Pre-Proposal - Inveth & Dash Options

John Quarnstrom

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Inveth Pre-Proposal

Inveth is a cryptocurrency options exchange that offers users the ability to conduct options trading through Ethereum Smart Contracts. These smart contracts handle both the escrow and business logic for options transactions. Furthermore, each contract must be fully collateralized by the underlying asset - this is verifiable through the blockchain, and provides full confidence to buyers and sellers. Inveth has already developed PoC for Ethereum options, and we intend to implement Dash options next.


Overview of Financial Markets

Traditional commodity exchanges, including the CBOE (Chicago Board of Exchange) and CME (Chicago Mercantile Exchange) offer the ability to trade options on commodities.

Options are contracts in which the buyer has the right, but not the obligation, to buy or sell an underlying asset to the seller at a fixed rate, sometime in the future. The buyer pays a premium (which the seller receives immediately) for the rights to the options contract. If and when the buyer chooses to exercise an option, the seller is obligated to follow through, based on the terms of the contract.

These financial tools enable buyers and sellers to hedge their existing market exposure, or generate income on their holdings by writing (a.k.a. selling) options and speculating on price movements. There are two unique types of options - calls and puts. Call options allow the buyer to purchase an underlying asset at an agreed upon rate, sometime in the future, while put options allow the buyer to sell an underlying asset at an agreed upon rate, sometime in the future.

Purpose

There are three primary groups within the Dash network that would benefit from this tool.

1. Merchants
- Dash Evolution merchants will need a way to hedge their market exposure. Traditional currencies are usually stable and provide a means for businesses to hold them in a bank account, and spend them when required. Holding onto Dash for months could prove disastrous to businesses, as their purchasing power and income could quickly deteriorate

Merchants can buy Dash put options to preserve income.
Merchants can buy Dash call options to preserve purchasing power.


2. Miners - Profits from Dash mining operations can fluctuate greatly. On May 1st, Dash was trading at $600. One month later, Dash was trading at $300.

Miners can buy Dash put options to guarantee their return on investment.

3. Investors - This group is responsible for providing liquidity to the options market. Writing options is a purely speculative move, but provides investors with a way to generate income on their cryptocurrency holdings and provide a helpful service to merchants and miners, whose businesses heavily rely on Dash.

Investors and hedge funds can generate income by selling call options, if Dash decreases in value.
Investors and hedge funds can generate income by selling put options, if Dash increases in value.



Organization

Inveth is led by four individuals, each with unique skills and experience.

John Quarnstrom, CEO
Founder of Inveth, developer of the ethereum call and put options protocols. Background in software engineering and decentralized application development.

Thomas Shivers, COO
Operations manager, background in cryptocurrency trading and portfolio management. Unique insight into digital asset management and global trading operations.

Britt Cagnina, CTO
Blockchain interoperability developer with strong knowledge of blockchain architecture, and business analyst for financial instruments.

Dragan Boscovic, CEngO
Engineering operations manager with a background in developing cross chain enablers and solutions, and Director of ASU Blockchain Research Lab.

Legal Compliance

United States businesses that are trading options for their business purposes, including merchants and miners, are allowed to buy and sell options. Likewise, US persons that qualify as “eligible contract participants” are allowed to sell options contracts.


Transmission of User Funds

The MetaMask extension is required to interact with the platform. Your ether wallet will pay the gas fees inherent to using a decentralized application - this includes creating Smart Contracts, sending TrueUSD, receiving TrueUSD, and creating an identity which Inveth will then grant access to. Furthermore, Dash options trader will need a personal wallet for Dash in order to buy and sell options contracts.

Inveth is developing a solution that does not enable the platform to control user funds. Once two users enter into an options contract, the code becomes law. There is no outside party or authority that can affect the outcome of an options contract. If a buyer decides to exercise his option, the seller is obligated to follow through on his obligations, by nature of fully collateralizing the contract with the underlying asset.


Timeline

A conservative estimate for the timeline of this project is as follows:

Month One - Dash call option protocol developed.
Month Two - Dash put option protocol developed.
Month Four - Call and put option protocol audited and tested.
Month Six - Dash options are live, trading is open to early access participants.
Month Eight - Dash options trading is available for general use.

Request

Inveth is requesting 500 Dash to develop and integrate two unique protocols for Inveth, one for Dash call options and one for Dash put options.

Funding will support the following:

  1. Bridge for transactions between Dash and Ethereum blockchains. 150 DASH
  2. Implementation of Dash bridge onto the Inveth platform. 50 DASH
  3. Legal expenses for conducting options trading activities. 50 DASH
  4. Auditing and security testing for each protocol. 200 DASH
  5. User experience and user interface development. 50 DASH

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Interested in hearing everyone's opinion from the Dash community and gathering feedback on this pre-proposal. Happy to answer any questions, and will be checking in each day over the next week or so.

