Polygon Builder Series vol.4 — Rafaella Baraldo From Pods Finance

Polygon Builder Series is a video and blog series where our host Nemo talks with fellow builders on Polygon.

Our guest today is Rafaella Baraldo from Pods Finance.

Pods enables the easiest way to hedge crypto assets in Ethereum. The Pods Protocol is a decentralized non-custodial Options Protocol that allows users to buy, sell and provide liquidity using the new Options AMM.

Polygon and 0x are supporting builders with 10M fund. Make a proposal at https://gov.0x.org/.
Read more about the fund here.

Are you building on Polygon or interested to start? Apply here https://polygon.technology/developer-support-program/.

Apply for Polygon Advocates Program: http://bit.ly/PolygonAdvocates

Catch the whole podcast below:

https://youtube.com/watch?v=_AMwN4pKX7I

[00:00:14.530] — Nemo

Hi everyone, welcome to one more episode of Polygon BUilders Series where I interview fellow builders, my name is Nemo and today I have Babi from Pods. Hi, Babi.

[00:00:24.880] — Rafaella

Hi, Nemo.

[00:00:42.820] — Nemo

Can you for the start tell us a bit about yourself and introduce us to pods?

[00:00:51.460] — Rafaella

Absolutely so. Well, my nickname is Babi, but my actual name is Rafaella. I am from Brazil. I started my career in traditional finance in Sao Paolo, where I worked for investment banks, a hedge fund, multifamily offices. And so I got the chance to see the financial markets from different points of view throughout the beginning of my career. And that was really great. And now I’m building pods with an amazing team. And at pods, we’re basically focusing on the easiest experience and the easiest way to hedge possible in the world. Right now. We don’t have that. When you think of hedging, you don’t think of something or a place to go or someone to call for help. So basically what we’re doing is leveraging the technology that we can use in DeFi, Ethereum and now Polygon to create an instrument for easy hedging of any asset.

[00:01:54.930] — Nemo

Since you mentioned Polygon, I’m wondering, you guys focused on building pods on Polygon. So can you tell us a bit about the reasoning behind that?

[00:02:05.010] — Rafaella

Yeah, absolutely. So this was our demo release, and it is one of the steps of many testing steps that we have been taking since March and even prior to that, of course. And for us it was really important when we were choosing where to go as an L2 or as a scalability solution when we were thinking about the integrations, because while we were building pods, we need some like partners or integration points, which is like chainlink, the graph, tenderly, multi sig, for instance, so that we can have control of the admin keys and security. So we took all of that into consideration and they were all ready to use in Polygon. And so that was a major difference for us at that point.

[00:03:00.600] — Nemo

And from the development perspective, how was the whole experience building on top of Polygon?

[00:03:06.160] — Rafaella

Yeah, so I’m not I’m not a developer, but I’m going to say here what I’ve heard Rob talking about Polygon and what I remember from them saying was that it was very easy to experience the development in Polygon and in that you guys have a really good developer developer experience setup with documentation and support and everything. So, in fact, I guess that that can be a great role model for us when we’re creating documents and documentation for integration with pods. So it was overall really positive.

[00:03:44.910] — Nemo

Got it. OK, and so let’s get a bit more into the options and pods and what’s going on there. So one of the challenges in a lot of discussions that I’m having is that for the novice users, people that are experiencing DeFi for the first time, where a lot of these products that people can use permissionlessly, they could never experienced before and didn’t have that much of the experience or education how to use them. And since we want to educate and minimize the amount of people getting rekt on using the different services and different products and especially not understanding what they’re doing. from that perspective, how we can help users or popularly called apes to figure out the way how to not get rekt here and how to actually use properly tools like pods?

