Bringing the same efficiency that exist in the traditional financial system to the crypto economy

Problem

In the traditional financial system there are trillions of dollars worth of derivatives and financial contracts to help investors manage their risk to an asset. In order to help grow the crypto economy we would need to bring the same efficiency and tools that exist in the traditional financial system to the crypto economy.

Solution

Seglos provides a smart financial contract between a user who wants to increase their exposure to the exchange rate of ETH/USD and another who wants to eliminates their exposure.

Our innovation is in our use of crypto currency for margin and settlement instead of USD, which is currently in short supply in the crypto economy.

Additionally the application is executed entirely on the Ethereum blockchain using smart contracts. This allows our solution to inhere the security, anonymous and trust of the Ethereum blockchain.

Implementation

A contract is created by having a speculator and a hedger send a certain amount of ether to an Ethereum smart contract address.

A speculator is a user who want to increase their exposure to the price of ETH/USD. (if the price of Ether moves up or down 10% the user would make a 20% profit and/or loss)

A hedger is a user who wants to eliminate their exposure to the price of ETH/USD. (if the price of Ether moves up or down they would hold their initial USD value)

From here the exchange rate of Ethereum can either increase or decrease. Below is a visualization of the data in the smart contract which keeps track of how much Ethereum belongs to each party as the exchange rate changes.

Exchange Rate Increases

①

In this scenario the exchange rate of ETH/USD stands at $100 when the contract was created. Both parties have 1 Ether, so they have $100 worth of wealth.

②

Exchange rate of ETH/USD increases to $110.

The rules of the smart contract dictates that the wealth of the Hedger always remains at $100 while the Speculator takes on all the profit and loss.

③

So we transfer the underlying asset, Ether, from the Hedger to the Speculator to make both sides whole.

Now the Speculator has doubled their profit, from $10 to $20, and the Hedger’s wealth is pegged to the USD at $100.

Exchange Rate Decrease

①

The same mechanic also works when the exchange rate of ETH/USD decreases. Here we have the same setup with the Speculator and the Hedger both having 1 Ether.

②

The exchange rate of ETH/USD decreases to $90

The rules of the smart contract dictates that the wealth of the Hedger always remains at $100 while the Speculator takes on all the profit and loss.

③

So we transfer the underlying asset, Ether, from the user to the Fund to make both sides whole.

Now the Speculator has doubled their loss, from $10 to $20, and the Hedger’s wealth is pegged to the USD at $100.

Closing the contract

Once the contract closes the smart contract will return the Ethereum to the user and the Fund according to their profit and loss.

Technical details of the smart contract: URL

Seglos financial contract market place: URL

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