Pythiad #7: A First-Party Financial Oracle
Welcome to the 7th installment of the Pythiad, the Pyth Network newsletter!
To our followers: thank you for all your support, feedback, and good vibes! And to our newcomers, we say welcome.
We are delighted to have you on board. As always, there is so much to discuss.
- Pyth Network Developments
- Pyth End-Users
- Pyth in Chicago
- Pyth Metrics
- Pythian Community
Pyth Network Developments
January 2022 will remain as one of the most important times for the Pyth network and its community with the whitepaper revelation.
Following the initial release of the Pyth network whitepaper and coverage by the Financial Times on Tuesday, 18th January 2022, we wanted to provide to the Pythian community a summary of the whitepaper. If you were to have any questions, come join us in our Discord or Telegram.
Growth in DeFi requires high-fidelity, time-sensitive, real-world data, direct from the source and made available on any L1 blockchain. Financial market data, however, is often accessible to only a limited set of institutions and users. Traditional markets typically maintain strict control over and access to both live and historical price feeds. Consequently, only a selected group of users has access to the most timely, accurate, and valuable information.
The Pyth network is a next-generation oracle solution that aims to bring this valuable financial market data to the general public. The network does so by incentivizing market participants — trading firms, market makers, and exchanges — to share the price data collected as part of their existing operations. The network aggregates this first-party price data on-chain and makes it available for use by either on- or off-chain applications.
End-users of Pyth data can elect to pay data fees to gain protection against a potential oracle failure. As data publishers must stake tokens in order to publish data for a product, the stake of at-fault publishers (if they make the aggregate price erroneous) will be used as a payout to those end-users voluntarily paying fees. Delegators choose which product (price feed) and a publisher to stake on top of in order to earn data fees (or lose their stake if the oracle is inaccurate due to publisher faults). Initially, 80% of the data fees will go to delegators while the remaining 20% will be shared among publishers — this, among other parameters, will be subject to change through a PYTH governance.
The goal of the design and mechanics around the PYTH token aim to make the Pyth network self-sustaining and decentralized.
3 different types of stakeholders will interact within the network:
- Publishers publish price feeds and earn a share of data fees in exchange. Publishers are typically market participants with access to accurate, timely price information. The protocol rewards publishers in proportion to the quantity of new pricing information that they share.
- Consumers read price feeds, incorporate data into smart contracts or dApps, and optionally pay data fees. Consumers can either be on-chain protocols or off-chain applications.
- Delegators stake tokens on a specific product and publisher to earn a share of the data fees in exchange for potentially losing their stake if the oracle is inaccurate.
Any actor may have multiple roles within the network. For instance, data publishers (or consumers) may additionally decide to delegate tokens to earn additional data fees.
Network participants will interact following 4 on-chain core mechanisms:
- Price aggregation combines the reported prices and confidence intervals of individual publishers into a single price feed and confidence interval feed for a specific product (e.g. BTC/USD feed). This mechanism is designed to produce robust price feeds — feeds whose prices cannot be significantly influenced by small groups of publishers.
- Data staking allows delegators to stake tokens to earn data fees. The delegators in aggregate also determine the level of influence (stake-weight) that each publisher has on the aggregate price. In addition, this mechanism determines whether delegators’ stakes are slashed. Finally, the mechanism collects data fees from consumers and distributes a share to delegators (initially set at 80%). The remainder (20%) goes into a reward pool that is distributed among publishers.
- Reward distribution determines the share of the reward pool earned by each publisher. Each product has a reward pool that delegators can stake into. The reward distribution mechanism preferentially rewards publishers with higher quality price feeds and reduces the likelihood that uninformed publishers will earn rewards.
- Governance will be using a coin-voting system that will help determine the high-level parameters of the three mechanisms above. Parameters include what types of tokens may be used for data fees; which products are listed on Pyth; the share of data fees allocated to publishers, delegators, and other uses; the number of PYTH tokens that publishers must stake or enable claims to be filed against a product, and more.
