used for subscriptions are permanently locked, reducing supply.

Chainlink — Eve DeFi uses Chainlink automation services for pricing for top assets including EVE.

Few things to note:

1. We have a cache issue that we need to fix, so if you don’t see an order re-load the page.

2. When you buy an order it will not go straight to your wallet. You have to go to the claim area and claim it — yes annoying we solve it on v.2

3. Any token can be listed but only the ones in the drop-down list can be taken as payment.

4. This is the link to the interface, make sure you have polygon connected otherwise you wont see anything.

5. We encourage all users to check out the Knowledge Center before using the platform. https://eve-technology.gitbook.io

To launch: app.evedefi.io

Notes:

Our interface is a beta, we plan to upgrade this. However, it’s fully functional and our testing group felt it was fairly easy to operate.

Users should keep in mind Eve does not work like a typical AMM-based DEX.

Eve DeFi uses single-sided liquidity, which means you have no risk of impermanent loss and no slippage.

Liquidity is not available on all coins, users must provide liquidity and make pairs, the more you guys help with this the more traction the product will get! We are working with liquidity providers and they will likely be active when options trading is live.

What’s next?

Options Trading and lending are on schedule for a March release.

A highly updated governance system for the Eve Dao will also be live in the next 3–4 weeks.

Front-Running is a major issue on DEX exchanges, it’s been estimated that front-running attacks have cost traders over a billion dollars since 2021.

In this article, we discuss how Eve DeFi by design prevents front running but first lets review the history of front running in traditional markets and how it became possible in the world of Decentralised Finance.

What is front running?

When a trader takes advantage of insider knowledge about a large upcoming trade in order to profit it’s called front running. Typically this knowledge would usually come from a brokerage firm, bank, company insider or leaked from a fund.

The term front running started back when brokers would hand deliver orders between trading desks, a trader could literally run ahead of others to reach the desk and execute his trade before other traders, hence the term front running. In modern times computer systems have reduced the need for traders to physically run but the process is still the same.

For example, let’s say a broker gets an order to buy 50,000 shares of Apple, no doubt this trade will present an opportunity for a front runner to profit. In this case, the broker would alert the front runner, who would simply buy Apple before the large trade was placed. The front runner would then sell immediately, generating a quick short term profit. The trade itself is risk free, but its also very illegal.

In the blockchain world front running is a very different process and of course since all the data is public its not necessarily illegal which has made it attractive to many.

How front running works in the blockchain world:

In most blockchains transactions are organised by fees, with the highest fee transaction being processed first and the lowest fee transactions last. Pending transactions which have not been processed are placed in a mempool which a holding area for unprocessed transactions. This ordering method is what provides front runners opportunities to extract profits. Here is how it works?

1. A front-runner would scan the mempool, looking for large DEX trades that are not yet processed.
2. After finding a worthwhile trade the front runner would push up his gas price to max levels and buy the token before the transaction was processed.
3. The large transaction would eventually process pushing up the price of the targeted token.
4. The front-runner sells earning a profit.

This is all done automatically using bots and it’s incredibly profitable with no risk. Some very large funds have been known to execute this strategy across hundreds of coins. The system works largely due to the automated market maker system (AMM) which most DeFi protocols are based on, for a front runner this means a source of liquidity is always available within the targeted pool.

To learn more about mempools check out: https://www.quicknode.com/guides/web3-sdks/how-to-access-ethereum-mempool

Can front runners be stopped?

Systems are available to try and trick the attacker or black-list the wallet address. The Salmonella contract can be used to trick front runners or charge a tax to them. A few tokens we encountered developed this mechanism in the token itself. In any case, most traders will be unaware how to defend against front running aside from using max gas when trading which still can be circumvented, thus new protocols are being built that avoid the problem by designing around it.

How Eve Smart Trade stops Front Running:

As described above the typical DEX exchange uses an automated market maker, price is simply a function of supply within the pool and the contract itself holds a pair of coins. Unfortunately, the AMM system by design provides a front runner a vulnerability to exploit.

