Putting binary options on the blockchain brings certain improvements to the binary options market but carries new risks as well.
Last week, the Synthetix Exchange’s team announced an update to the entire Synthetix system called “Antares.” Antares matters because it brings improvements to binary options trading to the Synthetix Exchange. Through understanding the benefits and risks of this still new trading option, it’s easier to see where Synthetix is headed and what roadblocks stand in the way.
The Synthetix Exchange is a cryptocurrency exchange for all sorts of derivatives on the blockchain. Generally, a derivative is any sort of investment opportunity that allows you to experience the price movements of something like a stock without actually holding that stock. With the help of smart contracts and a technical feature called a decentralized oracle, Synthetix is aiming to offer all sorts of derivatives on the blockchain so they can be traded peer-to-peer. In other words, brokers will no longer be needed.
A more general way of understanding Synthetix’s offering is to say that they provide cryptocurrency traders with synthetic assets, which I’ve already mentioned in a previous post. Generally, a synthetic asset can be a future, option, or anything else that fits the definition of a derivative that tracks the price of a related asset that’s more tangible, like a stock or precious metal.
Until the Antares release, the only synthetic assets that Synthetix supported which weren’t cryptocurrency-related were fiat currency derivatives, gold derivatives, and a few that tracked the movements of popular stock indexes.
Now a whole new market is opening up with Synthetix already holding roughly 1/6 of the DeFi market’s total value and more if only derivatives-focused products are counted.
That market is, as mentioned above, binary options.
Outside of the blockchain world, binary options are trades which you either win or lose, as their name suggests. A prime example of a binary option would be: “will Tesla reach $2000 a share by tomorrow?”
Overall, most binary options are priced between $0–$100 a share, and in this case, if you bought three shares, that would signal that you believe Tesla will reach that price by that particular point. If, however, you place a sell order, that would mean that you’re betting on the event failing to come true.
Here, it’s also important to note that while the trading period for a particular option is open, its price can move anywhere within the range mentioned above based on how many traders are buying it and how many are selling it.
Additionally, these share prices are common but not the rule. Different exchanges and platforms can offer all sorts of different options pricing.
Traders typically trade in binary options because they have fixed profit potential as well as a fixed risk. In all cases, an option either pays out completely or it doesn’t, meaning that it’s a 50/50 split.
Additionally, many binary options only last for a single day, which makes them attractive for those looking to make a quick profit in a short amount of time.
Binary options are historically susceptible to fraud and corruption.
Before the blockchain, a large part of the global binary options niche operated outside of the eye of financial regulators, and today, it still does. That means that with no regulatory oversight, there is no guarantee that your option will payout or that the fees you pay won’t change at a moment’s notice.
As you may already know, with Bitcoin’s launch, came the introduction of what is popularly termed “trustless trust.”
All transactions on a blockchain are transparent (unless it’s Zcash or something similar) and no middleman is needed to push them through.
Instead, a system like Bitcoin or Ethereum organizes users like miners around the common goal of facilitating all transactions as a group. These users don’t have to trust each other at all. Instead, they put their faith in the idea that the system will continue to run as long as they do their jobs.
Hence the idea of a new form of trust called, “trustless trust.”
How does trustless trust+Synthetix improve binary options?
Traditional binary options trades are facilitated by brokers, some of which can hold good reputations like Fidelity, while others work more under the table.
In both cases, these institutions are looking to strike the ideal balance between making a profit and keeping you around. This can play out through brokers pricing their options trades above those that are available on the regular markets.
In other words, the richest players who are considered “accredited” typically get the best deals on binary options.
The blockchain and by extension, exchanges like Synthetix level the playing field by allowing everyone to have the same pricing options regardless of their level of capital.
Furthermore, since Synthetix is what is called a “decentralized exchange,” any trading fees are sent directly to SNX token holders. Through staking their SNX, which means leaving it connected to the exchange in a certain way, these holders are facilitating all trading instead of a single business doing the same.
It is these SNX holders, in turn, who will eventually decide the future policies that govern binary options trading. This means how they are priced, how long each option can trade, and everything else. Currently, the network is on its way towards being fully decentralized, which means that developers are working out some kinks before they allow for this “decentralized governance.”
All in all, once the transition is completed, with Synthetix, the user will truly be in control of every aspect of trading.
Are there any other benefits to binary options on the Synthetix Exchange?
In short, yes.
Anyone can theoretically create a binary options trade on Synthetix.
To do so, you need to first buy at least $1000 sUSD, which is Synthetix’s own stablecoin that’s based on the US Dollar. The easiest way to do so is to swap Ether for it since it’s an ERC-2o token (a cryptocurrency hosted in Ethereum-based smart contracts).
From there, you simply follow a short series of steps beginning with specifying what the question or situation for the option is: i.e., will Ether reach $300 a coin by tomorrow?
Next, you’ll need to specify when the option runs out or its maturity date, alongside a few other variables like the bidding period vs. the trading period.
What this means is that you need to define exactly how long people have to buy your binary option before the trading period, which is the time they have to settle their trades after the option expires (matures).
All in all, Synthetix appears to have made creating and trading binary options as easy as a few clicks. If you’re interested in more of an in-depth look into the process, check out SIP-53, which is like a set of community guidelines for how binary options are created and managed.
Just like any other investment, binary options carry their own unique risks.
In the case of traditional markets, this comes down to potentially exorbitant fees and opaque pricing structures, as mentioned above. With Synthetix, these risks shift to new areas like smart contract hacks which can manipulate options markets.
Picture the DAO Hack of 2016 today.
If you’re not familiar with that event, head here, where there’s a great explainer on it. In any case, what the DAO hack showed was that smart contracts are flawed due to their immutability. Unlike traditional software, once they go live, it is nearly impossible to push through improvements(patches) if weaknesses are discovered.
In 2016, an organization called “the DAO,” which acted as a smart contract-driven investment fund that was run by its users went live with serious weakness in its “recursive call function.” What this amounted to was an unforeseen ability for anyone to transfer a massive amount of funds that didn’t really belong to them to smart contracts that they could eventually access.
In the end, the hacker used this security hole to attempt to give themselves the equivalent of $50 million in Ether. While in the end, their efforts were essentially rolled back, doing so meant forking (splitting) the Ethereum network, which brought allegations of the network being more of an oligarchy of sorts than a decentralized utopia.
By all accounts, the only way to prevent such an event (or something similar) from occurring with other smart contract-related ventures is to perform extensive audits before launching them. These audits can run anywhere between $4000-$250,000 and beyond.
While many media sources have panned them as very expensive or something similar, smart contract development groups should ask themselves: isn’t any of these amounts worth it to prevent something much more costly?
For now, audits seem to be the best way forward and Synthetix did have them done last year.
Where does all of this leave us/what’s next?
The Synthetix Exchange is an exciting new opportunity for crypto traders of all levels. In sharing my thoughts on it over a series of posts, my aim is to help you become aware of the possible upsides and downsides of its trading options. Keeping that in mind, in my next post on Synthetix, I’ll dig deeper into “synths” including blockchain-based binary options and why they matter.
For now, however, consider this an introduction to one of crypto’s newest trading opportunities and if you like my context, let me know here or on Twitter!
Disclaimer: None of this is meant to be financial advice. I’ve lived and worked in crypto since 2017 and I aim to merely educate people on the upsides and downsides of all sorts of projects. Additionally, I’m a student just as all of us are. Therefore, my thoughts on projects evolve naturally over time as I learn more about them.