Thales protocol

If you want to bet on the direction of a cryptocurrency price but don’t like the idea of purchasing a risky asset, Thales protocol is something that can be beneficial to you. Thales is a decentralized protocol for creating peer-to-peer parimutuel markets. First, let’s explain what the parimutuel betting is.

Parimutuel betting is a betting system different from the fixed-odds betting that most people know. As the name suggests, you know what you can potentially win in fixed-odds betting. If you bet $100 for Manchester United win against Liverpool at odds of 2.56, and MU wins the match, you’ll gain $256. In parimutuel betting, all bets are pooled in one place. Odds are computed when the pool is shared among the winning bets. An example will make it clear.

Let’s say, there are 6 potential outcomes for a given event:

1 $37

2 $208

3 $140

4 $52

5 $371

6 $186

The total amount of money bet on this event is $994. The match is over with the outcome 2 being realized. The wager company’s commission is 10%. After deducting 10% from $994, $894.6 is left which will be shared among the winners. Thus, each winner will get 894.6/208, or $4.3.

Thales makes it possible to bet on such kind of wages, such as the price movements of cryptoassets. But if you think that you can only bet on the prices of cryptocurrencies on Thales, you’re wrong. Since the protocol employs decentralized oracle networks, theoretically any event known to the oracle can be used to make a market on Thales.

Positional and Ranged Markets

Positional market is a parimutuel market where there are only two outcomes for a given event. It’s kind of a binary option. Each Positional Market has these variables:

- Asset. It’s self-explanatory — the asset on which the participants make bets.

- Strike price. It’s the price level the participants bet on

- Maturity. The settlement date of the Positional Market.

UP and DOWN tokens

Let’s look at the real Position Market to understand better. As of this writing, there’s a Positional Market defined with these variables: Asset — BTC, strike price — $25,500, Maturity date — Sep 5, 2022. If you believe that on 5th September 2022 BTC price will be higher than $25,500, you’ll want to buy UP tokens. Conversely, if you think that BTC price will be below $25,500, you’ll buy DOWN tokens. UP (DOWN) tokens ensure payout if a Market has positive (negative) outcome.

If in the above example you’d bought 1,000 UP tokens, which are worth 0.1418 USDC, you would have paid 140.18 USDC. If at the maturity date BTC price ends up higher than the strike price of $25,500, you’ll gain 1,000 USDC, 1 USDC per UP token. Thus, your return on investment would be 613%! Needless to say, DOWN tokens will be worthless in this scenario.

If you have bought 1,000 DOWN tokens instead, you paid 887 USDC. In the case that BTC price is below the strike price at the maturity date, your investment will be worth 1,000 USDC with ROI of the moderate 12.7%. UP tokens will end up being worthless in this scenario.

Anyone can become a Market Maker on the Thales protocol. Once the required collateral is locked into the smart contract, Positional tokens are minted after which anyone can take part in that market. USD stablecoins, such as sUSD, USDT, USDC, and DAI can be a collateral for the Positional Markets. If you want to participate in a Market as a Market Maker, first, you should deposit collateral into the existing market; then, you should mint both UP and DOWN tokens simultaneously. At the maturity date, either of the Positional tokens (UP or DOWN) will be worthless; winner token can be redeemed 1:1 to a stablecoin. Prices of UP and DOWN tokens are calculated based on the Black-Scholes formula.

Another market available for trading on the Thales protocol is Ranged Markets. They differ from Positional Markets in that Ranged Markets revolve around the price range, not the specific strike price. The Market Makers bet on if the specific asset price will fall in the given range at the maturity date. An example can be: Asset — BTC, strike prices — $18,500 and $19,500, Maturity date — Sep 5, 2022. Each Ranged Market is defined by these variables:

- Asset. It’s self-explanatory — the asset on which the participants make bets.

- Strike range. Price range between the two price levels the participants bet on

- Maturity. The settlement date of the Ranged Market.

Traders taking part in Ranged Markets buy not UP and DOWN, but IN and OUT tokens. If in the example above, you believe that BTC price will end up in the given range of $18,500 — $19,500 at the maturity date, you want to buy IN tokens. If you think that BTC price will be below $18,500 or above $19,500 at the expiry date, you can buy OUT tokens.

Think of the Ranged Markets concept as volatility trading. If you expect that volatility will increase, you should buy OUT tokens; it’s like going long volatility. Conversely, if you expect that volatility will drop, you can buy IN tokens; it’s like going short volatility.

Hedging with Thales

As an investor, you don’t only want to grow your capital but first to protect it. One of the ways you can do it is hedging. Hedging is buying or selling a position opposite to your existing position in order to reduce losses. Say, you have bought gold bullion. There’s a risk that gold price can crash, and you’ll lose money. But you can reduce your investment loss by hedging your position; you can sell gold futures or buy a put option on gold futures.

Thales protocol is a cost-effective place to hedge your crypto investments. Say, you’ve purchased $10,000 BTC at $19,550, yesterday’s (August 28, 2022) settlement price. Your investment will experience a big loss if BTC price falls. To hedge your position, you can buy DOWN tokens. Let’s say you go to the market with the following variables: Asset — BTC, Strike price — $18,000, Maturity date — Sep 9, 2022. Buying DOWN tokens in this Positional market means that you will gain if BTC price will be below the strike price.

To cover against the potential loss of $1,550, purchase price minus the strike price, you’ll pay 1550 * 0.253 (DOWN token price at the moment) = $392,15. If BTC price falls below $18,000 at the maturity date, you’ll make 1,550 USDC. Thus, by paying only 3.92% of your investment you effectively hedged your position against 8.6% decrease. And your potential profit in this hedge is whopping 295% which can be calculated as (1–0.253) / 0.253. Remember that at the maturity date all winning tokens can be redeemed 1:1 to USDC or any stablecoin supported by the protocol.