Mechanics of Tokenized Digital Options
Last updated
Last updated
Each UP, DOWN, IN or OUT options on Thales are represented by ERC20 tokens:
UP tokens ensure your payout if an outcome resolves positively
DOWN tokens ensure your payout if an outcome resolves negatively
IN tokens ensure your payout if a range market outcome resolves inside the range
OUT tokens ensure your payout if a range market outcome resolves outside the range
Each specific market on Thales is a dedicated market Smart Contract and is 100% collateralized by USD. Once this collateral is locked into the marketâs smart contract, Positional Tokens are minted and made available for interested traders via the Automated Market Maker (AMM). Every 1 USD locked into a Market Smart Contract mints 1 of each Positional Tokens (e.g. 1 USD -> 1 UP token + 1 DOWN token).
See the Using the Thales AMM page for more info.
Each USD collateralizes one UP token and one DOWN token. The winning side of the market will have the ability to redeem their Positional Tokens in a 1:1 ratio for the USD collateral added to the pool, while the Positional Tokens of the losing side will become worthless and cannot be redeemed.
By holding an UP ERC20 token from a specific market in your wallet, that token represents a claim for 1$ from that market contract, in case the market resolves as UP at the Strike Date.
By holding an DOWN ERC20 token from a specific market in your wallet, that token represents a claim for 1$ from that market contract in case the market resolves as DOWN at the Strike Date.
Only one of these two tokens can claim the 1$ on Strike Date, while the other will be deemed worthless.
Ranged Markets is a product built on top of the Thales protocol that allows users to participate in markets around the following question:
Ranged Markets use the same framework as Positional Markets, but they use a Price Range instead of a single Strike Price, to resolve the market.
Variables that define a Ranged Market:
Asset- The specific asset used to resolve a market based on it's price (e.g. BTC, ETH, etc.).
Maturity Date- The date and time at which the current price of the asset is compared to the market's Price Range to determine if the Ranged Market resolved IN or OUT.
Strike Range- The range between two price points that traders use to position INSIDE or OUTSIDE of for that market.
Instead of having a single Strike Price with accompanying UP and DOWN tokens, Ranged Markets have two Strike Prices that construct a Price Range and are accompanied with IN and OUT ERC20 tokens that represent the two exclusive outcomes of that Ranged Market.
Ranged Markets use the Thales AMM contract to offer on-demand liquidity for IN and OUT tokens. It uses the already existing adapted Black Scholes algorithm to calculate the probability between 0% and 100% of a certain Ranged Market finishing INSIDE or OUTSIDE of a specified Price Range at the specified Maturity Date, and then uses that calculated probability to price the IN and OUT tokens.
For example, if the AMM calculates the probability of the specific Ranged Market finishing OUTSIDE of the specified Price Range to be 25%, the AMM will sell the OUT tokens representing that position for $0.25, reflecting the probability percentage. On the other side, the probability that the market will resolve INSIDE the specified Price Range will be equal to 100% - XX%, where XX% represents the probability of the market resolving OUTSIDE. This means that the IN token representing that INSIDE position, will be priced by the AMM as $1.00 - $0.25 = $0.75
If a specific Ranged Market resolves INSIDE the specified Price Range at the specified Maturity Date, the IN tokens will be redeemable for USD in a 1:1 ratio while the OUT tokens will be worthless.
If a specific Ranged Market resolves OUTSIDE the specified Price Range at the specified Maturity Date, the OUT tokens will be redeemable for USD in a 1:1 ratio while the IN tokens will be worthless.
Thales Ranged Markets use the available Positional Markets to form Price Ranges around their individual Strike Prices. That means that every two Positional Markets with the same Asset and Maturity Date will also create a Ranged Market around their respective individual Strike Prices.
The collateralization of Ranged Markets comes from underlying Positional Markets that create the Ranged Market. This implies that the volume driven by Ranged Markets will subsequently also drive volume of the underlying Positional Markets that the Ranged Markets are created around.
The Ranged Markets AMM does not have a dedicated Skew Impact mechanism. They actually inherit the Skew Impact from the underlying Positional Markets that create it.
For the sake of demonstrating a profitable trade using Ranged Markets, let's take the following Ranged Market:
Asset: BTC
Strike Range: $25,000< --- >$35,000
Time until Maturity: 11 weeks
Current BTC Price: $29,081.47
With these variables, the Thales AMM prices the IN and OUT tokens of this market at:
IN = 0.417 USD
OUT = 0.720 USD
Ranged Market Tokens have a slightly higher premium because of the fact they are created by two individual Positional Markets.
Skew Impact of each of the two Positional Market that create a Ranged Market is compounded in the respective Ranged Market they create.
Let's say a trader has 1000 USD and wants to acquire a position stating that the price of BTC will remain between $25,000 and $35,000 in 11 weeks from now.
This trader then uses the 1000 USD to purchase exactly 2398 IN tokens from the Ranged Markets AMM, since the AMM algorithm offers the IN tokens to buyers at 0.417 USD per token.
If in 11 weeks (at the Maturity Date) the price of BTC remains between $25,000 and $35,000, our trader will be able to exercise (redeem) his IN tokens (that they acquired for 0.417 USD per token) for 1 USD per IN token. Which means his 2398 IN tokens will be worth exactly 2398 USD, providing them with a profit of 1398 USD on the initial 1000 USD investment.
If BTC does not remain between $25,000 and $35,000, the OUT tokens (that were priced at 0.720 USD) for this Ranged Markets will be worth 1 USD each, and the IN tokens would be worth 0.