[00:04:49.730] — Rafaella

Absolutely. So I guess there are a few points to that question. I’m going to start with the point of options trading and then going further to DeFi protocols like pods or others. So options trading is a complex thing to do. To be honest, I guess is one of the most complex ways of being a trader is becoming a specialized options trader. It involves many things and it takes years of a career to actually master this. So one thing that I would say is that not everyone has to become an option trader to benefit from the positive things off options. And I guess that this is one of the beauties of DeFi, because we can actually provide people with the positive side of options without having them, without having to ask them to become options traders. And so, like I said, this is more of what of what pods is trying to do in the sense of abstracting away the complexity of options when it needs to be abstracted or when it can be abstracted. For instance, when someone is just buying a put option, which is the right of selling an asset in the future, which can be seen basically as insurance of a price, if someone is just buying that in terms of price, they don’t need to understand everything, absolutely everything else behind options trading. So that’s the first thing. However, so if you’re interested in learning more about concepts of options, my recommendation is to explore YouTube a lot like everything that you can. Khan Academy is great. They have amazing videos, especially about pricing in different combinations that can be done. I love them, but you can also just keep exploring the other videos until some point you’re going to realize that you understood the concept, seeing it in many different ways. And I prefer watching videos instead of reading. But if you are also interested in reading, there’s plenty of material about options. Concepts are on there for traditional finance. Now, let’s go to the second point, which is DeFi protocols in how not to get rekt when entering the DeFi protocols. So I guess that the first thing is to learn and explore what can happen. If you don’t want to read, you can just enter discord of the team and ask what can happen? What is the worst thing that can happen to me if I do this operation that I’m thinking of doing? I’m sure that everyone that is building in this space will be happy to respond you saying what could happen, what could go wrong. And so this way you are at least aware of what can happen to you and the risks that you’re going to be taking for that position. So this is one thing that I highly recommend and it’s not hard to do it is actually pretty easy to do. The other thing is more of a connection between understanding traditional finance options and understanding options protocols in DeFi. Even though you understand a lot of let’s say that you studied a lot about options in traditional finance and now you’re going to enter a DeFi protocol, somehow my recommendation would be to actually, again, go there to that options protocol and learn about that specific implementation, because there are many things in DeFi that are not exactly equal to traditional finance. So you may be expecting something and getting something completely different. So I would recommend to read again about the exact implementation that you’re looking at so that you make sure you won’t get surprised in the end.

[00:09:36.790] — Nemo

So while we’re on the topic of user, what would be some of the major user types that you, and your team plans to focus on at first?

[00:10:06.690] — Rafaella

So before I answer this one, I’m going to start off by putting a picture here — when you think of a protocol, you can think of it as two things. One thing that is the protocol, that is the underlying infrastructure, sitting below everything, and then something on top, which is the app, the app may or may not be using everything that the protocol allows for that specific context. And when we think about pods, this is kind of what we’re doing. So we have an underlying protocol that allows many different combinations and possibilities, which can be actually sometimes confusing for users if we were to do an app that is just the mirror of the underlying protocol. And we also have an app that is focusing on one specific use case of the underlying technology and the underlying protocol. And so basically, the app is kind of showcasing what the protocol can do with hedging experience. So we created a really, really easy way for people to find a hedge and decide to hedge their positions in our app. So we’re providing a really great experience for this, for this market. Then beside this type of user we have another two types of users in our one showcase use case of the hedging side, which is the sellers and liquidity providers. So we are, of course, improving still a lot the liquidity provision part in the app. But basically in this phase, we’re allowing people to provide funds to get a little bit more risk, but maybe also more return in the LP side. And so this user is more of a kind of traditional DeFi user that is looking for a kind of passive income, but putting some diversification there. And on the other hand, we have the sellers. So the option sellers, I guess that in our context here would be the users that have more context or information about options trading, and they will enter the market and sell options to the AMM when they see an opportunity. So if they see that that option is had too much buying activity and implied volatility was too high. And for this reason, the price is too high. It’s expected that they will join the AMM in selling options to it and correct the implied volatility to a level of where it should be. So there is also a possibility for for those users to enter and correct the market where it needs to.

[00:13:17.060] — Nemo

I’m really interested to hear what are some of the ideas, how users can leverage pods in their own favor?

[00:13:24.380] — Rafaella

Yeah, absolutely. So Alpha, one thing that I am crazy about in DeFi is composability. So making a really composable tool has been our goal since day one. And so one thing that we created was we allow users to use something that we call smart collateral. And smart collateral is basically instead of just using normal DAI or normal USDC, you’re going to use interest-bearing DAI from AAVE or interest-bearing USDC. Basically what that allows, for users, is that whenever they are locking collateral inside an options contract, either to provide as liquidity or to sell it back to the AMM, this user is going to be exposed to receiving not only the premium if they sold to the AMM, and if they provided as liquidity, they will receive the AMM returns and the fees from the AMM. On top of that, they can also receive the yield from AAVE generating over that period, plus AAVE rewards and Polygon rewards that are being directed to AAVE.

