It’s been some time since Defi saw some real innovation. Uptil now we have seen these Defi applications - Money Markets, AMMs, Collateralized Debt Position (CDP) style stablecoins, rebasing tokens, Principal tokens and Yield tokens, bonding, restaking,  Perpetuals and some few others. All of above mechanisms are core innovations because these are sustainable business models formed without much reliance on any external entity. Some reliance of external parties is needed as every one of these systems have some edge cases which need readily available keepers or profit seeking entities willing to act to stabilise the system in case of divergence.

Everyone of above mechanism have a capability to generate revenues and income in itself just like corporations achieve cash flows through services or products. None of them need a reliance of any fiat asset or RWA to generate income. Instead everyone of them can stay in the realm of the crypto or on-chain world and can generate revenues in a censorship resistant manner. 

But the space has been just recycling and forking these concepts with some minor tweaks for the past 3 years now. It’s the same thing again and again and being repeated across different blockchains glamorised in a form of new token, incentives, some addition of long tail assets, addition of RWAs etc.

People have now started feeling that whatever was possible in Defi has happened and now it’s unlikely that a new sustainable business model will come.

But we at Autonomint have built something that has the characteristics of becoming a sustainable business model over time. By sustainable business model I mean, something which can generate revenue and cash flows by satisfying some unmet needs of the market and without any token reliance.

I would like to start by stating the example of Maker DAO.

Maker introduced a mechanism of collateralized Debt position which allowed users to cheaply mint their stablecoin DAI by depositing a crypto collateral. Maker created an on-chain central bank that can mint money at the cheapest rate possible depending on market demand. Although this is still far away from country central banks which are able to mint fiat money by just collecting government debt which can be issued by government at any time to mint money at what is called a risk free rate i.e. the lowest/cheapest rate at which money can be borrowed. Maker DAI though not any government but allowed the possibility of minting a stable asset at a low enough rate which wasn’t possible in Defi and still isn’t possible.

Money markets have higher borrowing rates and supply rates and they ain’t the cheapest and very much sensitive to their utilization ratios. The Maker DAO business model becomes sustainable because they allowed the possibility for people to borrow cheaply from them and then lend at a higher rate in money markets like AAVE, Compound and capture the basis spread or arbitrage. Why I say so because when the markets were bearish and there wasn’t much demand for credit in crypto money markets then the supply rates decreased. This very much constrained the Maker DAO mechanism as they have to mint DAI at sometimes below the risk free rates. That’s why they started lending to institutions, RWAs and now onboarding T-bills because of their higher rates at that time. Also, money markets started drying up which started the craze of token farming initiated by Compound first with their COMP token.

So, every business model works only if they are able to facilitate a need or demand in the market. That’s how Product Market Fits are achieved. If the demand is diminishing which is common as market moves in cycles and sometimes corporate entities also need to offer freebies or massive discounts to artificially generate demand because the need is always there. Crypto also has it’s own cycles and DeFi like TradFi will face money velocity issues. 

We at Autonomint have uncovered a need in the market which we believe no one is paying attention to. We think that just like Maker facilitated the need for cheap credit, there is a need for cheap volatility hedging.

Crypto markets are very volatile because almost 90% of the space works on extrinsic value principal with market focus on token price rather than project cash flows. We have created a primitive called dCDS that will make it possible to cheaply hedge for volatility. We have created the ‘Maker DAO’ of the derivatives space. dCDS stands for decentralised credit default swaps. It offers users a cheap mechanism to hedge for their crypto asset volatility. It will allow users to capture the basis spread in hedging or derivative fees just like Maker DAO allowed the possibility for users to capture the basis spread in borrowing rates and money market rates. This is done by building a new kind of hedging mechanism inhouse called as dCDS(decentralised credit default swaps) which can work sustainably in of itself.

