In the past few months, we’ve seen a new wave of token models emerge surrounding DeFi governance.
In case you’re unfamiliar, the Simple Agreement for Future Governance (SAFG) is a simple, yet elegant token model that allows protocol teams in virtually any jurisdiction to distribute tokens to their users. These tokens are generally non-transferable and have no economic rights, solely representing voting power in future protocol changes.
While these tokens don’t seem attractive on the surface, the key reminder is that there’s nothing preventing a sufficiently decentralized governance group from lifting these restrictions or modifying the rights. They can add transferability. They can add economic rights or value accrual mechanisms. The token model is essentially dynamic based on the needs and wants of the overarching governance community.
However, it may take time for these networks to sufficiently decentralize themselves and bootstrap active community governance. We’re seeing this playout with Balancer and Compound in real-time. Native tokens are being distributed to users who participate. But these tokens can’t be transferred. They can’t be speculated on. There’s zero liquidity.
But the DeFi community is filled with smart people, and they found a loophole. Opium.exchange created derivatives of these non-transferable governance tokens that allow market participants to speculate on their future value.
We are very excited to announce PRE-MARKET for $BAL tokens of @BalancerLabs
First time in #DeFi https://t.co/4VxAz9kex3 introduces ZEPO:
a fabulous instrument that used historically as a smart way to create a secondary market or avoid investment obstacleshttps://t.co/sVImv1ZJnB
— Opium.Team (@Opium_Network) June 8, 2020
ZEPO is an options contract that replicates the price of an underlying asset.
Traditionally speaking, ZEPO contracts are popular in countries with significant barriers-to-entry and/or obstacles when transferring a specific asset. With ZEPOs, the purchaser of the option will always exercise the contract at maturity, making it identical to owning the underlying asset. On the flip side, the seller of the contract must sell the asset at maturity at the pre-defined price, effectively making them “short” on the respective asset.
Without getting too complex, the holder of the option has complete exposure to the price movement of the underlying asset – without actually holding it. In the case of Balancer’s tokens, ZEPOs are European-styled and Cash-settled, meaning they can not be exercised prior to maturity and must be settled in stablecoins (which is convenient as BAL is currently non-transferable).
Pre-Market Trading Live on Opium Exchange
Opium is a non-custodial decentralized exchange for derivatives trading. The team launched pre-market trading for BAL – Balancer’s native governance token – using the ZEPO framework. Prospective traders can now purchase ZEPO BAL contracts for lots of 10 BAL each with an expiration date (or maturity date) on July 1st. This means 1 ZEPO equals 10 BAL worth of value which must be settled on July 1st.
If there’s still no Uniswap market for BAL at maturity, meaning the tokens are still non-transferable, the oracle price will report 0.6 DAI per contract – the price at the initial offering of the contract. Therefore, it can be risky now to purchase BAL contract and make a bet on the price appreciation of these tokens when there are no actual liquidity or secondary markets at expiration.
It’s also important to note that the ZEPO contract payout is capped by the initial margin of the contract seller, currently set to 2 DAI per BAL. Since there’s no secondary market right now, these parameters may be subject to change in the future upon further evaluation.
With the SAFG model continuing to grow in adoption by major DeFi protocols, we may see these types of derivatives products proliferate in the coming future. ZEPO contracts provide a simple, unique workaround the non-transferability of these new governance assets and ultimately, allow the DeFi community to speculate on their future value. Over the next year, it’ll be interesting to watch how the restrictions and utility of these DeFi governance tokens evolve.
Will we see Balancer governance vote to lift the transfer restrictions in weeks, months, or years? The same goes for value accrual mechanisms and other utility functions for these tokens. It’s early in DeFi governance and there’s a lot of unknowns, but it’s extremely exciting to watch unfold.
For those that missed it, we’re actively participating in Compound Governance. With the token distribution set to go live later this month, users who deposit and borrow capital from the protocol will earn COMP tokens. If you’re indifferent about participating in Compound governance or simply too busy to keep up with all of the proposals, you can delegate your COMP tokens to our official governance wallet: DeFiRate.eth.
If you’re interested in trading BAL ZEPO contracts, you can do so by visiting the Opium Exchange BAL market here.
To stay up to date on the latest developments of Opium’s ZEPO contracts and further releases (like more options with longer maturity dates), you can follow the team on Twitter or join their Telegram to participate in discussions!
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Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.