Hedgy, a bitcoin startup, launched its derivatives platform in early June, shifting an operation that had run largely under the radar into public view. Unlike traditional exchanges that act as counter
Hedgy, a bitcoin startup, launched its derivatives platform in early June, shifting an operation that had run largely under the radar into public view. Unlike traditional exchanges that act as counterparty to both sides of a trade, Hedgy connects two parties who want to hedge bitcoin's price swings through peer-to-peer smart contracts that neither side can break or alter once they're finalized.
The company built the service with an eye toward broader applications down the line. The company sees its role as a smart contracts oracle potentially valuable for consumers and merchants, though for now only bitcoin miners can access the platform. These miners want to lock in a sell price for coins they haven't generated yet.
Matt Slater, Hedgy's CEO and co-founder, answered questions during an AMA on ZapChain. He explained how the mechanics work. Two parties agree on contract terms, then both deposit at least 30 percent of the contract value into a multisig bitcoin address. The contract settles when its term expires or when the margin funds run out.
Liquidity poses an early hurdle. Every exchange that launches faces this challenge. Slater acknowledged it head-on: "We are working with market makers that help mitigate [the risk of low liquidity]," he said.
The 30 percent margin requirement creates exposure. Bitcoin has dropped 20 to 30 percent in just a few days. The most recent crash was in January. A user could lose hedging protection in the span of a week or two, or even faster. The protection they thought they'd purchased could disappear before they notice.
What happens during a crash? Slater explained the mechanism: "It would depend on the margin posted to each contract that would determine at what price the contract would stop out. Since these are bespoke contracts, the counterparties can agree up front to post additional margin as the price of bitcoin changes."
The premise behind Hedgy reflects a broader argument within the bitcoin world: the digital currency needs to stabilize before reaching mainstream adoption. Marc Andreessen articulated this point in January: "Now, yes, in the long run, BTC does need to stabilize — which I think will happen with a combo of scale + use of derivatives (hedging)."
Hedgy's platform could help enable that stabilization. Right now the company restricts access to miners. The platform's potential stretches far beyond them, to any bitcoin holder who wants to protect wealth from price swings without selling the coins themselves.
One scenario: a Hedgy plugin for bitcoin wallets that lets users hedge their bitcoins against their local currency in a single click. Asked if that's in the plans, Slater replied: "Perhaps."
The platform has limited reach at the moment, and Hedgy won't reveal its true potential until more of the bitcoin community gains access to it. Existing options already let people address volatility by selling coins for dollars, euros, or other forms of fiat currency. A built-in hedging service could appeal to a different user base. Volatility remains a major concern keeping potential users away from bitcoin. The ability to manage that risk from inside a wallet could bring new people to bitcoin.