The concept is made possible by attaching a derivative position on stablecoin minting process. This derivative position will allow you to hedge the downside price fall of your crypto collateral while being able to mint stablecoin at upto 100% Synthetic LTV. Users do not pay any upfront option premiums like they are required to pay in derivative platforms. On top of that, users are able to retain the upside of crypto collateral asset as well. The hedging fees (put option premium) for hedging of crypto collateral is only paid at the close of stablecoin position i.e when the user repays the stablecoin borrowed from crypto collateral. The most interesting thing here is that the option premiums are 50% lesser than option premiums on any derivative platform out there like Deribit, Binance options, Hegic, Derive etc. 

So, just like users in MAKER used to mint DAI at cheap borrowing rates and then supply the DAI in money markets for higher supply rates to capture the basis spread. Similarly, users in Autonomint will mint our stablecoin USDa backed by crypto asset at a cheaper hedging cost. After that if they want they can go to some existing crypto derivative platform like Deribit, Hegic, Derive or Binance and open a long position (sell a put option contract) in existing Derivative platforms for higher premiums. This will allow them to capture the spread in premiums.

***Here is an example
***
Platform: Deribit
Position  —  ATM Put Option on ETH for 1-month expiry
Date — 22nd July 2024
Price of ATM ETH Put Option (9th August expiry) — $222.9 
Price of ATM ETH Put Option (30th August expiry) — $302.55

Platform: Autonomint
Option Price for ATM ETH Put Option with 1 month expiry - $177

So, Autonomint option fees is lower by around 40% than Deribit. This option fees can go even lower such that the user is required to pay a negligible option fees altogether.

All of the hedging fees collected from the premiums paid is diverted to the dCDS users with the protocol taking a cut. The users in dCDS can deposit any stablecoin or any accepted token and collect the hedging fees. They also will have the option to accrue liquidation gains and crypto collateral price change gains. All of this is done with a ‘See-Saw’ function where any collateral price variations are constantly reflected to dCDS users.

The protocol offers hedging protection of collateral price downfall till 20% only as the rest of 80% amount is offered in our stablecoin USDa through borrowing of the same. We did multiple simulations of yields acquired by dCDS users. We took very conservative figures like 1 new user entering every day with just 1 ETH collateral to mint stablecoin against the same and simultaneously hedge their ETH collateral with dCDS mechanism. We also assumed that 1 new user is entering every day to deposit $500 in stablecoins in dCDS. The simulation was run through a volatile time-period of 3 months between 1st May 2024 to 6th Aug 2024 where the ETH price reached a peak of $3900 and a low of $2300 so around 40% price correction. The dCDS yields observed are mentioned below in the chart

So, a dCDS user achieved a pure stablecoin yield of 64% in a 3-month time period after considering all the volatility price risks taken by dCDS users. This 64% is a net yield after subtracting any losses due to volatility risks of collateral. Thus the yields are around 10x higher than offered by any stablecoin product in the market. I would like to mention that these yields are not fugazzi like the one offered by others which are filled with points, volatile tokens or boosts. Instead the yields achieved by dCDS are pure stablecoin yields. I also havn’t yet added the liquidation gains and price change gains in above yields. Above yields are purely composed of option premiums collected in stablecoin. So, if I add them then this yields will rise even higher.

So, I think all of above is pretty cool. If you are into derivative trading then you would really really like this concept.

The mechanism works internally on it’s own and doesn’t rely on any governance token or anything. It’s a sustainable mechanism catering to exploit the arbitrage between hedging premiums in the industry. There has been a very less focus on creating new mechanism of hedging the risks. Everyone always assumed that ETH hedging costs will aways be nearly the same across all platforms. But by replacing the downside price fall with stablecoin after some moment, we are able to not only decrease the hedging costs but also generate a sustainable mechanism for dCDS users to risk their capital in providing protection. Also, a big part of option premiums comes from their speculative nature that is their tradability. If you remove the tradability component then it becomes less attractive for users in an isolated mechanism but in an ecosystem setting, it retains it’s attractiveness or demand due to composability with other Defi or derivative platforms. Composability is the biggest use case of crypto which if utilised in the right setting can unlock good business models. It allows for users to arbitrage among option premiums on a single ATM (At the money) contract.