Cheers,
John Quarnstrom
 
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Arthyron

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May 29, 2017
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Thanks for your pre-proposal, giving Dash users the ability to hedge against the volatility of the crypto-market and open up other income opportunities for more savvy investors would be a great boon to the ecosystem, so what is the benefit to your team in creating this project? What kind of fees/cuts will your platform take from transactions (I would assume the goal would be to become self-funding)? What would you say is the benefit of this service to Dash in particular beyond helping general users--especially those whose businesses depend on stable prices--keep and grow their profits? Will there be some sort of Dash exclusivity or other incentive to make Dash an attractive option to users and investors? How long would that exclusivity/incentive/discount exist? Given that every transaction in cryptocurrency is considered a taxable event in the US, would your platform include automation services for facilitating tax reporting for users?
 

Argon31

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Irrespective of who builds them, crypto options are coming on many exchanges, much like margin trading.

I dont see the point of paying you 500 dash for building a feature for your own business.

If you came back with this already built, with a discount for dash users, it might find support.
Otherwise, this doesnt look like it will deliver roi for us and is unlikely to gain support.

However, thank you for your professional proposal.
 
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John Quarnstrom

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Thanks for your pre-proposal, giving Dash users the ability to hedge against the volatility of the crypto-market and open up other income opportunities for more savvy investors would be a great boon to the ecosystem, so what is the benefit to your team in creating this project? What kind of fees/cuts will your platform take from transactions (I would assume the goal would be to become self-funding)? What would you say is the benefit of this service to Dash in particular beyond helping general users--especially those whose businesses depend on stable prices--keep and grow their profits? Will there be some sort of Dash exclusivity or other incentive to make Dash an attractive option to users and investors? How long would that exclusivity/incentive/discount exist? Given that every transaction in cryptocurrency is considered a taxable event in the US, would your platform include automation services for facilitating tax reporting for users?
Hello Arthyron. These are great questions. We believe the Robinhood model is most appropriate here, and do not plan to charge tx-fees (outside of inherent blockchain tx-fees). With that being said, we may eventually offer leverage or ancillary services (consultation, data feeds, advanced charting, etc.) to support our business model.

Aside from the business use-case of Inveth, we will apply as a SEF and DCO with the CFTC to onboard more market participants that want to speculate on digital assets. The benefit to Dash, in this case, is the influx of institutional investors taking physical positions in Dash (as many of our financial contracts require collateralization of Dash - this means that in order to sell calls or exercise puts, users must own Dash). Hedge funds love derivatives, so we expect a large demand for the underlying asset itself. This should help spread awareness of Dash within the finance industry as well.

We intend to develop Dash options first, as far as exclusivity goes, however we believe limiting the Inveth platform to Dash options would do more harm than good. The end-users, aside from businesses, would include hedge funds ... and if they can only trade Dash derivatives, they would have no interest (it would be similar to saying they could only trade APPL or MSFT). However, we will have the infrastructure to educate and on-board Dash businesses in place from an early stage, and the main incentive is still 0 transaction fees. There may be an onboarding fee for processing and registering new users, which we would specifically waive for Dash related business / individuals ... however our compliance team is still organizing that right now.

Yes, our platform will monitor user transactions and generate tax reports (for hedging purposes, this is taxed as ordinary income - for speculative purposes, short or long-term capital gains tax).

Thanks - let me know if you have any other questions.
 

John Quarnstrom

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Irrespective of who builds them, crypto options are coming on many exchanges, much like margin trading.

I dont see the point of paying you 500 dash for building a feature for your own business.

If you came back with this already built, with a discount for dash users, it might find support.
Otherwise, this doesnt look like it will deliver roi for us and is unlikely to gain support.

However, thank you for your professional proposal.
Hello Argon. Thank you for your feedback, and allow me to clarify. Inveth will apply as an SEF / DCO and offer Dash derivatives as a regulated commodities exchange. Economically speaking, this will increase demand for Dash by enabling U.S. financial institutions to legally trade derivatives ... and many of our contracts are physically-settled, meaning users will require a physical position in Dash to sell calls and exercise puts. Because Inveth requires a physical position in Dash to trade, demand for the underlying asset will rise.

As mentioned in the previous post, we intend to operate Inveth similar to Robinhood, with 0 transaction fees - this business model is something we only recently decided upon, and believe it will provide a great incentive for Dash users to trade on our platform.

Please let me know if this addresses a few of your concerns. Thanks.
 

Arthyron

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Thanks - let me know if you have any other questions.
Thanks for answering most of my questions. One you left out pertains to your business model. With no fees on transactions, etc, how does your team get to a place where you're self-funded? What is your incentive to build and maintain the platform? Will you rely on ad revenue or what? Maybe I'm just overlooking something obvious, but I'm not understanding how your team plans to profit from this.

