What Are the Challenges in Creating a Liquid Market for Derivatives Based on Cryptocurrency Network Security?
Creating a liquid market for such derivatives faces several challenges. First is the difficulty in defining and verifying a 'security event' like a 51% attack in a standardized way that a contract can settle against.
This requires trusted and resilient oracles. Second, there is a lack of historical data to accurately price the risk, making it hard for market makers to set premiums.
Third, the potential market size might be small, leading to low liquidity and wide bid-ask spreads. Finally, there is a significant risk of moral hazard, where large miners could potentially buy put options on a coin and then attack it themselves to profit from the resulting price drop.
Glossar
Put Options
Premium ⎊ Put options, within cryptocurrency markets, represent a contractual obligation assumed by a seller to fulfill a buyer’s right to sell an underlying asset at a predetermined price on or before a specified date, functioning as a protective mechanism against downward price volatility.
Liquid Market
Depth ⎊ A liquid market, within cryptocurrency derivatives, signifies efficient price discovery and minimal transaction costs, crucial for effective risk transfer and hedging strategies.