Overall, every participant will have incentives to fully engage with the network:
- Publishers are incentivized to stake PYTH tokens to participate in the protocol and earn a share of the rewards. Publishers earn a share of the data fees for the products they price. The data fees for a product will likely grow in proportion to consumer usage of the price feed. Publishing erroneous (voluntarily or not) data to the network may lead to the publisher’s stake being slashed.
- Consumers are incentivized to pay data fees for two reasons. First, data fees enable applications to reduce the risk of using Pyth price feeds as they would receive a payout in case of failure. Second, paying data fees attracts more publishers to the product, which improves the robustness of the price feed.
- Delegators are incentivized to participate in the protocol to earn data fees (coming from consumers’ data fees). Delegators will initially earn attractive payments, but competition between them will reduce the payments over time as the market becomes more efficient.
January has been a quiet month on the front of new feeds as only one appeared:
JET is the utility token of the decentralized borrowing and lending protocol Jet Protocol. JET enables the two following primary uses:
- Governance voting rights to change and upgrade Jet Protocol
- Tiered usage benefits of Jet Protocol earned by locking up JET
Jet is also leveraging the Pyth feeds to power their platform and it is with pleasure that we now support their homemade token within the network.
When will we see moar feeds?
Up until now (and will continue for a short period of time), new feeds have been added according to demand and sourcing capacity. However, as presented in the whitepaper, the process to add new products within the network will become (once Pyth is feature complete) fully decentralized, thus enabling anyone to work towards adding (and even sourcing) the product he wishes for.
We are currently working to get a handful of new additional products live. Those should appear in February, and if you want to be the first few that know which feeds are in the works, you can always find some alpha when checking other environments such as testnet or devnet.
Announced previously this week, the Pyth program and more specifically the Pyth Product Accounts structure have received a lifting that will be deployed onto Solana mainnet on February, 3rd. So be sure to check out the blog post and adapt how your program reads Pyth data. If you have any questions, come to our Discord or Telegram.
There are known clashes in other asset classes too, for example, there is a US equity called “HKD” which is also the mnemonic for Hong Kong Dollar. And there are two potential “SAN/EUR” equities in the Eurostoxx 50: Santander, the Spanish bank, and Sanofi, the French pharmaceuticals company. Even where there aren’t clashes, there’s potential for confusion. We might have “DAI/USD” the cryptocurrency and “DAI/EUR” shares in Daimler AG.
So what’s new?
As a reminder, within Pyth program product accounts store metadata about a product, such as its symbol (e.g., “BTC/USD”) and asset type. In addition, not all products share the same account structure.
With the new symbology, according to the asset type value, the remaining fields will vary. Crypto will no longer have “country” nor “tenor”, equities will no longer have “tenor” and FX & Metal will no longer have “country”.
Overall, users should not rely on the symbol name being unchanging or parse data out of the symbol. Instead, programs should always use the different attributes to identify the product they are interested in.
These changes will enable us to be much more scalable in regards to products available within the network while ensuring anyone that leverages these price feeds can easily and confidently understand which asset is linked to the account.
This January has not only been a month to remember for Pyth but many of our great partners and end-users. Indeed, we have seen an unprecedented flow of new DeFi primitives getting launched on Solana and existing ones further establishing themselves as successful.
On-chain perpetuals have never been that easy
Solana speed and low-gas not only allows complicated products to exist on-chain but also enable both the general public and traditional market participants to “trade” as if they were using centralized exchanges. Thus, this leads to significant volumes traded.
Perpetual platforms such as Mango Markets, Drift Protocol, Bonfida, and now 01 Exchange (launched on Solana mainnet on January 27th) have accumulated over $3.2B in trades during the month of January. We expect this number, even if the bear market comes in (yikes), to be up only for 2022.
Nonetheless, there is still so much potential growth when compared to other solutions. Most top 10 centralized exchanges report more than $1B volume per day ($30B on a monthly basis) with the top 3 executing regularly over $10B ($300B+ monthly).
So wen will we see Solana perps protocols reaching $1B+ daily? Hopefully soon.
Too many options!
