Opium Network – a permissionless derivatives protocol – has teamed up with Aave to launch the DeFi’s first credit default swap (CDS).

 

The CDS contract enables users to exchange risk on Aave’s unsecured loan to DeversiFi, providing the lender (Aave) with compensation in the event of a default.

A protection mechanism against defaults on Credit Delegation loans is extremely valuable due to the under-collateralized nature of the credit line – a new and rare characteristic for a DeFi-based loan seeing as most are heavily over collateralized.

Credit Delegation on Aave

Aave’s Credit Delegation allows users to issue under-collateralized loans to a trusted party, at an interest rate set by the lender.

The lender deposits funds into Aave and creates a vault backed by the deposit. They then authorize a trusted borrower’s wallet address to draw funds from the vault, under conditions enforced by an Open Law Lending Agreement.

Privacy-preserving L2 DEX DeversiFi drew the very first credit line, borrowing 20 WBTC against a $500k USDC position from Aave.

How it works on Opium

Opium Network is facilitating the issuance and exchange of CDS contracts for DeversiFi’s loan through their “OEX-CDS-AAVE-CREDIT-5FEB-0.1CAP” market.

The CDS seller (an investor with capital) locks up collateral which would be paid out in the event of default. An upfront premium is paid by the CDS buyer (in this case Aave), with the current fair price of the premium being determined by the market.

Both the buyers and sellers of the contracts receive position tokens, which can be stored or exchanged outside out of the exchange.

In the event of a credit default, a payout is made to the CDS buyers (Aave) in proportion to the unpaid amount of the loan. In the case that the loan is fully repaid, the seller (an investor) retrieves their collateral while also keeping the premium paid for the CDS contract.

These particular CDS contracts come in increments of 0.1 WBTC, representing a fraction of the total size of the 20 BTC loan. If the lender wanted to offset the total risk of their loan, they would need to purchase 200 of the CDS contracts.

Opium Network

Opium Network is a decentralized protocol that facilitates the creation, trading, and settlement of any type of financial derivative.

A variety of derivative tools have been created on the platform to date, including futures and options contracts for ETH, gas prices and more.

We’ve previously covered Opium Network when they offered interest rate swaps for Aave lending rates through Swap.Rate along with some of the first DeFi token futures with BAL and COMP shortly after their launch.

The launch of the first DeFi CDS goes to show that Opium has a strong commitment to innovation, making them a rising project worth keeping an eye on.

While DeversiFi is highly unlikely to default on this particular loan, the premise for any lender to hedge their default risk using a permissionless derivatives exchange is one that speaks to the strength and maturity of DeFi’s rapidly maturing ecosystem.

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