First, Eve Smart Trade does not use an AMM-based system but uses a Chainlink price oracle instead which aggregates a price from several sources. In this way the oracle acts as the “market maker” which provides fair price discovery for traders while offering no vulnerability for a front runner to exploit.

Second, Eve Smart Trade was designed with single-sided order pools which means users cannot buy and sell to the same pool. When you buy from an Eve pool the proceeds go directly to the seller’s wallet, meaning only one token is stored in our smart contract. This further eliminates any possibility of a front-running attack as no liquidity can be extracted from the contract.

It’s incredibly simple by design but 100% effective at preventing front running, making Eve a better place to trade for both sellers and buyers of any type of token. In many ways Eve can be considered a next generation P2P trading solution, more on this in another article.

Here is a good article to learn more about single-sided liquidity pools and the benefits they have for traders. Several projects are looking at single-sided pools and Eve Smart trade will be one of the first.

A warning about oracles!

Eve uses two different oracles, one from Chainlink which only supports top coins which are very difficult to manipulate and another custom oracle we built to source a price from Coin Market Cap. In the case of our second oracle we advise users to be careful when selling or buying using this as a the sole basis for price discovery. Why?

On thinly traded or low market cap coins its possible for a bad actor to manipulate the price of a token and thus manipulate the oracle price feed. Low cap coins can be manipulated creating an opportunity for arbitrage with either a lower price on Eve or higher price to take liquidity from. This problem can be avoided by users setting manual prices on coins which could be subject to such an attack.

Eve Smart Trade will launch January 2023.

Be sure to visit:

https://www.eve.exchange
https://www.evedefi.io
Telegram: https://t.me/eveexchange
Twitter: @eve_exchange
Youtube: https://www.youtube.com/watch?v=u5VlzuM-jWM&t=203s

Governance & Staking:

Our current staking system will now form a part of the Eve DeFi governance system. All EVE token holders can post proposals and take a role in determining how Eve DeFi as a project moves forward.After Eve DeFi V.1 is deployed the team will also post proposals, seeking community feedback before taking the next development steps. In this way, Eve DeFi is a community-managed project similar to other DeFi products.

How to participate in the governance system?

1. Stake EVE. Use this link

2. Register for the forums using the wallet you are staking with here

Only wallets staking EVE will be able to vote. When you log in the first time we will verify your wallet is staking EVE, once verified you will be granted forum permissions.

Since users who stake more will have a higher influence over the voting process it can open the door to potential manipulation. The voting system will apply limits based on average holdings, for the purpose of fairness and 20% of all EVE holders must vote for a proposal to be passed.

Eve DeFi governance will be a four-step process:

1. Proposals are made in the forum by users and discussed.
2. Proposals that have traction can move to preliminary off-chain voting.
3. If passed, proposals are researched for viability and a budget drafted. A report will be shared to discuss in the forum.
4. A final on-chain vote is cast. If approved the proposal will be placed on the roadmap.

Governance forums are live. Eve holders can now log into the governance forum using this link

Governance Staking: You must be staking EVE before you log in otherwise your wallet will not be registered for voting.

Wishing you all great 2023!

The EVE Team

Be sure to visit:
https://www.evedefi.io
Telegram: https://t.me/eveexchange
Twitter: @eve_exchange
Youtube: https://www.youtube.com/watch?v=u5VlzuM-jWM&t=203s

Smart Trade: During our testing and audit of the smart contract we discovered a bug that is being fixed, thus Eve Defi launch will be slightly delayed by a few days.

The updated delivery for Smart Trade is as follows:

January 16th — Updated smart contract finished.

January 24th — Security audit completed.

January 31st — Eve Smart Trade live.

Options Trading & Yield Pool: Options trading uses the same smart contract with a separate add-on to facilitate functionality, the product is the first DeFi solution to offer fully collateralised option trading, which we feel is a game-changer for many projects and traders liquidity needs.

Timeline:

February 7th: Updated smart contract completed.

February 14th: Security audit completed.

February 31st: Options trading and lending pool live.