One additional question is that having active derivatives platforms that cater to Dash is great, but if your plan is to add other cryptocurrencies as well, what is the incentive to Dash besides being the first? Why are we being asked to fund your project when others will presumably be added without any cost to them (since, let's be honest, most teams are not self-funded the way Dash is and rely purely on donations)? First mover advantage is great, but if you're seeking funding of this magnitude, I suspect most Masternode Owners will want to see more benefit to the Dash network in particular instead of a platform that quickly enriches competitors in a short period.
 

Argon31

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Dash should not be paying to build something that you have to build anyhow.
Are any of the other coins paying for this?
 

John Quarnstrom

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One you left out pertains to your business model. With no fees on transactions, etc, how does your team get to a place where you're self-funded? What is your incentive to build and maintain the platform? Will you rely on ad revenue or what? Maybe I'm just overlooking something obvious, but I'm not understanding how your team plans to profit from this.
Offering leverage for a fixed fee (this is primarily for speculative users, not for business-oriented hedgers). We would also offer other tools ... the first iteration of the platform would offer physically-settled options. The second iteration would likely offer futures contracts. We foresee a need to bring on Commodity Trading Advisors (CTA's) to offer trading advice to clients. These CTA's would charge consultation fees.

One additional question is that having active derivatives platforms that cater to Dash is great, but if your plan is to add other cryptocurrencies as well, what is the incentive to Dash besides being the first? First mover advantage is great, but if you're seeking funding of this magnitude, I suspect most Masternode Owners will want to see more benefit to the Dash network in particular instead of a platform that quickly enriches competitors in a short period.
From my understanding, DASH is primarily attempting to become a payment processing platform. If this is a primary goal of the platform, there must be financial tools in place to support this. Evolution is a step in the right direction, but without the underlying hedging tools to support accepting Dash as a means of payment, it will never gain any traction from large retail clients.

How does the Dash network currently intend to support Dash Evolution merchants, if there are no tools in place to hedge volatility risk? No business owner with any common sense will accept a coin as payment that has been proven to fall 50% in less than a month's time span (and I'm referring to March 1st, 2018 - $600 to April 1st, 2018 - $300).

As mentioned in the original post, options contracts would benefit merchants, miners, and other miscellaneous businesses that involve handling physical Dash. I would be curious to know if you / Dash network would like to see other things from this project? We can always work to support that.

Why are we being asked to fund your project when others will presumably be added without any cost to them (since, let's be honest, most teams are not self-funded the way Dash is and rely purely on donations)?
We are asking Dash to fund the project, because we are starting with Dash first. Adding new coins requires security auditing, and we wouldn't be able to do so without self-funding mechanisms ... which means there would be inherent exclusivity in our project for BTC-derived chains. As mentioned before though, my theory is that this will ultimately do more harm than good to the Dash network.

I am curious, do you believe the ask is too much (you used the word "magnitude")? Security auditing, for the DASH protocol alone, will cost close to 350 DASH (at April 1st, 2018 price of $300) ... if options contracts were available, we could hedge against the DASH received for this project, but because there are currently no tools in place to hedge DASH (legally as a US person) I'm taking a risk-averse approach and asking for 500 DASH, assuming it will crash to $300 (and of course, hoping it will increase so we have more funding to work with). If we ask for less DASH, and DASH crashes, we won't even have enough to audit the protocol.

If security is not a huge concern for the Dash network, however, then we could simply self-audit the protocol, take the risk, and ask for a lower amount of funding ... but that seems like a terrible plan and something I want to avoid entirely.
 

John Quarnstrom

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Dash should not be paying to build something that you have to build anyhow.
Are any of the other coins paying for this?
Are you suggesting we lower the ask to 250 DASH, which would solely support logistics of launching the platform, and not actual development?

And we have not approached other communities yet, as Dash is primarily business-focused while others are more technology focused.
 

Arthyron

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@John Quarnstrom -- Ok, your funding and compensation for building/providing the platform and tools makes sense, thanks for clarifying.

Certainly some means of hedging will be important--especially for large retail clients, as you said--but there are a number of such platforms coming to fruition and more will follow as Cryptocurrency gains a larger market. So in order for this to be something worthwhile for the DAO to fund, your service would have to provide some benefit to the network over and above competing crypto-derivative services which are not seeking funding from us in order to start up. I don't believe you should cut corners in order to build a solid platform, but the arrangement has to make sense on the business end for Dash as well, when there are any number of other projects competing for funding every month.

