In April this year, the Hegic protocol was launched. It had several interesting features for call/put operations based on DAI and ETH, which immediately sparked some interest from liquidity providers and investors.
The problem is that, since then, the project has suffered two major setbacks that have compromised its’ image among users, hence affecting investors’ confidence as well.
A Quick Story About Hegic
First, to fully understand the content of this article, readers must know how options contracts work, as the business model used by Hegic is based on it.
Before going into more detail, be sure to check their official site for more information and news about the Hegic project.
Options contracts give users the right to buy or sell a specific asset at a later date at a so-called strike price (which is nothing more than an agreed-upon price).
In layman’s terms, options contracts are a leveraged bet on whether the price of an asset will go up or down within a previously fixed period.
How Does Hegic Work?
Hegic is an Ethereum-based for on-chain options trading, using hedge contracts and liquidity pools.
The main goal is that customers use their non-custodial hedge contracts to protect their ETH from potential risks in any market conditions.
Hedge contracts are similar to option contracts. A hedge contract is nothing more than an Ethereum smart contract that gives the holder the possibility to swap their DAI or ETH stablecoin at a fixed rate for a given period.
All hedge contracts are guaranteed by the code, which makes them a smarter version of put-option contracts, but non-custodial, trustless, and with no censorship whatsoever.
The platform’s initial plan was to benefit a wide range of people, including ETH holders, miners, traders, and new users who were just onboarding in the cryptocurrency world.
Hegic two foundational operations are call and put options; these concepts are quite simple to understand.
An ETH put option is an on-chain contract that gives the holder/buyer the right to sell ETH at a fixed price for a certain period. On the other hand, an ETH call option works similarly, but instead of selling, the holder/buyer has the right to buy ETH in the same conditions.
The plan sounded fairly good, so the team decided to launch the v1 protocol on April 23, just two months ago. Unfortunately, things did not go as planned, and two major setbacks happened so quickly that no one even saw it coming.
The first setback happened less than 48 hours after the team announced the product launch.
They used their Twitter account to alert the public about a typo that was found in the code. Hence, liquidity in expired options contracts could not be unlocked for new options.
7/8 ‼️ WARNING! Hegic Protocol V1 HAS NOT BEEN AUDITED YET. You can lose up to 100% of your funds that you provide to the liquidity pools contracts. There is a technical risk that the V1 contracts can be hacked. NEVER provide funds that you can’t afford to lose. Always DYOR. pic.twitter.com/RnsdkWymaG
— Hegic (@HegicOptions) May 8, 2020
Hegic stated that it was not a security issue, but the error occurred due to an incorrect function name. This particular function was responsible for unlocking liquidity in expired contracts, but they ensured their customers that it could not be used by a malicious actor.
Although they said all users would be refunded with the amount of premium paid for options, this situation ended up causing a quite uncomfortable situation.
When the problem seemed to be dead and the situation started to cool down, the Hegic protocol, unfortunately, succumbed to a design flaw. Notice that it happened just a month after the first setback.
The Shutdown of Hegic
In late May, Hegic was forced to shut down after a crooked trader took advantage of a hole in the network’s design.
It happened partially because of the design of the platform’s liquidity pool, where older liquidity providers have the precedence over the newer.
The issue happened when that trader realized that he could receive his premium and just leave after collecting it, without being forced to honor any of his obligations as an option seller.
This caused a huge loss for Hegic, which had previously frozen $30,000 worth of ETH forever due to the previous typo-related situation.
Fighting for Trust
Although those responsible for the platform were transparent and reacted to take control of the situation (at least partially), is naive to say these problems had not strained the company’s reputation amid the market.
Specialists blamed the fault on “poor game theory” in the project, which ended up compromising the results.
Today, the Hegic’s code is performing as expected and the platform overcame those two vulnerabilities, but it is hard to convince potential customers and investors to fully believe it.
Can Hegic Reclaim Trust of Users?
Hegic was originally meant to be an on-chain options trading protocol on Ethereum powered, where customers can use non-custodial hedge contracts to protect their ETH from losses and drawdowns in any market conditions.
Although the platform was designed exactly to protect users against risks, the first two months of its existence proved the idea was good, but the game theory behind was poor.
After two major setbacks, the company now is redeeming itself amid the players in the cryptocurrency race, fighting to overcome the present situation and, just like a phoenix, reborn from its own ashes.