Hxro Network Litepaper v1.0
Hxro Network is a decentralised liquidity network for risk-based applications built on the Solana blockchain. Through a series of native protocols, Hxro Network will provide the framework and infrastructure for a robust, fully-functional decentralized exchange for vanilla, exotic, and parimutuel options markets.
Network value will largely derive from transaction fees generated within the network. One hundred percent of the network's value will accrue to staked HXRO token holders, specialized node operators, network treasury and developer pools vital to the network ecosystem and functionality.
The network will be made up of the following elements which will either be built natively to the Hxro Network or composed through tangential Solana projects:
HXRO Token - Network governance will vest into staked HXRO token holders. Additionally, HXRO will have the following utility within the network:
Governance
Reduced transaction fee payments
Volume tier-incentive rebate rewards
Staking Rewards
Builder Rewards
SAMM Protocol - A “smart” automated market maker built native to Hxro Network that provides on-chain liquidity to a simplified dual-outcome parimutuel market.
THEO Protocol - A self-sustaining, risk-managed automated market maker native to Hxro Network that provides on-chain liquidity specifically in a decentralised market for both vanilla and exotic options.
Hxro network will compose with Project Serum to integrate its order books, spot and perpetual markets (used for liquidity protocol hedging) and other needs vital to the network's functionality.
Hxro Network will consist of market protocols that specify the necessary functionalities to facilitate the trading and risk management of multiple financial product types. The network will focus its efforts on three types of options markets:
Vanilla Options - Standardised, Cash-Settled European call and put options. These are options that you most commonly see on a traditional options exchange.
Exotic Options - Non-standard options that vary in their payoff structure, exercise terms and other contract components. Examples of exotics are 1-touch, Knock-Out, Barrier, Range and Bermudian options.
Parimutuel Markets - peer to peer, dual-outcome event markets where all positions are pooled together with the in-the-money (or winning) side sharing the pool pro-rata.
Hxro Network will build a permissionless, fully-functional decentralized options exchange protocol that will support both standardised and exotic options on-chain. Liquidity will be built through the introduction of traditional market makers and THEO protocol - a network native automated market making system capable of competitively pricing both standardised and exotic options while dynamically managing inventory risk. Options are one of the most powerful tools used for hedging risk and speculating on price movement in financial markets. In recent years, options volumes on both equities and non-equities have grown explosively. According to the Options Clearing Corporation, more than 7.4 billion cleared equity and non-equity options traded on centralized exchanges in 2020. This was more than a 52% increase in volume from the previous year. Through April 2021, total volume has already reached 2.4 billion with average daily volumes of 41.9 million - a 42% increase in ADV from 2020.
Crypto options markets have seen exponential growth in volume. Deribit has seen volume over $2B of BTC options per day in the first quarter of 2021. While these volumes continue to grow at a staggering rate, a viable decentralised options trading solution has yet to materialise. This has largely been due to the following:
Prohibitive trading costs due to high network fees
Options are extremely data intensive and require the ability for liquidity providers to mass quote a chain of options
lack of on-chain orderbooks
The protocol AMM is incapable of dynamically managing its liquidity while offering market takers competitive pricing and fees.
To date there have been multiple attempts at a viable options offering, with all projects at some point running into one of the issues stated above. This has resulted in many projects offering workaround solutions that while interesting, do not offer a comparable liquidity source to a standard centralised market system.
By introducing an Automated Market Making Protocol capable of solving for dynamic pricing and liquidity risk management issues currently present in other defi option protocols and coupling this with traditional market making participants, Hxro Network will be capable of presenting a commercial-grade liquidity solution that allows anybody to participate in provisioning liquidity to the network.
Parimutuel describes a payoff system in which all positions (or wagers) are placed together in a common pool. Consider an N outcome event, in this case the total pool will be the sum of all individual outcome pools. The house-take or fee is then deducted, and payoff odds are calculated by sharing the total pool net of fees amongst all winning entries.
Historically parimutuel-style wagering is most commonly identified in horse racing. However, this system has powerful application in a market context across other arenas including trading, prediction markets and sports wagering. In these contexts, parimutuel markets are generally dual-outcome. A trader takes a position on an event's outcome and if correct, he will be distributed the payoff from the money lost by the traders who took a position on the losing side (plus his initial position).
