A Crypto Pragmatist Deep Dive: Buffer Finance

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Disclaimer:

This is a sponsored deep dive. In this article, we will go in depth into an educational explainer on a protocol we’ve partnered with, Buffer Finance, and explain to you how the project works. We'll also chat about the product they're launching, Buffer v2.5 and why you might want to check it out. All partner projects go through an extensive due diligence process by the Crypto Pragmatist team.

While we've been given a token allocation to write this post, this educational report represents no endorsement to purchase the token of the project mentioned below, nor is it an endorsement of the product. It is simply an educational primer on the products and history of Buffer.

Introducing Buffer Finance
1. The Project
2. The Product
3. Trading
What Can I Do With Buffer?
1. Trading
2. BFR and BLP
3. Referral Program
The Origin Story: Why are Derivatives Important?
1. Derivatives for Retail
2. Derivatives for Sophisticated Capital
3. Using Derivatives to Generate Yield
Onboarding to Buffer
1. Optopi NFT
Understanding the Financial Mechanics of Buffer
Why is Buffer Important
1. Understanding the Tokens
2. The Evolution of Buffer
3. Competitors
Wrapping Up

Interested in learning more about Buffer Finance?

Check out the exchange here
Earn Yield here
Practice Trading here
Learn about the protocol via their docs here
Visit their Discord here
Visit their Telegram here
Follow them on Twitter here
Generate a referral code here
Check out their Youtube Channel Here
Learn about Staking here

Introducing Buffer Finance

Why did the iPhone win where the Palm Pilot lost? Why are we riding around on modern bicycles instead of penny farthings? And why has Uber become ubiquitous worldwide while the traditional taxi industry continues to contract?

In one word: User Experience, also known as UX.

Cryptocurrencies originally were traded as ‘spot’ assets, with the actual digital assets just switching back and forth between owners. Later derivatives emerged alongside leveraged trading; and even options have begun to creep in (although we’ll get to the difficulties of crypto-basd options markets a bit later).

Perps, also known as Perpetual Futures Contracts, however, have the highest market share of any crypto-based financial instrument, and it’s for a few different reasons:

Easy access to leverage
The lack of sophisticated and liquid options in crypto
A user experience that’s easy to understand, but is also used by sophisticated actors
The ability to make a lot of money on short time frames

Despite this, options can unlock a whole new type of investor, use case, and tier of capital. Many think that the underlying value of options traded in crypto markets will eventually surpass the notional value traded across spot markets.

Given such a large market, Buffer stands to face incredible growth potential in coming years.

Check out Buffer's Product Here

The Project

When we witnessed the retail boom in stock trading throughout 2020, 2021, 2022 (Gamestop, anyone?), one of the key changes that unlocked the ability for retail users to make life-changing money was the introduction of a clear UX around the buying and selling of options. Reddit community /r/WallStreetBets often advocated for a specific strategy: the buying of ‘FDs’ (I’ll let you look up what that crass abbreviation stands for).

While options have helped onboard millions of retail users, technical challenges and liquidity issues have largely prevented their widespread adoption in the crypto industry. But while this viral and popular product has permeated the TradFi industry, it was clearly only a matter of time before crypto projects popped up and launched their own options markets.

Buffer Finance offers exotic (ultra-short term) options for their users to make speculative leveraged bets. They’ll also shortly be offering other types of products that we’ll explain below.

The Product

Note: If you want an incredibly effective and simple overview of Buffer’s product as it applies to you, check out this informational video here.

It’s important to note that the options and products that Buffer Finance are far from identical to the products offered by TradFi brokers. They are referred to by Buffer as Up/Down options. What this effectively means is that a trader can set the following parameters:

Trading pair (BTC, ETH, and more, also forex pairs and commodity pairs)
Time (1 minute to 4 hours, with longer durations coming)
Size
Direction

And win a fixed payout.

Interesting here that Buffer allows you to set up your bespoke options—TradFi markets require you to purchase a specific option; thanks to Buffers’ passive liquidity model you can purchase options with any parameters you choose, as long as they fit in the limits of Buffer’s parameters.

Check out Trading on Buffer here

What Can I Do With Buffer?

The first thing you can do with Buffer Finance is trade options any of the following tokens:

With any of the following parameters:

That’s Buffer’s core functionality and this simple product has proven incredibly popular; with over $6m in volume. But as of this week Buffer is launching an entirely new version: Buffer v2.5.

Buffer v2.5

Buffer is launching a new version this week, called Buffer 2.5 that offers a whole host of new features to users. The team makes onboarding easier though account abstraction--account setup and trading don’t even require you to hold ETH in your wallet. UX improvements add 1-click gasless trading, and hedging strategies are expanding; which should help onboard institutional capital.

Along with that the UX generally moves closer to a CEX; with new limit order capability, an early close function. Private trading is also added, along with new pairs (Commodities). It also opens the door for new pairs, so hop in their Discord to request new pairs.

Buffer’s Tokens

Buffer Finance has two different tokens that you are necessary to understand, each of which has variations that allow the economic system to create an economic equilibrium in the system.

BFR: $BFR, the governance token of the protocol, can be staked to earn up to 40% of protocol revenues in the form of $USD or $ARB, via airdrop, and esBFR (vested governance token). There is an additional APR in protocol native token rewards of:

Multiplier points: Points reward long-term stakes by boosting APRs
esBFR: a governance token reward that must vest over time.