[00:14:49.460] — Nemo

Yeah, that that’s definitely something that people love. Since you were mentioning composability, what would be the possible integrations or some ideas how people can integrate and how people can builders collaborate with pods?

[00:15:26.250] —Rafaella

So it’s great that you ask that now because we’re also part of hack money (hackathon) and we have been talking about ideas for for a while because of that. So I guess we can start talking about some ideas here from really easy things to do. One really interesting thing is that you can create is an exposure token. So you can just create an ERC20 token and withing this token you can have some stable interest generating investment, like something from yearn or maybe from curve that is generating fees and rewards there, plus a put option that will allow the user to convert or exercise in case the underlying asset of that went up. So with this, the person basically can get in one combination, enhance yield that is generating for them, plus exposure to the underlying asset of that call option. It’s like if I had, only BTC if it’s going up, if BTC goes down, I’m out and I’m still generating the yield from curve or wherever other place. So that’s one really easy thing to create. And then there is also the opposite side of that, which is you can create like a super smart ETH, for instance, where you put ETH on LIDO finance that is generating interest for ETH there and then you combine this with a put option on ETH and basically you created ETH that is generating returns for you and at the same time is protected from volatility, just like a super ultrasound ETH. You can do that for any any asset, for instance.

[00:17:35.090] — Nemo

Got it. OK, and the last question that I have is, in your opinion, what decentralized options can bring on the table compared to centralised solutions? If we ignore the decentralized, centralized debate, what are the other things that you think that decentralization can bring on the table that couldn’t be done with a centralized.

[00:18:12.860] — Rafaella

Yes, this is awesome. I think that it can bring so much. I think honestly, I think that it can bring more than we can think of right now. Just to start thinking about this is so far we don’t know this, but because of derivatives, so many products in the world can exist today, because of it we can drink coffee every day. It’s because the producer hedged or sold the future or did a bunch of stuff during the entire supply chain so that coffee could get in our table every day with, like kind of reasonable price. And then when we think about that, we can question ourselves, like, why is that? Why is it that derivatives were so important for the development of businesses around the world. It is because when you’re using derivatives for the hedging purpose and not the speculative purpose, you can bring more previsibility to your business, cash flows, basically. If someone is running a business on, let’s say, latex and latex price in the market is super volatile, you take one year to produce that latex. By the end of the year, you cannot run the risk of having to sell that latex for less than you had to put in, to actually produce it. If you are in that risk all the time, at some point your business is going to break. And of course, you’re never going to sleep because you have people working with you and things like that. So bringing derivatives into the game allows people to bring more previsibility into their businesses. And basically just start creating more and more things on top of that. So instead of thinking of the price in the end of the month, someone is going to be thinking about how can they do their product better, how can they serve their users better. And I think that so far, most of the usage of derivatives has been kind of limited to either big accounts of private banking or corporate institutions that are at least medium size to big size. But now what we can do in DeFi is basically we can open this up instead of being one liquidity per country. So one thing that we can do with DeFi, first, open up the liquidity for those assets all over the world and make it one. So there’s probably someone that is trying to speculate or do something else on the other side of your trade somewhere in the world. If I can make it easier for them to find each other, that’s great. And the second thing is basically allowing this really cool primitive to anyone to use. So all the things that can be built on top of this, I don’t know, to me, they’re just mind blowing.

[00:21:35.510] — Nemo

Is there anything else that we didn’t cover and you would like to share with anybody who is listening right now?

[00:21:42.680] — Rafaella

I don’t know. I think that I think that that was mostly it. If anyone is thinking about launching in Polygon, I would definitely recommend to use a lot of the graph and tenderly to track everything that is happening. And, if you need help with that, we just did it. So feel free to reach out and we’ll be happy to help.

[00:22:26.190] — Nemo

Got it. OK, well, Babi, thank you once again for all of this. I hope that you enjoyed I definitely did and it’s helping me out to understand options more and more. So, yeah, that’s it from us. Thank you for watching. Thank you for being with us, Babi.

[00:22:46.470] — Rafaella

Thank you, Nemo.