Cover image Source- modified
Compound Finance launched their COMP token a few weeks back and it was listed on Uniswap. It is a governance token of Compound Protocol just like MKR from MakerDao. COMP is used for voting purpose in the protocol and thus it is valuable. Within a few days of listing, price moved upwards rapidly. Binance and Coinbase listing happened like dream and COMP price skyrocketed. Yield farming has already become a buzzword after COMP launch and many similar governance tokens are being launched by other organizations. The hype around DeFi governance tokens are reminding about the ICO boom. After the launch of COMP token, Compound Finance has replaced MakerDao from the number one position in DeFi. At present 1.63 billion USD is locked in Defi and Compound dominance is 38.98%. COMP effect has been magical for Compound Finance. Current COMP price is 235.03$ and it is almost 36% down from the all-time high of 372.79$. COMP reached its peak just a few days after its launch on 21st June, 2020.
Image Source - Total Value locked in DeFi & Compound dominance
DeFi Token insurance by Opyn
Opyn is a decentralized platform built on Ethereum. It provides insurance in DeFi. Opyn’s Convexity Protocol allows to create Call & Put Options. The options are executed through oTokens. Opyn offers American type Put options and the buyers can sell the products before expiry date. It is aimed to protect crypto assets against volatility and flash crashes.
COMP June'20 price movement from Coingecko
How to insure COMP?
Opyn has started to offer a Put option on COMP. The put option will expire on July 3rd 2020, 13:30 GMT+ 5.30. The strike price is 150$. That means you can buy a Put Option with $150 strike by paying some premium. The premium keeps on varying as per demand-supply. At present, the premium is 2.23$. Suppose you are holding a good quantity of COMP tokens but you are anxious due to the arbitrary price movement. The price discovery mechanism of a new token takes time. The CoinMarketCap rank of COMP is 23 and it has a market capitalization of $691,648,473. This is quite high for a new token. Will the price drop? You never know! With the help of Opyn’s Put option, you can insure your COMP token against price downslide (below 150$). Obviously the scope of the so-called insurance is not very broad as this is an experimental synthetic product. Once you buy Opyn’s put option, you get the right to sell COMP on or before the contract expiry date of 3rd July, 2020. A right is a right and not an obligation. If you don’t want to sell, you can hodl COMP happily. The buyer of a put option receives oTokens (oCOMPp here). You have no need to deposit COMP to the protocol now. These tokens provide you tokenized right to sell COMP at 150$. oCOMPp can be traded on Uniswap any time before the expiry date. But how are you assured that you will be able to sell COMP at 150$? Opyn keeps 150 USDC crypto collateral for every put option to avoid any liquidation risk. Now suppose, you buy the put option and COMP price drops to 10$ (below strike price). Holy hell! Such things happen in crypto. The put option comes out as your saviour then. It allows you to sell your COMP at 150$. You just need to send your COMP and oCOMPp to the protocol to receive 150 USDC. If the COMP price does not drop before the contract expiry date, your loss is only 2.23$ (the premium which you paid) per contract. Win-Win situation!
It is true that DeFi is a happening field. But the governance tokens were not supposed to be priced so high. Some days ago, even the Compound Protocol team said that they really didn’t expect COMP would be traded with such high price. Ultimately the market dynamics decide the price. Earning insane APY through yield farming has become a crazy game today. I’m not sure how long it’ll last but the decentralized governance model of DeFi is definitely path-breaking. The rising interest in the governance of DeFI protocols is positive for the crypto industry. Futures & Options lead to balanced price discovery and stability. Hope these DeFi tokens discover their true prices quickly. Till the time, watch out the traction.
Note: The images (if not cited) are created by the author. You can follow the author on twitter.