Bumper, a decentralised finance (DeFi) protocol, has launched an innovative options platform. The management team claims its options pricing model is both cheaper and more efficient than the traditional Black-Scholes option desks. The Bumper team claims that their protocol will disrupt the $13 trillion options market, notably attacking current options leader Derbit.
Bumper’s innovation is the culmination of a three-year research and development programme, backed by $20m in early funding, and collaboration with the Swiss Center for Cryptoeconomics, known for work on Synthetix, and coded by renowned developers Digital Mob, who previously worked on protocols such as Barnbridge, Gnosis and Filecoin.
Bumper is challenging the 50 year old Black Scholes model. Authored in 1973 it is one of the most important concepts in modern financial theory. This mathematical equation estimates the theoretical value of assets based on implied volatility, taking into account the impact of time and other risk values. It is to this day regarded as the one of the best ways for pricing an option contract.
The Black-Scholes paper went on to win the Nobel Prize for economics and has proven so precise and reliable that it has given rise to a $13 trillion market of options in traditional finance. The difficulty when attempting to move this premise to crypto, especially decentralized finance (DeFi), which is trustless and permissionless. Moreover, there are properties in DeFi that do not exist in TradFi such as pooled liquidity and running complex smart contracts.
Jonathan DeCarteret, CEO of Bumper, explains the difficulty of migrating the Black-Scholes directly onto crypto.
“Crypto typically has low latency and high frequency of liquidity which poses certain complexities for the model – and yet the key point of the Black-Scholes formula remains – it’s set up like a baseline speed of light, you can’t beat it.
“Option desks make great use of pricing risk, but have to add their costs on top. We wanted to find an evolution of this algorithm in a totally new and innovative approach that would give us the same baseline as Black-Scholes but in a much more efficient and fairer manner. We raised $20 million in funding in 2021 to create a superior crypto equivalent.”
The resulting Bumper protocol undercuts traditional options desks by one third, while paying between 3-18% APR to Liquidity Providers (LPs) that supply USDC to the protocol. Early adopters of the protocol will also share in $250,000 worth of incentives, by either protecting their ETH or earning on their USDC.
DeCarteret says “Bumper removes the downside volatility of a user’s crypto tokens, paving the way for them to take leveraged positions with zero-liquidation risk. That in itself is a major breakthrough, but when you consider it’s on average 30% cheaper than the market leader, the value proposition becomes crystal clear.”
The protocol charges a premium which is calculated incrementally during the term, based on a combination of market conditions, protocol rebalancing and proximity to the user’s floor. This generates real yields for liquidity providers who realise returns ranging between 3-18% APR on average without the need to sell option contracts.
Until now, the methodology for calculating the price for hedging risk relied on the fifty-year-old Black-Scholes model, which has fuelled the $13 trillion options market.
“Fifty years is a long time in tech and although Bumper uses completely different inputs and a novel rebalancing mechanism, it is surprisingly correlated with Black-Scholes, but more efficient, even under the most volatile of market conditions,” said Mr DeCarteret.
Bumper has been deployed to the Ethereum mainnet, and is currently accepting deposits in ETH and USDC, with additional ERC-20 tokens and multi-chain support slated to be added to the protocol in rapid succession.
For more information on Bumper, including their early user rewards and incentives for rival DeFi options protocol users visit bumper.fi.
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