Thales smart contracts are deployed on Ethereum layer one. To bring liquidity to binary options markets Thales implemented a trading UI with 0x gas-less order books. The 0x protocol offers off-chain order books and on-chain settlement for trading options tokens. Thales smart contracts enable anyone with access to Ethereum to start an sUSD pool for trading options. sUSD is the flagship stable coin of the Synthetix protocol.
Suppose Sarah created a pool with 10,000 sUSD for the ETH $4,000.00 July 31, 2021 market. the user mints 10,000 sLONG and 10,000 sSHORT tokens. The strike price is $4,000. .
For every 1 sUSD Sarah deposits sUSD into a contract, 1 sLONG and 1 sSHORT tokens are minted. The terminal value for a long or short binary option token is 0 or 1sUSD. Only one side of the market can claim rights to sUSD in the pool.
On expiry only two scenarios are possible.
If the price of ETH on that date is greater than or equal to $4,000.00, the sLONG tokens win the total sUSD pool. sSHORT tokens become worthless.
If the price of ETH is less than $4,000.000, the sSHORT tokens win the total sUSD pool. sLONG tokens become worthless.
If the market price of ETH rises to $4,500 before July 31, 2021 in this scenario, the price of the sLONG may rise to reflect a higher likelihood of paying out 1 sUSD. The winning side can only collect sUSD after the oracle is called on the expiry date and resolves the market.
Setting a price
Sarah effectively sets the initial market price once Sarah has minted options and supplies liquidity to the newly created market.
If Sarah determines there's a 40% likelihood the price of ETH >= $4,000.00 on July 31, Sarah would be inclined to offer sLONG options for of 0.40 sUSD as a limit sell order type.
By extension Sarah would be inclined to offer sSHORT options for a price of 0.60 sUSD as a limit sell order type.
Minting, incentives, and Fees
Suppose Chuck wants to add to Sarah's pool, an existing pool tracking the same underlying asset price, expiry date, and strike price.
Chuck deposits 10,000 sUSD into the pool and mints 10,000 sLONG and sSHORT tokens.
Chuck receives 9,900 sLONG and 9,900 sSHORT tokens.
Chuck pays a 1% fee to mint. Effectively, 100 sLONG and sSHORT tokens, are paid as fees. Half of the fees go to the market creator and the other half is a Thales protocol fee.
50 sLONG and sSHORT tokens are market creator fees earned by Sarah.
50 sLONG and sSHORT tokens are earned by Thales token holders.
Sarah's expected value function for starting a pool depends on how many people like Chuck mint into Sarah's pool.
How do markets settle?
Anyone can settle the market and make the sUSD claimable for the winning token holders.
The 10,000 sUSD becomes the total payout for the market to whichever side of the market is right. An option token's terminal price is only 0 or 1 sUSD.
The sLONG and sSHORT tokens reach a market clearing price on limit order books. sLONG and sSHORT tokens can be traded on peer-to-peer markets.
For any options market, there is one orderbook for short tokens and one orderbook for long tokens. At the expiry date of a market, either the short or long tokens will be worth 1 sUSD but never both. If the price of the Chainlink price feed called at the time of market expiry is greater than or equal to the strike price, the long tokens will have a claim to all of the sUSD locked in the pool.