For those interested to review the DeFi code here are the links:

EVEOTC | Address 0xCe4B66b5dB9EC83DBE02c91EE7E8932Ac916983d | Etherscan
The Contract Address 0xCe4B66b5dB9EC83DBE02c91EE7E8932Ac916983d page allows users to view the source code…goerli.etherscan.io

EVEOTCStakes | Address 0xC32CB439E565631582e4d77a3Db86f43dD94E53C | Etherscan
The Contract Address 0xC32CB439E565631582e4d77a3Db86f43dD94E53C page allows users to view the source code…goerli.etherscan.io

NOTE: The code is being updated.

Wishing you all great 2023!

Be sure to visit:

https://www.eve.exchange
https://www.evedefi.io
Telegram: https://t.me/eveexchange
Twitter: @eve_exchange
Youtube: https://www.youtube.com/watch?v=u5VlzuM-jWM&t=203s

Eve Smart trade is the first product we are launching in a suite of decentralized finance products. What makes Smart Trade special?

The typical decentralized exchange has a few big issues which impact trading on every asset but especially small-cap assets. These issues tend to surround the topic of liquidity and to some extent slippage and front running play a part. Each of these issues we have experienced with $EVE Token on a daily basis as it trades on Uniswap and centralized exchanges.

It’s our goal to solve these issues with smart trade, making a healthy market for all tokens, especially small-cap tokens. In this article we will discuss liquidity risk and why it’s an issue for many small-cap projects when they trade on based DeFi protocols like Uniswap or even centralized exchanges.

Finally, I will discuss how Eve Smart Trade solves these issues.

What is Liquidity risk?
Liquidity in the context of trading is a term used to describe how easily a token can be bought or sold in the market at a fair price. While a token like BTC or ETH has massive liquidity in the billions often small-cap tokens have limited liquidity as the project itself tends to be the only provider of liquidity. Liquidity risk is the risk of a token becoming illiquid, and it’s a major problem for over 6,000+ tokens.

In pair based exchanges there are several ways to determine how good or bad the liquidity situation is for a token.

Spread: This is the most popular metric but if anything is just an indicator of a healthy market of buyers and sellers. Tight liquidity means a token has plenty of buying and selling interest but it does not account for market depth.

Depth: Is a very important metric and relates to how much a trader can sell or buy before impacting price. As an example, a trader selling 1 BTC is unlikely to impact the trading price, but a trader selling 1,000,000 EVE likely will cause the price to crash. This is because BTC has greater depth.

Resilience: Is an important metric as it relates to how quickly the price will bounce back after a strong sell-off. Does the token bounce back? Or does it set a new low price level? If it bounces back thats good.

Trading small-cap tokens on nearly all centralized and decentralized exchanges will be challenging. Small trades inevitably will move the price of an asset. This results in project treasuries and investors having limited options to sell or buy assets without disrupting market prices significantly. This is a major problem for a number of reasons.

First, the major reason a new project will fail is down to a lack of liquidity or available funding, tokens are meant to provide a source of funding for most projects, yet, often they provide just one wave of funding in the IEO.

Second, external liquidity providers have significant risk when providing liquidity to small-cap tokens, thus they often avoid such projects. These projects are left to support the market with their own capital, buying back tokens they cannot sell easily. Eventually the project runs out of funds the token price goes down and the project dies.

Consider the following example to illustrate:

Let’s say a pool was started on uniswap with 1,000,000 XYZ and $200,000 USDT making a market price of .20 per XYZ. If one large seller sold 500,000 XYZ over a few hours. The price would be .10 because 50% of the supply of USDT was drained. Upon noticing the situation other market participants would likely sell and the token price would drop significantly.

On AMM based exchanges, price is simply a formula of x/y. While the project may have had sufficient depth one trader destroyed the market, if the token did not have resilience it would likely continue to fall resulting in a total collapse of liquidity and would eventually result in the failure of the project.