Options are one of the many financial derivatives the general public has access to when trading equities but despite being available for crypto trading, they are still under-used.
In 2021, a record of 39 million options contracts have traded daily, rising 35% from 2020 and retail investors now account for more than 25% of this trading activity. The US equity markets options volume as a percentage of spot is ~35X bigger, which goes to show the potential to replicate the sheer size of the options market on crypto. But the reality today is that while option writing strategies have been one of the most lucrative ways to earn yields on digital assets, crypto options volume as a percentage of spot volume is ~2%.
Then how is the option environment shaping up in Solana?
We need to go back as far as March 2021 and the inaugural Solana x Serum Hackathon, to find the first-ever options-related program mentioned with PsyOptions. Since then, PsyOptions remained relatively simple as it works similarly to option trading in traditional finance with a central limit order book for physically-settled American options. Based upon the Serum Core program, PsyOptions is actually enabling anyone to use their pre-existing market structure to create and trade options on any asset you wish for the duration you want. In addition to their existing American Options, PsyOptions are currently working on European-style options which will enable a greater capital efficiency to users.
Following PsyOptions, Zeta Markets revealed itself during the Solana Season Hackathon from May 2021 with a hybrid order book and options AMM model (automated market maker) that allows for efficient pricing and deep liquidity. The idea was to emphasize the user experience with easy-to-trade derivative products and exciting underlying.
But the whole option ecosystem on Solana really took off when the first DeFi Option Vaults (DOV) appeared. Existing DOVs on Solana are Chest Finance, Friktion, Katana, and Tap Finance. DOVs are very simple: users stake their assets into vaults which will then deploy the assets into pre-selected options strategies such as covered calls or put selling to earn additional yield. Despite being risky (any uninformed investment is risky), the release of those DOVs now enables the general public to have access to strategies previously only available to institutions. For a great explanation of DOVs, we suggest you read the QCP Capital blog.
With the infamous Solana composability, the last arrived (DOVs) garnered great success among DeFi users given their ease of use and appealing APY returns. Both of which led DOVs to quickly collect over $200M in TVL and this is only the beginning.
Indeed, the past week saw Zeta Markets announcing a partnership with Ribbon Finance, the leading DOV on EVM chains with more than $150M in TVL and $3B of options volume traded since inception. Through this action, the Ribbon user-friendly “Theta Vaults”, already available on Ethereum and Avalanche, will find their way to Solana and, more specifically, on top of the Zeta’s infrastructure which enables to mint and auction DeFi options. Details are available here.
Financial innovation happens here
In addition to the above DeFi segments, there are many more that are yet to reach global significance, but their innovative products and killer teams will likely lead them to success and mass adoption.
Perpetuals (mentioned above) are a “crypto” innovation from 2014 popularized by the notorious Arthur Hayes (alongside Ben Delo and Sam Reed) and have been so far the go-to financial product for the general public looking to express their market view through leverage in the crypto markets.
However, the traditional finance world has always been operating through another type of financial derivatives: futures. Futures contracts obligate the buyer to purchase an asset or the seller to sell an asset at a predetermined future date and set price; while perpetuals, as the name suggests, never expire and therefore have no final settlement or delivery. Futures in the traditional markets represent about half the trading activity with 30 billion contracts settled in 2021, and despite doubling in the number in the last 8 years, futures have been, until now, the big absentee within DeFi.
Luckily Zeta Markets happened! On the 17th of January, Zeta released dated futures (weekly SOL expiry for now) for everyone to leverage. With a deposit limit initially implemented ($1K per account), Zeta has already successfully resolved 2 weekly SOL futures (#1 & #2). We are very proud to see the Pyth feeds being utilized as the settlement reference for this one of kind DeFi product. With the caps raised, we are expecting to see significantly greater traction on these primitives.
- Algorithmic Stablecoin
Popularized through Maker (DAI), Luna (UST), Magic Internet Money (MIM), and Frax Finance (FRAX) decentralized stablecoins are one of the most interesting concepts in the DeFi space and broader crypto world. Most protocols are still reliant on centralized stablecoins issuers (Tether with USDT & Circle with USDC) that have, in the end, the reach to freeze assets you own without your consent and proper appeal mechanism.