For traders, parimutuel markets offer a simplified way to trade risk. Since the outcome of a trade is generally binary (in the money or out of the money), a parimutuel market can remove many of the complexities associated with execution and position management in a traditional trading market. Additionally, because of the pooled nature of parimutuel markets, an imbalance in the distribution of assets to each outcome creates implied payoff odds. This creates the potential for asymmetric payoffs in cases where the imbalance becomes significant.
Hxro Network will introduce a parimutuel protocol designed to support fully on-chain, peer to peer liquidity and market functions for a simplified dual-outcome parimutuel market. The protocol is designed to solve for the liquidity consistency problem typically faced in nascent markets and will support applications specializing in market segments including trading, prediction markets and sports wagering.
THEO Smart Automated Market Maker (THEO) provides the network legacy exchange grade liquidity to standardized vanilla and exotic on-chain options markets. Using such an AMM with external market context being provided by independent theoretical pricing nodes can allow a system to efficiently build liquidity across the volatility surface of any digital asset. This result has the potential to solve the liquidity consistency problem typically faced by on-chain options markets whilst being efficient enough to keep fees to participants low. Ongoing governance is then required for parameter calibration to keep the system in a state of equilibrium. More information on THEO protocol can be found here
SAMM
Smart automated market maker (SAMM) provides on-chain liquidity to a simplified binary-outcome parimutuel market. Using such a SAMM with external market context being provided by independent probability nodes can allow a system to bootstrap liquidity efficiently. This result has the potential to solve the liquidity consistency problem typically faced by parimutuels whilst being efficient enough to keep fees to parimutuel participants low. Ongoing governance is then required for parameter calibration to keep the system in a state of equilibrium. More information on SAMM protocol can be found here
Any HXRO tokenholder will be eligible to stake their tokens to the Hxro Network. Staked tokenholders will also become eligible to participate in network governance. In exchange for their staking and governance participation, staked tokenholders will receive a pro-rata share of network transaction fees allocated to the staking pool. Rewards are funded by network transaction fees, not perpetual inflation and issuance. 100% of network transaction fees will be shared between stakers, network treasury, specialized network nodes (i.e. probability providers in SAMM, surface providers in THEO and liquidity pool stakers), and a builders reward pool. The exact breakdown of how fees will be shared has not been finalized and is currently under discussion with current community members.
Stakers will have the option to lock their stake for up to 3 years. Those doing so will earn a 3x multiplier on their share of the rewards. Naturally, those who lock their stake longer should have a higher stake weight and thus a higher portion of network rewards. This multiplier will also double as governance weight, where staked token holders can express their view and participate in the direction of vital network decisions with more voting power vesting into longer term stakers.
Staking rewards will vest in an opposite fashion. Those who lock for the minimum period (daily) will have their rewards vest over 1 year (max), while those who lock for the maximum amount of time (3 years) will receive fully vested rewards daily. Between the min and max time periods is a sliding scale. Fees will be distributed to stakers based on their weighted stake on each distribution period as a basket of the tokens users used to pay fees on the network. Initially this will be comprised of USDC and HXRO. This allows users to stake HXRO, and earn USDC or whichever tokens are deemed valuable and used to pay fees on the platform, keeping HXRO’s fee form dynamic based on what users determine are valuable (HXRO, USDC, etc), and eventually likely transition to fully HXRO over time as the token gains continued acceptance.
It is proposed that a 75M HXRO (7.5% of supply) liquidity incentives pool will be created to incentivize new and existing users. To insure liquidity incentives are not wasted by granting them arbitrarily, rewards are dependent on the daily notional gross volume transacted on the Hxro Network in any given day. The number of HXRO granted per day will scale depending on total platform volume in USD and max out at 102,740k HXRO per day if gross volume is over $1B. A sliding scale will cover rewards between these amounts. Users will earn a pro-rata portion of these fees depending on their pro-rata volume on the platform. Rewards will be time-locked for 90 days, and vested linearly for simplicity. A sliding scale of rewards ensures the platform isn’t over rewarding is usage drops or is limited.
