Other Outcome Products
The range token enables a DAO or nascent project to use its native token as collateral to borrow funds. At maturity, if the debt is not paid, the range token holder is instead compensated with an equivalent amount of the collateral (the native token) using the settlement price of the native token to determine the number of tokens.
A range token can be viewed similarly to convertible debt. In the venture capital world, convertible debt allows startup companies to receive funding today without issuing equity upfront. The range token holder is effectively short a put option and will have exposure to the downside of the native token below a certain price. To compensate the range token holder for taking on this “default” risk, the holder is rewarded a call option on the native token. A minimum number of native tokens is given to the range token holder no matter how much the native token rallies. The combination of the structure creates a tradeoff between the seller and the buyer.
Protected token pairs use the UMA Long-Short Pair contract to wrap any ERC20 asset and create protected and recovery tokens. The protected tokens are put in a wallet or contract address where you want an extra layer of protection and the recovery tokens are held in a secure wallet elsewhere and can be used to recover the underlying assets in the event of a hack, bug, or other cause of lost funds.
Therefore, the protected tokens can be used with confidence that they do not expose your assets to additional smart contract risk beyond the relatively simple (and OpenZeppelin audited) Long-Short Pair contract, which is particularly useful for new protocols or new features added to existing protocols.
A call option is a building block for the derivatives market. It gives the buyer the right but not the obligation to buy the asset at a specific price (strike) at a specific time. There are a number of reasons for call options in the traditional financial world. Some of the reasons translate to the DeFi space as well as open new use cases such as:
Leveraged Speculation — The simplest use for a long call position is the ability to speculate on the appreciation of an asset with leverage while also limiting your downside. To obtain the right to be long 1 ETH at a price of 2000 in our example above, the token holder only needs to pay 5% of 1 ETH. However, the flip side to that is the value of the option will depreciate or decay very quickly to zero if it does not trade above the strike price.
Strategic DeFi Project Uses — Many DeFi projects have distributed their governance tokens either via airdrops or through liquidity mining or developer mining programs. The one downside is many recipients of the tokens may not be long term community members and instead are just looking to dump acquired tokens which could cause a depression in the token price. Distributing a mix of governance tokens and call options could help align the incentives of token recipients by giving recipients a vested interest in contributing to the long-term success of the project.
Better Airdrops and Farms - Options are a popular form of compensation because they align incentives. A token economics benefit is that they only result in sell pressure if the market is bullish. A certain price target is set by the deployer, and option recipients can only cash out if the token price exceeds the strike price at expiry.