Enters UXD. UXD aims to solve an incredibly difficult problem: creating a stablecoin that is stable (1 UXD = 1 USD), decentralized (no censoring), and capital-efficient (no overcollaterization). How does UXD work? UXD is pegged to the US dollar using derivatives (currently Mango Markets is integrated and soon others). Since it is backed 100% (meaningfully collateralized) by a delta-neutral position, users will always be able to redeem 1 UXD for 1 USD worth of assets. If UXD deviates above or below the USD peg for any reason, traders will be able to make risk-free profits and bring the price of UXD back to the peg. Learn more from their docs.
So even if the Pyth oracle is not directly embedded into UXD, by leveraging the on-chain perpetuals platform funding rate, they are indirectly relying on the difference between the platform mark price and the Pyth index price.
- Power Perpetuals
We previously mentioned that 01 Exchange went live on Solana mainnet with perpetuals. However, they do not plan on stopping and have upcoming one of the most innovative products out there. Based upon the discovery of Dave White, Dan Robinson, Zubin Koticha, Andrew Leone, Alexis Gauba, Aparna Krishnan, 01 aims to release Power Perpetuals.
A power perpetual is a perpetual derivative indexed to the power of the price of the underlying instrument. Powers provide option-like exposure because of the convexity of the payout. When prices move in your favor, you earn a lot more than you would lose if prices move against you.
For reference, 01 did a simulation for SOL with the 2021 price action to demonstrate the gaps between SOL and sqSOL.
- Convergence Hackathon
The Convergence Hackathon, led by the Wormhole and Serum teams, has now closed its doors. After almost a month of building, lots of submissions were received and all will be reviewed by judges and sponsors. As a reminder $500K is up for grabs with Pyth sponsoring a $30K prize. Many other teams like PsyOptions, Terra, and Atrix were also supporting the hackathon.
Along with the building, Convergence organized panels, 3 weeks during, that covered various interesting topics. Here is a non-comprehensive list of recommendations:
- Pyth: Under the Hood
- Crypto and DeFi Trends with Sam Bankman-Fried
- Tradfi in Defi with Radkl, Two Sigma, and Jump
- Future of DeFi with Multicoin, Delphi Digital, Race Capital and the Frog Nation
- Solana DeFi Panel with Zeta Markets, PsyOptions, Solrise, and Symmetry
- Crosschain Panel with Saber, Wormhole and SushiSwap
- Building with Serum Core
- Building on Terra Luna Ecosystem
You may find all the Convergence videos on this playlist and will soon discover the results of the hackathon.
All in all, we are proud to be part of and contribute to the Solana ecosystem where the next leg of financial innovation is and will continue to happen.
Pyth In Chicago
January in Chicago, Illinois, is probably not the most sound idea weather-wise, however for building on Solana, Chicago was definitely the place to be in January. Pyth has been all hands on deck being involved in 3 different events: the Solana Bootcamp, the Pyth Workshop, and the Chicago Hacker House.
First, the Solana Bootcamp, organized in partnership with Solana and Jump Crypto, took place from January, 10th to the 14th. Led by Jarry from Solana Labs, the week welcomed about 150 participants to get taught the basics of Solana and how to build on top of it. All lectures are available both on GitHub and on YouTube.
The second week (17–21 January) consisted of two simultaneous events: the Pyth Workshop and the Chicago Hacker House.
