Hermetica: Earn Yield On Your Bitcoin With Options

Hey, what’s up guys? Welcome back! Glad you are here to learn more about the new and exciting projects happening on the Stacks protocol right now. I am super excited to bring your attention to Hermetica. This project caught my eye a few months ago, and I wanted to learn more about it.

The basic premise of this project is to make Bitcoin DeFi easy and accessible to the average user using sophisticated derivatives strategies normally reserved for the ultra-wealthy. strategies.

Hermetica also highlights the fact that this is all done trustlessly and securely through smart contracts via the Stacks protocol. This project is still in its testnet phase, so you can try it out without losing any funds. This is all well and good, but how is the yield generated?

How Is Yield Generated?

Generating yield with your Bitcoin? Are you crazy? How dare you! This is generally frowned upon in some Bitcoin circles because they believe the risk of losing your Bitcoin is far greater than the benefit of lending it out.

This isn’t to say they are wrong in thinking that. There are plenty of examples of people losing their Bitcoin because of bugs in third-party coding, theft, or mismanagement. The Blockfi and FTX debacle come to mind. Needless to say, these instances are not going to stop people from wanting to pursue the option Hermetica is creating. Bitcoin is permissionless, right?

People are going to do what they want to do. Might as well get used to it. So, the way Hermetica is able to generate a yield is through creating option contracts.

Option contracts? Wait, what are those? Here is the textbook definition for those who don’t know what an option contract is.

An option contract is “An agreement between two parties to facilitate a transaction involving an asset at a preset price and date”. In layman’s terms, it is basically saying that you and another party agree to buy an asset sometime in the future for a certain price.

There are two kinds of option contracts. There are call options and put options. As a call option, you are betting on the appreciation of the underlying asset. A call option, you are betting on the underlying asset going down in value.

For example, say investor A wants to buy a call option contract from company B at a strike price of $65 for one month; company B is paid a premium to assume the risk of selling the share at $65. So, if the price of the option stays below $65, company B is safe and doesn’t have to sell shares.

If the option price goes above $65, company B is obligated to sell shares to the investor A at the agreed-upon price of $65. Investor A gets cheaper shares, and company B loses money.

Put options work in the opposite way.

Hermetica utilizes what is called a covered call. So, back to our current example, if company B is forced to sell, typically, they go out and buy the asset on the open market to cover what is owed. With a “covered call,” company B would have the asset on hand to sell, negating the need to go to the open market.

So, how does this apply to Hermetica? Hermetica would HODL enough of their own Bitcoin in a Stacks smart contract to pay out call and put options as they are long-term bullish on the price of Bitcoin appreciating over the long term.

Why Should Bitcoin Holders Consider Using Hermetica?

If you have owned Bitcoin for any period of time, you understand how volatile it can be. One day, it’s up 20 percent; the next day, it’s down 35 percent. You just never know with Bitcoin, as it is still in its price discovery phase.

Most people can’t handle the ups and downs of the Bitcoin price rollercoaster. That’s alright; it is not for everyone, but what do you do if you want to take a little risk with your Bitcoin?

This is a problem Hermetica is trying to solve. Hermetica is stating that they can help you generate an 8 percent return on your Bitcoin using a covered call strategy. The benefit of this strategy is that it seeks to maximize your gains by generating reliable premiums that can paid out while minimizing your downside risk.

This covered call strategy is ideal if you believe the Bitcoin price is increasing slowly and steadily. Large price swings up or down are not great for a covered call strategy.

As always, do your own research and only risk the amount of Bitcoin you are willing to lose. This is just a general overview of the Dapp and not an endorsement. Let’s get into what the UX looks like.

Home Page

Just a FYI, you will need testnet Bitcoin and testnet Stacks to interact with this Dapp because it isn’t live on mainnet yet.

Get testnet Bitcoin: https://testnet-faucet.com/btc-testnet/

Get Testnet Stacks: https://explorer.hiro.so/sandbox/faucet?chain=testnet

Once you obtain your testnet coins, head on over to hermetica.fi. Here, you will be greeted by this home screen.

Click on the access testnet tab with your testnet wallet, and you will be taken to this screen next.

This is the main page where you will interact with the Dapp. Here, you can deposit your BTC into the vault and get an overview of the vault and vault details.

The vault overview section lays out their strategy for the vault and the risk of using their strategy. It also gives you info about performance and management fees. Everything is above board and easy to understand, which is a plus in my book.

With products like options, if you are not a sophisticated investor, it is easy to get caught up in the mumbo jumbo of the language and not really understand what you are getting yourself into. Kudos to Hermetica for keeping it simple! Here is what that overview looks like.

Analytics Page

It is here where you can examine the performance of the covered call strategy over a 7 or 30-day period. This page also shows you annualized growth over the same period, which I think is beneficial to know. I like how the information is presented; very clear and easy to understand. These are all testnet numbers here; just as an FYI, these numbers might not be the same out in the wild. Only time will tell.

Portfolio Page

The portfolio page is pretty self-explanatory. It gives you a history of all your transactions and opened and closed positions. Here is what it looks like:

As you can see, the presentation is very clean, with very little fluff and distractions.

Bridge Page

This is a page that you are probably not familiar with. Hermetica is built using the Stacks protocol and not on native Bitcoin L1. This means that Hermetica can’t natively interact with Bitcoin on its own.

In order to get the value of your Bitcoin into the Stacks ecosystem, you have to “bridge” it over and have the value represented in a “wrapped” Bitcoin token on Stacks. This token is represented as xBTC.

So it BTC———>xBTC. The xBTC token is what the Dapp is interacting with on Stacks. Here is what it will look like on your end.

Once you obtain your xBTC, you will return to your home screen and deposit your xBTC into the vault. Unfortunately, there is an issue with using the testnet bride, so I can’t show you what that interface looks like, but I hope you get the gist of it.

I think with the new Nakamoto release and the implementation of sBTC; things might change on how you bring Bitcoin into this Dapp. Regardless, I will keep you posted!

Final Thoughts

I think this is an interesting Dapp that you should keep an eye on in the future! It sure has the potential and could be a great tool to generate yield without too much risk if that is something you are looking for. I love all of the creativity and development happening on Stacks right now! I can’t wait to see Hermetica's finished product!

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