So as I currently understand it, the primary benefit to funding *your* platform is to have that derivative/hedging layer of the Dash ecosystem already solidified by the time Evolution rolls out, which makes sense if you could safely/efficiently/effectively roll that out long before your competitors. We'd more or less be funding that accelerated entry in to that space. Suppose, though, some of your competitors are able to roll their platforms out just as fast--and there are other crypto-derivative platforms out there or on the way--what would the incentive be to funding your project for the network over and above other projects competing for funding when we know these other platforms will be built in the relatively near future? Do you see what I mean?

Perhaps the amount you're asking is a reasonable amount for what you intend to accomplish *in general,* especially if you want to do it *right,* but is it really of sufficient benefit to Dash to fund *your* platform when we don't have to fund your competitors and still reap their benefits? That's what you have to convince the DAO of when/if you put forth your proposal, and the higher the asking price, the more solid your reasoning has to be, the sweeter the pot, because we've been more or less maxing out the treasury with dozens of projects being left without funding every month.

I want your project to succeed because I want an exchange friendly to Dash ready to roll when Evolution drops, so help us understand why that platform should be yours in particular and why we should fund it.

Hmm, so you'd be focusing on BTC-derived chains, so does that mean BTC forks or coins that share BTC's codebase? All of them or just a select few? While that would probably include our largest "competitor" (BCH), that could be seen as somewhat of an exclusivity benefit. I think Dash can more than hold its own in a direct competition with the other BTC forks so a partial exclusivity could be a positive point to emphasize.
 

John Quarnstrom

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@Arthyron and @Argon31 - Thank you for the feedback.

The main point I want to emphasize is that Inveth is building a framework for physically-settled options. If you look at all the derivatives contracts on the illegal (95%+) and legal (CME/CBOE) markets ... they are financially settled. This means that you need twice the amount of capital to hedge DASH (instead of being able to sell off 100 DASH @ $500 ... you have to invest another $50,000* in capital to hold a hedged position in Dash). This is driving off any rational business owner / merchant from the Dash ecosystem. Traditional exchanges will not support Dash businesses in a friendly and straightforward manner (financially speaking).

We are the only group in the space focusing on this blockchain-intensive solution - a solution that allows companies to transfer their actual Dash to collateralize calls or exercise puts.
 
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Arthyron

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@John Quarnstrom -- Great, thanks for the clarification, that makes a lot more sense and I think is a great idea. So if and when you decide to come to a full proposal, you'll have to be very clear about the physical settlement and legal compliance aspect of your platform and educate MNOs who may not be familiar with the derivatives market as to why this is a very beneficial product for the Dash ecosystem. There are a lot of very finance savvy people in the community, but also a lot of people that are new to investing and finance, so you'll have to catch the latter up and explain how and why physically settled and legally compliant solutions are important for Dash moving forward. If you can manage to do that and really leverage the time-sensitive nature of the project, I think that will greatly improve your chances.

Something to consider, because we've lately had to evaluate dozens of proposals every month in addition to keeping tabs on the ones we've already funded to ensure that they're holding up their end of the bargain, a lot of MNOs have been having trouble devoting as much time and energy to the evaluation of each proposal to the extent that I personally believe they deserve and try to allocate. As such, the more concise you can make this educational/explanatory component, the better. Proposals that have a succinct video presentation introducing the team members and the project overview tend to do better than proposals that are just a wall of text. Another option--if you really want to go in to depth about the utility of this project--would be to seek out some of the popular news outlets in the ecosystem (Dash Force News, TaoofSatoshi's Cash Alternative TV, Craig Mason's Reasonable Crypto, etc) and conduct an interview to elaborate on your project. While it's not a guarantee, it will greatly improve your chances, and when you have a complex proposal which entails a lot of esoteric (to some, anyway) knowledge, that could win over some who might dismiss it because they don't understand it.

One other thing I'd emphasize is the utility to hedging and risk management to businesses of all types and not merely to speculative investors. The reason I mention this is that lately the focus with Dash has been on integrations and use cases. We've been trying to move away from the speculative side of cryptocurrency and the hype cycle and more toward stability and adoption, so try to emphasize that role of your platform more than merely increasing market cap or coin price or what have you.
 

John Quarnstrom

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@Arthyron These are some really good ideas! This project is fairly complex, so having a video and/or article would certainly help the average MNO. We will definitely touch on what you've suggested, and see about reaching out to a few news outlets in the meantime. Making a video sounds fun as well.
 
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Argon31

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Are you suggesting we lower the ask to 250 DASH, which would solely support logistics of launching the platform, and not actual development?
And we have not approached other communities yet, as Dash is primarily business-focused while others are more technology focused.
Thats your problem.
No, I am saying that you build your own platform with your money and come back when you have transactions, so Dash can subsidize Dash pairs.
We cannot pay for helping you startup your business.