How Binary Options Work
Binary options are a type of options contract that provides a return on investment based on the binary outcome in the future. They pay out the profit if the price of the asset is above (or below) a certain amount indicated at the time of option creation.
The mechanism of binary options
A binary option is a type of contract that allows the investor to make a transaction with a future yes / no result. This can be illustrated as follows:
BTC will be above $ 50,000 on August 16, 2021 at 18:00 UTC + 1.
This statement may be true or false. In the above-mentioned case, true will symbolize "long" options, while false will symbolize "short" options. Tytanid offers parimutuel binary options. This means that the part of the market that was wrong has to pay the other side of the market.
Let's take a look at how this works in practice. Suppose that if the market "BTC is above $ 50,000" gathered a total of 100 ETH from investors, where 45% of investors were long and the long side of the market was right, they would divide themselves 55% of the short side of the market, i.e. 55 ETH. Investors on the long side will receive a commission from the losing side of the market in proportion to the percentage they have on their own side of the market. All binary options markets are denominated in ETH and this is the only currency to buy options.
Binary options are derivative financial instruments based on floating auctions. This means that the price of each side of the market will balance until the end of the option bidding phase. In simple terms, the state of the market structure at the time the offer is submitted does not affect the payout volume at the time of market settlement. The only significant elements affecting the final settlement of the market are the long and short skew after the end of the bidding phase of the option and, of course, whether a given binary option is true or false at the time of market maturity.
When you place an offer and purchase the selected option, you transfer your ETH to the total pool of funds of the given market and select the side. In each market, you are allowed to take both the long side and the short side at the same time. To sum up, in the bidding phase, users will not know what shape the market will finally reach, because they will only be able to check the current percentage ratio of the long side to the short side. Investors should carefully examine the skew to be sure that the current shape of the market reflects the probability they associate with the final result.
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Creating a market
To create a binary options market you need to go to the "Create a Market" page. Before you create a market, you need to set its parameters. First you need to select the asset class that interests you. The following asset classes are available: crypto, fiat, equity and commodities. Then you need to select the asset on which you open a new market. The next step is to set the strike price (several currencies are available), then you should enter the funding amount. The minimum amount for which a market can be created is the equivalent of US $ 50 in ETH. Then set the end date and time of the bidding phase. Once this is done, set the date and time when the market should reach maturity. When all of the above steps are completed, use the slider and select how you want to allocate your funds. The final step is to check the market summary on the right side of the screen. If all the parameters set by you are correct, click the "Create Market" button.
Participation in open markets
The Tytanid protocol allows users to create new binary options markets as well as join markets previously created by other users. There are three phases in which a market can exist. They are Bidding, Trading, or Maturity. The decisive factor which side of the market wins is whether the price of the asset on which the options were acquired is higher or lower than the strike price. If the value of the asset for which the options have been opened is higher than the strike price, the users who bought the long options beat the users who bought the short options. On the other hand, when the price of the stock is lower than the strike price, users who have purchased short options beat investors who took positions on the long side of the market.
The Bidding phase
This is the phase of the market that allows investors to bid on long or short options. During the bidding phase, it is possible to withdraw the ETH invested in the market. However, such a withdrawal is associated with the payment of a 5% commission on the amount withdrawn from the market. During the bidding phase, it is allowed to place an unlimited number of bids on any side of the market from the same wallet.
The Trading phase
Once the trading phase has started, bids are no longer allowed. Since then, the market parameters have been finally shaped. In the trading phase, it is also not possible to withdraw the ETH invested into the market. The shape of the market will determine the profit volume for investors on both sides in the event of a win.
The Maturity phase
From that point in time the options are mature. For example, for the market "BTC> $ 50,000 on August 16, 2021 at 18:00 UTC + 1" the Maturity is August 16, 2021 at 18:00 UTC + 1. Once the market has reached maturity, you can take profits if you are on the winning side of the market. This phase is limited in time and lasts for 6 months. This means that all options must be exercised within this time period or they will be lost. All options that are not exercised within 6 months of the start of the maturity phase will go to Tytanid.
Tytanid Protocol charges 1% commission on the funding amount for market creation. Additionally, the market maker will be charged a 1% fee for submitting an initial bid in a newly created market. The commission for joining the created market is 1% of the amount that the user invests in a given market. The amount charged to users who placed bids on an already created market is divided in such a way that 90% of the commission goes to the Tytanid Protocol, and the remaining 10% to the market maker. Users who choose to withdraw their invested funds in the bidding phase will be charged a 5% fee of the withdrawal amount. The fee charged to the investor for the withdrawal of funds in the bidding phase will be divided in such a way that 80% of the funds will go to the Tytanid Protocol and the remaining 20% will go to the market maker. The commission charged to users who decide to reinvest funds previously invested in a given market into another market in the bidding phase will be 5% of the amount that is reinvested. The user fee for making an inter-market reinvestment is 5% and will be distributed so that 80% of this amount will go to the Tytanid Protocol and 20% to the market maker from which the user leaves when reinvesting. Additionally, the user who reinvests funds into the new market will be charged a 1% fee for submitting an offer on the new market. This commission will be split in this way with 90% allocated to the Tytanid Protocol, and the remaining 10% to the market maker in which the given user is making an offer for reinvestment. If, at the date and time indicated as when the market will mature, the asset price is exactly equal to the strike price, the funds invested in the market will be allocated to the Tytanid Protocol.