How does UMA's LSP contract allow users to trade options easily?

LSP is very simple in design (only about 300 lines of code!). . But it can create arbitrarily complex derivatives with homogeneous long and short positions, and does not require active position management by users.

Here's a look at the design of the LSP and why we think so much about it.

How LSP works

As mentioned above, LSP is simple. The user can perform three main actions.

At any time, a minter can pledge a certain amount of an asset to mint a short token and a long token. At this point, the foundry is fully pledged and the position is risk neutral. Regardless of the settlement price of the long and short tokens, the sum of their values is the same as the total value of the pledges. This means that the minter can redeem a pledge at any time by paying back a pair of long and short tokens, thus closing the position.

When users create long and short token pairs, the two positions cancel each other out in terms of risk exposure. Only when the user sells long tokens or short tokens will a one-way exposure occur. It also gives its counterparties one-way exposure.

At maturity, LSP will ask UMA's Optimistic Oracle (OO) for a settlement price, and then use the price returned by OO to determine how much collateral each long token and short token is worth. In the contract, ExpiryPercentLong  Represents the ratio of pledges between long and short tokens. Position settlement function is shown in the figure below:

It's that simple! Unlike UMA's EMP contract, the founder does not have to worry about liquidation due to price fluctuations of the finished product or collateral. Unlike other information entry mechanism solutions in the field, LSP does not integrate complex or costly real-time on-chain price push mechanisms, but instead puts prices up at once in a trust-free and manipulation-resistant manner.

For example

Let's look at how to use LSP to create covered call options.

On July 30, 2021

Although the LSP contract itself is simple, it has a wide range of applications.

UMA's Optimistic Oracle has been online, providing customized feeding services for a variety of products. It can return deterministic information about anything in a trust-free manner, and is resistant to manipulation, so it can act as a settlement mechanism for LSP contracts.

LSP contracts help unlock the potential of OO. Developers can combine LSP and OO to build traditional/long tail products.

For example, Optimistic Oracle can provide price information for the following scenarios:

If you want to know more about OO and LSP use cases, check out these tweets1,2,3.

Next step

LSP contractsandPrice conversion libraryIt is currently being audited by OpenZeppelin and will soon be deployed on Ethereum L1 and Polygon.

As we mentioned in the last article, UMA will launch its first RangeToken for UMA tokens in the next few weeks using LSP contracts. In addition, our partners are also looking to use LSP contracts to launch their own derivatives, KPI options and structured products.

If you are interested in using our LSP contract for development, be sure to read ourThe documentAnd join us in Discord. If you have any feedback or questions, please feel free to contact us. Thank you!

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