HXRO Network: Composable Derivatives will Save the World
We’re still so early. Much has been built since DeFi Summer in 2020, but DeFi is still immature relative to the longstanding legacy of traditional finance. Fragmented liquidity and frictions in user experience prevent mass adoption by institutions and retailers. The requisite tooling for DeFi to become truly massive is still missing. Pyth is one such tooling. In this spirit, we are excited to highlight another powerful infrastructure player working on the same mission — the Hxro Network.
We are joined today by the contributors of Hxro Network, a fully composable, on-chain derivatives primitive (#PoweredByPyth). HXRO Network is here to make DeFi capable of everything that TradFi can do (sound familiar?): core primitive for exchange, risk management, and settlement — at the same level as the institutional players.
Let’s start off easy. What is Hxro Network?
Hxro Network, built on Solana, is a fully composable, on-chain derivatives primitive that provides core exchange, risk and settlement infrastructure for professional-grade financial applications.
Any CeFi or DeFi application (CEX, DEX, DOV, sportsbook, prediction market platform, metaverse game platform and various other product platforms) can easily connect via the Hxro derivatives marketplace. We therefore think of this very much as a B2B2C stack with the Hxro primitive at the bottom, applications built on top, and most users accessing Hxro markets through any application that is connected.
The power of this model is that all applications and market participants (including market makers, professional traders and OTC brokers) share liquidity regardless of the venue from which they access it. Put another way, all liquidity, from all venues, bottoms out into Hxro derivative market order books!
In the background, Hxro uses Pyth prices and confidence intervals in multiple ways.
Firstly, Hxro leverages Pyth’s market data oracle and confidence intervals as an input in Hxro’s customized risk engine, Spandex. Within Spandex, Pyth data is used as an input when determining account health, real-time margin requirements and account liquidations.
Hxro is also implementing Pyth data as an input for determining a price curve and volatility surface for its vanilla options market (which will be released later this year).
Lastly, Hxro will also be incorporating Pyth market data as a price and settlement oracle in its on-chain parimutuel markets.
What’s the founding story behind Hxro? How have your backgrounds in TradFi helped in building DeFi primitives?
Hxro Network founders have multiple decades of experience in TradFi derivatives markets as traders, risk managers and in operations. Additionally, most of the teams contributing to the Hxro Network project since day one have come from some of the largest principal trading firms in the world.
Collectively, we were able to pinpoint the friction points of a centralized exchange, clearing and settlement stack (as well as the parts that make sense to keep), and were able to design a primitive which we believe captures existing benefits of centralized infrastructure with the added value of a DeFi layer.
Without our collective domain expertise in both CeFi and DeFi, this would be very hard to accomplish.
Congratulations on launching your alpha! Your derivatives marketplace is now on Solana, providing a key derivatives infrastructure layer. What does this unlock?
This is a moment in time when many professional trading firms, institutions and operators are rethinking (either voluntarily or by necessity) the fabric of the global derivatives landscape.
Leading participants believe it can evolve in a way that opens up access to markets to a wider spectrum of participants, market types and products while also disintermediating systemic market risk and increasing market transparency through on-chain mechanisms. Hxro Network is one of the alternatives, as it unlocks the following:
1. Access and a more inclusive derivatives landscape.
2. Liquidity formation at the primitive layer.
Imagine a world where markets which would otherwise be secondary or tertiary markets on a single exchange (for example: vanilla options or long duration futures on alts or maybe even derivatives that are used by companies to hedge bets on sporting events) can now share access to liquidity–in a way where the collective liquidity can greatly increase an end-user’s ability to obtain fair pricing when hedging risk. This is a critical component of market formation and critical to unlocking the reflexive power of liquidity as it scales.
3. The disintermediation and horizontal dispersion of systemic risks (no central point of failure).
This speaks directly to what we’ve been dealing with in the digital asset space recently where a lack of transparency and central points of failure have caused the systemic unwind of risk across the entire digital asset marketplace. What’s clear is that the majority of these issues have stemmed from centralized players. Alternatively most of the models in DeFi have performed incredibly well.
4. Real-time transparency for risk and critical market data.
Hxro Network’s customized risk engine, Spandex, runs risk inline (or in real time, as trades occur). This is a critical component in the mitigation of any unknown risk issues that could cause a material or potential catastrophic risk event.
Pyth network is about bridging the worlds of TradFi and DeFi. What are your views on the role traditional finance will play in the development of decentralized finance?
As mentioned above, we don’t think it would be possible to understand the real friction points of TradFi markets and where DeFi can improve upon those points without having contributors who have experienced TradFi markets firsthand.
Tell us more about Dexterity (the framework for trading instruments with defined payoffs) and Spandex (your customized derivatives risk engine). What prompted their creation? What is their place within a large ecosystem of protocols and institutional players?
Dexterity is an open source collection of smart contracts that provides the base exchange and clearing framework for trading any instrument with a defined payoff function. So think of this as the part of the network that handles the accounting, exchange and settlement function.
Spandex is Hxro Network’s customized derivatives risk engine. It is the first on-chain, real-time risk engine to use a portfolio risk-based approach to managing users’ margins and risk.
Put simply, this means that when you have more than one position in your wallet, you will receive any potential benefits of correlated offsets between all positions in the wallet, as opposed to receiving isolated margin on each position individually,
As an example: say it cost you $5,000 of initial margin to carry a BTC-USDC 1-week future. Now say you simultaneously sold a 2-week future behind it: your portfolio margin requirement would actually go down substantially, where maybe now you’re only required to post $1,000 due to the optimization benefits of having a 1-week vs 2-week spread on.
The map of primitives across the HXRO network can be overwhelming! Market protocols (derivatives, parimutuel), liquidity protocols (SAMM, THEO), Dexterity, and Spandex, and HXRO token and governance. Do you have any helpful frameworks for the community to digest everything?
Haha. Yes, quite an ambitious slate of primitives that were built! I think it is best to focus on the main features which would be Dexterity and Spandex as well as the networks staking, governance and rewards contracts first. Everything else, I would consider secondary for now.
What should your community look forward to next?
Next for Hxro Network will be to move from our alpha sandbox to opening on real USDC as collateral. I would expect this to be ready to go later this summer. At that time we will also launch governance, staking and rewards.
Any final words for your community and the reader?
What has come to light the past 2 months of what we would consider systemic market events has magnified the risks associated with centralized finance. Especially as it relates to lack of transparency and human error. This screams the need for an onchain DeFi alternative to the incumbent market.
I think over the next 12–18 months you will see a significant shift of interest by both market participants and regulators to the exploration of defi derivatives and how they might help mitigate these legacy market risks. We expect to see Hxro Network, as a primitive and as an entire ecosystem, lead that initiative.