Value in Pair Currency
Using Dex pairs in base valuation of the underlying tokens in a deal
Referencing the Technology Topic below:
Hedges and Loans all have underlying assets/tokens as collateral in order to guarantee payoff outcomes to both parties.
Considering that DEX-es value tokens in quote/paired token, it is only logical to embrace this as the valuation standard for the underlying assets on our protocol.
This removes risk that may be associated with using other currencies, when price changes.
Call Option Hedge with VELA tokens as underlying assets is created
In the Hedge, VELA tokens are valued in XXX TOKENS an unofficial pair
VELA tokens on DEX are paired with WETH officially
This creates a discrepancy in pricing or valuing. There is now need for a currency conversion.
Now supposed the price of XXX crushes by 50% overnight, or during the lifespan of the Call Option:
The underlying value of the hedge is spoiled on the protocol, and is cut to half
Yet on DEX-es, the value of the underlying tokens remains higher in WETH
In turn, the collateral provided in the hedge is no-longer proportional to guarantee the parties.
Twice the amount of XXX is now required to bring the Hedge value up to true Dex value
Conclusion
Third party currencies will not work to value hedges.
Our protocol supports all ERC-20 tokens on the blockchain it's deployed on.
This then enables for ease of costing, valuation and payoff when trading on our platforms. Value remains fair for both parties for the underlying tokens in question.
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