BLP: The BFR liquidity provider token, representative of the opposite of collective positions on BFR. As the source of liquidity for traders, BLPs take the other side of open positions. When users mint $BLP, it is automatically created as a counter-trade to Buffer traders and begins accruing rewards. Rewards are given in the following ways:

Whatever token you provide as liquidity, with two options:
1. aBLB earns $ARB
2. uBLP earns USDC fees
esBFR

esBFR: “Escrowed BFR” tokens can be used in two ways:

Staked for additional $BFR rewards
Vested over 1-year to earn liquid $BFR token. As vested, more $BFR becomes vested

To vest the $esBFR, users are required to “reserve” the amount of $BFR or $BLP that was used to earn the $esBFR—in this awy,you are perpetually incentivized to continue staking and not unlock.

If that explanation feels a bit complex, check out this diagram:

Referral Program

In attempt to bootstrap a community using existing users, Buffer has created a referral program that allows people like you to onboard users and receive a direct financial benefit

Check out the Buffer Referral Program

The Origin Story: Why is Buffer Important?

Why are Buffer’s products important? Despite being speculative products, they serve an important purpose in the crypto ecosystem. While some believe that crypto needs fewer speculative instruments, a whole subset of industry observers tend to believe that speculative infrastructure is actually incredibly important to create efficient markets in crypto.

Imagine only spot markets existed in crypto—there would be no way to speculate on the downward price movement of an asset, now would there be a way to create leverage in the system—the system would favor large investors, hedging strategies to manage risk wouldn’t exist. Without these more sophisticated tools; the industry wouldn’t be able to onboard massive capital. Without capital, the industry will perpetually exist as a tiny industry relative to TradFi.

Using Derivatives to Generate Yield

Yield is one of the key incentives and features of cryptocurrency, and Buffer adds a world of possibilities to the paradigm of yield generation. The first mode of yield generation has existed since long-before crypto: the selling of options to generate yield against your existing assets.

Theoretically, using Buffer you can write covered calls or cash-secured puts against existing assets in your portfolio and generate yield against them.

Afterwards, we’ve got BLP, explained above–a way to generate yield by earning fees from the traders on the platform. Take the other side of trades and earn a share of the fees: since traders tend to be net-unprofitable after accounting for fees, it’s a winning proposition.

Learn about Buffer Yield Opportunities

Onboarding to Buffer

If you’re familiar with using dApps with a web wallet, Buffer should be very accessible to you with its accessible interface. Check out Buffer’s quick-start-guide here: [https://docs.buffer.finance/quick-start-guides/how-to-connect-to-the-app]

Optopi NFT

Many crypto protocols have begun to use crypto-native tools like NFTs to offer perks around community and loyalty for their users. Buffer Finance has an 8,888 NFT collection of ‘Optopi’ that offer special access to a trader group; discounts and rebates on fees, and access to trading leagues.

But the coolest feature of the NFT collection offers are the boosted payouts that ownership offers, with up to 8% boosts.

These aren’t small differences; they’re very meaningful, and even more to traders who frequently use the platform. It just goes to show the effort Buffer puts in to onboard new traders.

Understanding the Financial Mechanics of Buffer

Buffer faces the task of of onboarding two distinct types of users:

1. Active Traders: highly speculative traders who seek to make enormous speculative returns over very short time frames. Traders win big or lose their initial stake.

2. Liquidity Providers: liquidity providers take the other side of the trade against active traders. They pay out winning trades and collect the premiums of every trade. While other similar models pit active traders against passive LPs, Buffer’s model is particularly attractive to LPs as they can charge high fees against high leverage.

Below we see the total volume of options traded on Buffer alongside total fees—a pretty good ratio for LPs, if you ask us. This makes LPing quite attractive as long as Buffer can maintain a group of active traders. Meanwhile, since Buffer offers the possibility of massive upside and leverage for traders that are potentially playing with a limited amount of capital, fee-payers (active traders) tend to be relatively ambivalent to fees.

Since Buffer’s launch, they’ve done about $844k in fees with $712k worth of payouts. Meanwhile, liquidity providers offer up about $1.08m in liquidity. That’s a net gain for LPs of $132k, a return of 12% since launch. Obviously that can vary massively, and BFR token holders earn a part of those fees, but it’s a strong return relative to other DeFi yields.

The Evolution of Buffer

To evolve and thrive, especially in today’s market conditions, crypto projects must constantly ship new products and work on driving forward education adoption (that’s why they sponsored this newsletter, for example).

Today Buffer offers one type of speculative option product, but will shortly offer two more:

Up/Down Options: Up/Down options (Buffer’s existing product) allow users to speculate on the (you guessed it), upward or downward movement of the price of a given asset. A trader selects an asset, direction, and direction. If it ends up in-the-money, the trader earns a pre-defined payout.
Above/Below Options: These options, shortly available with Buffer combine an asset, strike price, and expiration/maturity date. If it closes above or below the price at the expiration, it pays out.
Knock-outs: Buffer has produced minimal literature about knock-outs, but there will be more information shortly.

Competitors

Buffer exists in two different competitive spaces–the first being around the concept of simple-to-use speculative crypto products, and the second being around options products.

More and more options products are coming online, as well as products that look to simplify speculation. A few projects that exist in the space are:

Premia Finance: An Arbitrum-based options project
Bracket Finance: a product providing simplified
Aevo: a new options protocol
Ribbon: an options protocol that lets you buy OTC options against yield-generating strategies
Rollbit: A product providing access to many different simplified and abstracted crypto derivatives

As well as Deribit, a centralized product offering.

The Future of Buffer

Obviously the most evident update for Buffer will come with their v2.5 launch this week, but the project is well poised to take advantage of the growing options market as well as the growing desire for speculative retail-focused products.

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