Hegic (HEGIC): DeFi Options Trading Protocol On Ethereum

Introduction to Hegic

Founded in January 2020 by an unknown developer carrying the pseudonym Molly Winterminute, Hegic is an on-chain options trading protocol built on the Ethereum network. Using specialized smart contracts known as hedge contracts, Hegic enables users to buy and sell decentralized options contracts for crypto assets. Hegic’s crypto options contracts offer holders (a.k.a. buyers) the right to buy and sell an asset at a certain predetermined price (known as a strike price), and obligate writers (a.k.a. sellers) to buy or sell an asset during a certain period of time. The Hegic model incorporates decentralized finance (DeFi) logic into crypto options trading in order to provide a product that offers functionalities beyond the traditional standards for financial derivative products. 

Hegic’s innovative DeFi approach to derivatives leverages hedge contracts — which are smart-contract-based analogues to traditional call or put options — on assets like ETH or wBTC. Hegic users are able to hedge crypto investments to better protect the value of their crypto assets. To fund these hedge contracts and provide platform liquidity, Hegic relies on a liquidity pool mechanism similar to those found in many decentralized exchange (DEX) protocols. Liquidity providers that deposit funds into Hegic liquidity pools facilitate the platform’s trustless options trading and can earn rewards for doing so.

Hegic Platform Structure and Liquidity Pools

Users can participate in the Hegic platform primarily as buyers of hedge contracts or as writers of hedge contracts.

First, Hegic users can purchase call and put options for certain Ethereum-based assets. This can be advantageous for many reasons. For example, a decision to participate in an option call may benefit your overall investment strategy, or mitigate some form of risk. Most traditional and crypto options trades are predicated on there being individual holders and individual writers in a transaction. Hegic’s liquidity pools, however, are designed to accumulate liquidity from many liquidity providers, or writers, which reduces downside risk and offers deep liquidity.  

Second, those who find the potential returns of writing hedge contracts to be attractive enough may “write” both call and put options on the Hegic platform by allocating various assets like wBTC or ETH to their respective liquidity pool contracts in order to generate yield. Hegic’s liquidity pools are non-custodial, which means that nobody is meant to have access to the writer’s funds except for the holders who have purchased the hedge contract. 

Hegic’s liquidity pool mechanism means that hedge contract writers’ assets are pooled. Therefore, the downside risk is distributed amongst all the liquidity providers. Similarly, the monetary rewards for writing a hedge contract are split between all of the liquidity providers as well. Liquidity providers earn the HEGIC LP token in proportion to their contribution to the liquidity pool, as well as a share of the pool’s premiums, which are paid in ETH or wBTC.  

Another unique feature of Hegic’s liquidity pool mechanism is that, as opposed to traditional models that rely on individual writers, a Hegic liquidity provider may allocate funds to many hedge contracts simultaneously in order to diversify their liquidity allocation. This model is designed so that, over the long-run, a liquidity provider’s returns on the Hegic platform might exceed the returns of a traditional individual writer. 

When hedge contracts expire, both a premium and a settlement fee are generated in ETH or wBTC. The premium is paid back to liquidity providers, while 100% of the platform’s settlement fees are distributed proportionately among all HEGIC token holders. These fees are accumulated and distributed quarterly. Both premiums and settlement fee rewards are paid out in ETH and wBTC, though Hegic also relies heavily on its own native token, which provides some unique benefits to holders.

HEGIC Token

HEGIC is an ERC-20 token that is primarily used for distributing rewards and as the platform’s general utility token. Though users can earn rewards in the form of ETH and wBTC, liquidity providers and platform users can also earn HEGIC and get special benefits by holding the token. Some of these benefits include: 

• By staking at least 880,000 HEGIC, token holders can claim one of the 3,000 available staking lots, which can make them eligible to receive an equal proportion of Hegic’s settlement fees denominated in ETH and wBTC and distributed quarterly. 

• Owners of a staking lot also receive rewards in HEGIC from bonding curve fees.

• HEGIC token holders are eligible for a 30% discount when purchasing hedge contracts on the Hegic platform. 

• Hedge contract writers who also hold a sufficient amount of HEGIC tokens are eligible for priority unlocks of their liquidity. 

• Liquidity providers earn HEGIC in addition to premiums paid in ETH and wBTC.

HEGIC has a fixed maximum supply of approximately three billion HEGIC, which is released according to a curated schedule through a bonding curve smart contract. Users can either purchase HEGIC on an exchange, or directly through the bonding curve. The total HEGIC supply is set to be distributed as follows:

• 3% distributed in an Initial Coin Offering (ICO) with a bonding curve schedule

• 22% to provide liquidity to the bonding curve contract

• 20% to reward early project contributors

• 10% to the Hegic Development Fund

• 40% to distribute as rewards to liquidity providers and options holders

• 5% to provide liquidity to a decentralized exchange (DEX) liquidity pool for public availability. 

Hegic Platform Governance via gHEGIC

Announced in April 2021, Hegic has unveiled plans for a gradual governance launch to reward platform users and enable active members of the Hegic community to participate in platform governance. The gHEGIC governance token was conceived in order to separate the Hegic platform’s governance and utility mechanisms from one another. gHEGIC tokens will be distributed to reward long-term platform users, HEGIC holders, liquidity providers, and active members of Hegic’s Discord channel. In order to initially receive gHEGIC tokens, a user must satisfy at least one of the following requirements:

• Bought at least four hedge contracts

• Offered more than one ETH or 0.05 wBTC to Hegic liquidity pools for over 100 days without making any withdrawals

• Been an active Discord user

• Participated in the HEGIC ICO bonding curve sale and not yet sold any HEGIC tokens 

Holders of gHEGIC tokens will be able to participate in community governance of the Hegic platform by voting on improvement proposals that involve rates, settlement fee sizes, supported assets, and other platform-specific decisions.

Future of Hegic’s Crypto Options Trading Platform

Hegic has established an options-like financial instrument updated for the Ethereum-based DeFi and cryptocurrency ecosystem. It helps spread downside risk and potential premium gains amongst hedge contract writers who can pool their liquidity together and can provide liquidity for multiple hedge contracts simultaneously — thus making it possible to increase efficiency and diversify liquidity.

 In the spirit of DeFi, Hegic provides a non-custodial, smart contract-enabled options trading platform that offers trustless automation and on-chain settlement. Hegic’s structure enables users to participate in its crypto options trading without increased autonomy and privacy. The platform also gives back to its user base by distributing 100% of settlement fees amongst HEGIC token holders — rewarding them rather than charging them for using Hegic. While initially only providing support for ETH and wBTC, Hegic plans to expand its offerings to various assets in the Ethereum ecosystem and further refine its hedge contract capabilities.