It was with great pleasure for the Pyth network to host many talks for its stakeholder community as well as for the Hacker House participants. Topics covered were various from the Pyth infrastructure, to Solana RPC with, of course, the long-sought Pyth Whitepaper Walkthrough. Find the whole Pyth Workshop playlist here. If we were to provide a curated list, we would recommend the below ones:
- Pyth: Past, Present and Future by Mike Cahill
- Walking through the Pyth Whitepaper with Jayant Krishnamurthy
- Understanding the Pyth Architecture by Samir Islam & Harnaik Kalirai
- Wormhole 101 with Evan Grey
- Solana Update with Bartosz Lipinski
- Jet Protocol Presentation with Kevin
- Mango Markets Presentation with Daffy Durairaj
- FTX Presentation, Regulations and Licenses with Brett Harrison
Meanwhile, in the Hacker House, approximately 250 shadowy super coders got together in a purple (Pyth?) lighted room. On the last day, a handful of demos were held with the likes of a multi-sig wallet, tools for automatic NFT actions, Twitter verification with NFT certificates, or basket swaps…
All this ended on a lighter touch, as all fellow participants gathered one last time at Tao to bid its farewell.
Since, the Hacker House has announced its upcoming schedule and it will be packed! Starting Feb 1st until 5th, the LA Hacker House is already full with 350+ signed up. From LA, the Hacker House will then go to Seattle (9–13 February), Singapore with Zeta Markets (15–20 February), Dubai (15–20 February), and many more.
- Total Value Secured
One of the most important metrics (which shows how important Pyth is for others) is the Total Value Secured by the Pyth network price feeds. Whether you are a borrow-lending protocol or a synthetics one, price feeds are a critical part of your program. As of the end of January 2022, we estimate that $1.2B is secured by Pyth. When possible, smart contracts are verified in depth to be sure the Pyth network is leveraged so that our assessments are fair and not exaggerated. Pyth data being natively available on Solana blockchain and so permissionlessly queriable, we may not know all programs leveraging Pyth — if you are using Pyth data, let us know! We’d be happy to support and broadcast you on our website.
- Trading Volume
Another major industry segment utilizing Pyth’s HiFi data: the trading ecosystem on Solana, which trusts Pyth to provide fast and reliable market data to their index mechanism. Every protocol has its own Pyth integration approach: vAMMs solely rely on Pyth for pricing and funding rates (oracle price versus market price), while orderbook-based DEXs leverage an oracle only for the funding rate. Solana is known for unique and powerful perpetuals and synthetics trading platforms: Mango Markets, Drift, 01 Exchange, Bonfida, and Synthetify. The recent launch of Zeta Markets and other DOVs (Chest Finance, Tap Finance) also boosted options activity. In January, those protocols saw over $3.2B in volume traded.
- NPM & Rust Downloads
This past month was packed and the Pythians showed to the task wonderfully well. First, we’d like to thank you all for the positive feedback the whitepaper brought. It was needed for a long time and are very happy to finally feed this craze.
One of the community highlight was the Pythia x Pyth art contest held within our Discord. Running for almost 10 days, we received a plethora of fancy & pithy art that you can review here. Among the whole lot, the top 10 submissions were selected and put up for votes which will end tonight (Feb 1st). The most up-voted art pieces will be broadcasted as the Pyth Intern banner in the following weeks while artists will either receive a Pyth NFT or Pyth merch.
Here is one of the submissions from Naive:
Similarly, Pythians have been spotted to be quiz lovers — as a matter of fact, we already organized 6 quizzes since the beginning. The idea is to have everyone have a good time while rewarding those who stay up to date with the Pyth network developments. There is a quiz ongoing here that focuses on the Pyth whitepaper, so if you have read it, come test your knowledge.
The Pythian community also had the chance to hear live some of the Pyth network contributors. First, Mike Cahill, one of the directors of the Pyth Data Association was invited to the FTX Podcast led by Tristan Yver. In the podcast, Mike mentions its beginning into crypto as well as touch point on the Pyth world so give it a listen.
In addition, another part of the team (@shadddowfax, @AlasdGem, and @KemarTiti) spent its Wednesday night on Twitter Space with the Zeta team. We’ll look to release content over this great discussion with one of the Solana DeFi spearhead teams.
Finally, Pythians, be on the lookout for the next weeks (early February) as the team will go on 2 other Twitter Spaces. Don’t miss those ones but in the meantime, you can check out the below Pythians takes.
Future newsletters will continue to summarize Pyth’s monthly progress and exciting things happening in our ecosystem. They will be sweet, succinct, and pithy. Thank you for reading!