In this article, we compare using Bumper with Put Options and examine its advantages for DeFi traders.
In the traditional finance world, Put Options contracts are commonly purchased by investors to hedge against falling prices.
An investor might use them when he believes that the market has become too expensive and is likely to see a decline in price.
Buyers purchase Put Options by selecting a contract offered by a seller which has a specific strike price and expiration date. Buyers pay a premium to the seller up front for their Option. There are no other costs to the buyer, although some platforms may charge additional fees when opening a contract.
A Put buyer has the right to sell the asset at an agreed strike price if the market declines below this level on a specific expiry date (this is called being “in-the-money”).
However, should the Put Option close above the strike price, then the option is considered “out-of-the-money” and expires worthless. In other words, the buyer loses the premium they have paid, but there are no other obligations.
American Options allow the contract buyer to close their position at any point before the expiry time, whereas European Options have a fixed expiration date.
In-the-money Calls and Puts generally allow users to respectively buy or sell a tranche of the asset at the strike price, or take a cash-settlement where the profit is settled without the transfer of the underlying asset.
Bumper is a novel DeFi protocol which allows a user to take out a position with a protect the floor price for crypto assets they hold, claiming stablecoin if it falls below their chosen floor or withdrawing their original asset if above.
To open a position, users select a floor (similar to a strike price) and a term length before locking their crypto into Bumper.
If the price finishes below the chosen floor at term expiry, then the user exits the protocol claiming stablecoins worth the value of the floor, leaving their protected crypto behind in the Bumper protocol.
Conversely, if the price finishes above the chosen floor, then the user simply closes, taking back their token(s), minus the premium.
Users can choose to renew their position, after initial term expiry or they may cancel their position prior to term expiry and be returned their principle asset, providing traders with flexibility.
Premiums are charged for opening a protection position, and are retrospectively and incrementally calculated, based largely on the measured volatility in the market during their term.
Users must also hold the protocols native BUMP tokens to open a position, which are bonded, or locked into the protocol, and released on exit.
Options desks have started to spring up in the crypto world, most notably on centralised exchanges including Binance, OKX and FTX, alongside some standalone Options desks, such as Deribit.
To use most of these platforms, you’ll need to complete Know Your Customer (KYC) checks, and citizens from restricted countries (including the USA) are generally not allowed to trade, although DeFi Options desks such as Hegic and Lyra don’t require ID verification.
Crypto Options platforms typically allow premiums to be paid using a small number of currencies, most often in BTC, ETH and USDC, and almost universally, in-the-money Options are cash-settled.
Put Options have long been recognised as a sophisticated method of hedging against downside volatility, and it’s tempting to regard Bumper in the same manner.
However there are significant differences between buying Options contracts and opening price protection positions using Bumper:
Bumper protects specific assets which are held in your wallet, whereas Options do not require users to even hold the underlying asset.
This is fundamentally what makes Bumper specifically a protection protocol rather than an Options desk which can be regarded as a “bet” on price movement.
Bumper provides a superior alternative to hedge against downside volatility, where traders can capitalise on being paid out in USDC at a protected price floor for capital preservation or to re-accumulate their principal asset at lower prices.
With Bumper you choose your strike, the position size and start date. This means you can enter the market, and exit, on your terms.
The availability of Put Options depends on whether there are sellers offering these options in the market at the specific strike price and expiry date you are interested in. Different options contracts with varying strike prices and expiration dates may also have different levels of liquidity.
Bumper deducts premiums fractionally from the entire pool of protected assets, and these are applied based on measured volatility during the protection term.
Users pay fixed premiums in advance on Options desks, which are generally set by the sellers (there are some exceptions where premiums are set by the platform). This can be disadvantageous to buyers, who are unaware of the pricing methodology used, and thus don’t know whether the premium represents good value.
In the Bumper protocol, whilst the specific premium is not known up-front (being based on measured price action during the term), the methodology used for calculating premiums is known, and enforced by the smart contract. An estimate of expected premium is calculated at the point a position being taken.
Some (not all) Options desks offer leveraged trading, which can amplify profits - and losses, but require a margin account to be funded by the user.
As Bumper is protecting specific assets, leveraged trading is not available, however future versions or extensible future applications may build in such a feature.
Bumper allows users to choose a protection floor between 50% and 99% of the protected assets current price.
Options desks allow users to purchase contracts which may be in, out or at the money, although there need to be sellers who will offer and fulfil contracts at these levels. On most crypto options desks, lack of available sellers results in a tight range of spreads in both directions.
The table below outlines the most main fundamental differences between Bumper and buying Put Options.
Bumper differs significantly from using Put Options to hedge a position.
In fact, most crypto Options desks work solely on the principle of betting on a future price of a specified token, with crypto’s utilised solely for processing settlements and paying premiums.
This is in direct contrast to Bumper which directly protects the tokens which are locked into it, and thus makes Bumper attractive to crypto holders who require a solution to prevent losses due to declining prices.
In conclusion, those crypto enthusiasts requiring a simple form of value protection, that requires no additional capital, will find Bumper a more attractive solution than Options for hedging against price volatility.
Disclaimer:
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The latest simulation results measuring Bumper premiums and the true cost of protection