The reality of small-cap liquidity

Unfortunately, nearly every small-cap token is providing 90% or more of the liquidity in any given pool. For small-cap projects or new projects looking to make a healthy market ultimately it means funds that could have been used to help the project grow are now placed at risk to buying back tokens from the market. It also means the project has no source of liquidity as they cannot find anyone to buy significant sizes aside from themselves. Bad Liquidity does not mean a bad project, it just means they either have not gained enough traction to attract top-tier market makers who supply sufficient liquidity. These projects need a solution that facilitates liquidity.

The Eve Solution:

While we cannot eliminate all liquidity risk, we can help projects improve depth through the design of our trading system. By removing automated market-making and pair-based order books we create a more stable environment for tokens to trade. How do we accomplish this?

At Eve we use a one-pair, one-owner pool. This means the liquidity provider places one asset, not a pair and no others can share in the pool.

Pool owners are considered Makers and those who take liquidity are Takers. The value of the sold asset is received 100% by the pool owner. Since pricing is set by an oracle that looks at several markets, both Maker and Taker know they are getting a fair price.

A small-cap project benefits greatly as they are able to sell a fixed supply, with no slippage, and receive 100% of the sale proceeds with no risk. Compared to Uniswap, the project would struggle to gain any proceeds as the system is constantly balancing the trades of sellers and buyers. To help offset the risk of dumping, the Eve protocol offers custom vesting periods, discounts, or premiums to the market price.

Let us consider the following examples:

The buy-side:
A trader wishes to purchase $50,000 of a small-cap project token, with Uniswap the trader knows this purchase will move the price up significantly, likely “mooning” the token and resulting in immediate selling pressure. By placing his trade on Eve the trader can get a set price without disrupting the markets, resulting in a potentially lower acquisition cost and a healthier market. The pool owner could impose a vesting period or a premium to offset risk.

Eve solved a depth issue for the trader.

The sell-side:
A small-cap project wishes to sell $100,000 worth of tokens from the project’s treasury in order to finance operations. Typically, this project would spread orders out over several days or weeks, across several exchanges but if they are the main liquidity provider they are simply selling to themselves negating any benefit. By forming this trade on Eve, the project could sell tokens over-time at an attractive rate, they would benefit by gaining 100% of the proceeds, and buyers would benefit from being able to purchase large volumes of tokens for a fixed price.

Eve helps all types of projects and traders to liquidate assets in an easy and decentralized manner without causing market disruption.

Token sale event:
Typically on token generation events, buyers have several discounts and vesting options, while this is normal it often results in an unfair situation in which many investors are unclear of terms offered to others throughout the sale process. Eve promotes transparency while simplifying the token issuance process making it easier for the project to collect funds and the buyer to receive his tokens. Using Eve, projects raise funds easily while investors receive discounts for longer vesting or lock periods.

In the first two examples, you’ll notice that depth remained constant for both buyers and sellers of tokens and liquidity risk was reduced or eliminated entirely. The solution greatly improved trading dynamics for small-cap projects offering both buyers and sellers the opportunity to sell tokens of potentially significant volume without disrupting market prices on other venues.

It should be noted Eve Smart Trade is not only for small-cap projects, but any seller or buyer of any type of asset can benefit from the trading dynamics offered. In many ways Eve smart trade is like a more advanced OTC desk.

Small-cap projects will use Eve Smart Trade as a solution to source liquidity for the ongoing financing needs of the project, which ultimately improves the trading experience at other venues. It should be obvious that Eve Smart Trade does not aim to compete with Uniswap or other AMM-based protocols, it is meant to help buyers and sellers arrange larger liquidity and depth while receiving the direct benefits of it, without dramatically impacting trading venues like Uniswap.

These are just a few examples of how Eve solves a number of issues relating to liquidity risk. In the next article we will discuss how Eve Smart Trade prevents front running entirely with our innovative protocol design.

For more info check out:

www.eve.exchange
www.evedefi.io

Telegram: https://t.me/eveexchange

Twitter: @eve_exchange

Youtube: https://www.youtube.com/watch?v=u5VlzuM-jWM&t=203s

As you are aware, recent events (namely, the FTX meltdown) have resulted in billions of dollars in losses that have severely impacted many high-profile companies and millions of crypto users.

