Thread by @wadepros

Squeeth is going to change the game for DeFi derivatives. Here's a smooth brain 🧵 about why I'm excited!

Evolution of the concept:

Everlasting Options → Power Perpetuals → "Squeeth" (ETH²)

h/t @_Dave__White_ @danrobinson @snarkyzk @andrewjleone @AlexisGauba @aparnalocked

Regular options expire, and if you want to trade them consistently long-term, this takes time, introduces risk, and gets expensive from gas and spreads paid to market makers.

Power perpetuals provide global options-like exposure without the need for strikes or expiries.

Why is global options-like exposure important? Power perpetuals consolidate much of options market liquidity into a SINGLE instrument (ie squeeth).

This instrument can be thought of as offering pure convexity. What's convexity? 🧠👇

https://twitter.com/_Dave__White_/status/1423740205874302976?s=20

Convex functions have positive second derivatives, in options this translates to the concept of gamma:

if prices move strongly in your favor, you make a lot
if prices move against you, or don't move much, you lose a little

blue: squeeth
red: "normal" 2x leverage

Did I lose you at convexity and gamma? Let's look at an example of price movements if you are long squeeth. Remember squeeth = ETH²

"if prices move strongly in your favor, you make a lot"

If the price of ETH 2x, squeeth will 4x

If the price of ETH 5x, squeeth will 25x

Now that you understand the concept (power perpetuals), exposure (convexity, gamma), and payoff function of squeeth (ETH²), let's revisit the problems squeeth solves for derivatives in DeFi!

Problems:
• Strikes and expiries
• Liquidity
• Liquidation risk w leverage
• Yield

Problem: strikes and expiries in options

Solution:
• Squeeth distills down an option to pure convexity with no strikes, no expiries
• Squeeth acts like an always at the money, perpetual call option

Problem: Fragmented liquidity

Solution:
• Instead of needing liquidity for thousands of options (oTokens), we need liquidity for just one squeeth

Problem: Liquidation risk with leverage

Solution:
• Squeeth provides leverage *without* liquidations on the long side
• Long squeeth holders pay a small % of their portfolio for daily funding

Problem: How to generate sustainable high yields in DeFi

Solution:
• Short squeeth gives users access to fire + forget high yields in a "sustainable" (not farming) way
• Sustainable yields are the result of being on the short side of long squeeth holders daily funding

Long squeeth recap:

Squeeth is a perpetual instrument that gives holders a payoff of ETH². This creates a leveraged position with unlimited upside, and protected downside. Compared to a 2x leveraged position, buyers make more when ETH goes up and lose less when ETH goes down.

Since long squeeth holders pay daily funding to maintain a leveraged position with unlimited upside, squeeth is a short- to medium-term trade for users who believe the price of ETH will rise.

Users who are long squeeth will receive a payoff of ETH², minus funding.

There are some really cool applications of short squeeth strategies that I'll cover in another smooth 🧠 thread!

In the meantime, if you have any questions or feedback, we @opyn_ would love to hear from you!

Squeeth nation, salut!

(none of the above is financial advice)

Research references:

Everlasting Options research paper ↓
paradigm.xyz/2021/05/everla…

Power Perpetuals research paper ↓
paradigm.xyz/2021/08/power-…

Unbundling Gamma with ETH^2-PERP by @llllvvuu ↓
llllvvuu.dev/blog/unbundlin…