When projects like Ethena are fueling their growth by shorting the entire ETH market, we instead will fuel our growth by allowing users to go long in the ETH derivatives market. A mechanism which works in alignment with underlying blockchains like Ethereum and just like Maker DAO, focuses on adding value to the Ethereum chain to fuel the growth of the biggest censorship resistant decentralised network ever built.

We have been showered by grants from Optimism and underlying Superchains who also validated our concept. Our codebase has just undergone a 1.5 month long Sherlock audit by 300+ auditors.

Also, I understand that an interested user might have questions on risk for dCDS users and maintenance of stablecoin peg in above mechanism.

A dCDS user has a similar opportunity to earn higher premiums without exposing themselves to any big risk. They will earn premiums from multiple borrowers as they are exposed to ETH price variations i.e. they are long on ETH. But if they want to neutralise their exposure to ETH then they can sell a call option on platforms like Deribit and earn high premiums from there as well. Thus, any supply of USDa generated by borrowers minting the stablecoin will have an opposite demand from dCDS users who are buying the USDa to take a position in dCDS and earn high premium based yields. This will help the protocol to manage the parameters on both side whenever they want to influence the supply and demand of USDa to stabilise the peg at $1.

Lastly, I would say that the entire crypto derivatives market has just been focused on replicating TradFi option trading mechanisms in the crypto space with using Black Scholes or binary pricing to calculate their option premiums. They didn’t think on the possibility of creating a new hedging mechanism with the help of a stablecoin which is one of the most adopted hedging mechanism in crypto. 

The most risky assets in TradFi are derivatives but the most risky assets in crypto are not derivatives but countless other things because the entire space is built with fugazzi tokens which rely on the extrinsic value and speculation and token buybacks. On top of that, the crypto space is filled with degens and meme coin speculators and the general risk propensity of the users is quite high. This becomes more risky when users take 100x or 1000x leverage on those tokens. So, a typical Credit default swaps model utilised in TradFi space wouldn’t have worked here. The traditional CDS mechanism is too concentrated and centralised with massive risk vectors (in billions) in a system filled with systematic risks. In the crypto space, a different dCDS is needed which can utilise DeFi composability to immediately liquidate, hedge or create opportunities for users. Attaching an options to a stablecoin minting position lends some certainity on the total loss possible for any party.

The dCDS mechanism currently handle 3 types of risks over time. These will be crypto volatility risks, token de-pegging risks (LRTs and stablecoins) & token hack risks. But the way we handle each of these risks is not by completely insuring for the entire loss but by just offering a 20% protection on any price fall and replacing the rest 80% with our stablecoin. The initial risks covered will be crypto volatility and token de-pegging risks. The 3rd risk of token hacks is handled with a completely new algorithm built from scratch allowing users to convert assets into ‘Colored Dollars’. These Colored Dollars are tokens with attached metadata but remain fungible in nature. We are able to track these ‘Colored Dollars’ with the set of proprietary color tracing algorithms we are building in-house. The purpose of ‘Colored Dollars’ is to trace the tokens whenever they get hacked across any Dapp or wallet and easily recover the full amount by a segregated rebasing mechanism. This mechanism will be launched after main-net once we have attracted sufficient liquidity in our platform. This will allow us to solve for one of the biggest problems of crypto hacks in this space. We think that it’s hacks and rugpulls and scams which are deterring users from a crypto adoption PoV and has given a bad reputation to this space. Thus, big TradFi funds compliance departments are hesitant in giving a green signal to enable liquidity in DeFi. We need a technical solution rather than a financial solution to solve this and Autonomint ‘Colored Dollar’ is that solution.

If you have read till now then you would have got a fair understanding of our value proposition. We will be opening our waitlist for interested folks who would like to be a part of Autonomint ‘Scout’ program.

If you want to be part of this waitlist then revert back on this mail: autonomint@gmail.com