The challenges are by no means over, and it is still unclear exactly how many businesses are suffering or will. The bottom line is that providing custodial trading services is becoming increasingly complex, and every company in the space is rightly concerned about counterparty risk.

To state what might be obvious to you but perhaps not to others, our primary responsibilities as a custodial exchange provider are as follows:

1. To protect and appropriately manage customer funds.
2. To conform with all applicable policies and best practices.
3. To limit and mitigate counterparty risk.

Numbers two and three above are where the main challenges arise. Number two is a long story, but to help you understand more about counterparty risk (no. 3), below, we provide a quick overview of how our trading system works and how the FTX debacle has affected our model.

Subscriptions, Markets & Settlement

To make our subscription-based model viable, our counterparties (market makers/liquidity providers) adjusted their client service specifically for us.

The adjusted model is significantly more complex and less profitable than usual for all parties, requiring daily post-trade settlements to ensure we always hold the right amount of customer funds.

What is post-trade settlement?

In short, when you trade on Eve Exchange, the asset you buy with your USDC (for example) is not always in our custody immediately. Instead, it is in the custody of one of our counterparties.

At the end of the day, we send USDC to our counterparty, and they send us the asset you bought/traded. Trades are tracked in real-time but settlement can be delayed by some hours; this is a post-trade settlement in the context of our business model.

Most institutional platforms work similarly, but very few retail exchanges do. It can have many advantages for users (better pricing, deeper books etc.) and allows us to offer a subscription-based service, but it does have some drawbacks for us and our counterparties.

The knock-on effects of FTX

All of our counterparties had substantial exposure to FTX. We only work with well-established top-tier service providers, so they are not in trouble, and the risks have not become unmanageable, but their businesses and ours have been affected.

In recent weeks, we have been communicating closely with all our counterparties, reassessing the strengths and weaknesses of our partnership models. To cut a long story short, continuing to provide retail custodial trading services based on this model has become increasingly complex, risky and costly. Therefore, we feel our plans for centralised retail services are no longer viable given the added costs & risk and additional regulatory requirements which are sure to come.

As a result, we are making the following changes to simplify, make the best use of our available resources and ensure the project continues to grow.

1. Our retail offering will 100% be focussed on Eve Defi, a Web3-based non-custodial solution.

2. Our centralised services will be bespoke and offered to businesses and high-net-worth clients only.

In short, this decision saves the company money and time whilst reducing risks as well as the resources needed to navigate the complex regulatory environment. And therefore, allows us to focus our energy on Eve DeFi which we believe is more relevant than a CEX in the current climate.

What does this mean for users who have funds on the exchange?

All those who have funds on the exchange have been contacted, and withdrawals will be processed shortly. If you haven’t heard from us, check your email for a message from support@eve.exchange or email that address.

If you have any questions relating to your account on the CEX, please use the above email address — do not write in Telegram for these matters.

What does this mean for the token?

The token will retain its proposed utility; in fact, we believe it will be strengthened with these changes.

Users can subscribe using EVE Token and trade with ZERO FEES. Those holding NFTs in their wallet will trade with ZERO FEES too. Furthermore, we plan to integrate governance features (voting with EVE) in the future.

EVE Token and NFT subscriptions will go live shortly after Smart Trade has been rolled out — see the roadmap in the Lightpaper.

The Eve DeFi website and first version of the Lightpaper are now online:

www.evedefi.io

Small changes you should expect over the coming days:

1. Staking access will be moved from www.eve.exchange to www.evedefi.io
2. The name and profile picture (but not the link) for the Telegram chat will change.
3. CoinMarketCap, Nomics, Coingecko etc., will be updated to reflect the changes.

We hope the information provided here adequately explains why we have made these changes, and you are excited to hear that we are focusing our efforts on Eve DeFi from now on.

Ultimately, the changes ensure we provide services via a more sustainable model that is lower risk.

Thank you for your understanding and continued support.

There will be a Twitter Space organised and announced shortly so that you can join and ask us questions directly. It will be recorded and shared with those who are unable to join.

Onwards and upwards,

The Eve Team