The Evolution of PsyOptions on Solana

The Solfate Podcast recently featured Tommy Johnson, co-founder of PsyOptions, in an enlightening discussion about the evolution of decentralized finance (DeFi) on Solana and the innovative products his team is developing. PsyOptions has been a pioneer in the Solana ecosystem, with roots tracing back to the blockchain's early days. Tommy and his twin brother began their journey in the Solana space after following the insights of Kyle Samani from Multicoin Capital, who was posting about Solana as early as 2018 or 2019.

Their first foray into Solana development came during the blockchain's inaugural hackathon in November 2020. Although their initial project—a third-party trusted Oracle system—didn't place, it laid the groundwork for their future endeavors. Undeterred, the brothers pivoted to automating options trading strategies, a move inspired by the limitations they faced with traditional brokerages.

Breakthrough Success and Company Formation

The turning point for PsyOptions came during Solana's subsequent hackathon, where they secured first place alongside Mango Markets. This achievement catapulted them into the spotlight, attracting investor interest and paving the way for the formation of their company. Tommy reflected on this period:

"We had no plans to create a company or like take this on full time and just go all in. But when you have people kind of like offering you, you know, money and telling you how big this thing's going to be, it's kind of hard to just say no."

The process of establishing the company, including legal structures and plans for a future token, took about six months. Following this, PsyOptions raised capital and dove headfirst into the world of DeFi on Solana.

Adapting to Market Dynamics

Over the past two years, PsyOptions has demonstrated remarkable adaptability in response to market conditions. Their initial focus on options trading with order book-based systems was scaled back due to insufficient demand and on-chain volume. This led to a strategic pivot, which included the acquisition of Tap Finance from Singapore, enhancing their capabilities in structured products.

The team also developed an over-collateralized borrowing and lending protocol that utilizes structured product tokens as collateral, aiming to improve capital efficiency. However, as macroeconomic conditions shifted and interest rates soared, the risk-reward profile of some products became less attractive to investors, leading to a decrease in Total Value Locked (TVL).

Current Initiatives and Future Directions

In response to these challenges, PsyOptions has refocused its efforts on three main initiatives:

1. Armada Platform: A partnership with the Hero team designed to assist projects in token launches and improve on-chain liquidity.
2. Tokenomics Solutions: Developing better tokenomics "puzzle pieces" for the Solana ecosystem.
3. Options-based Automated Market Maker (AMM): A new approach to options trading on Solana.

Tommy expressed high conviction in the Armada platform, emphasizing its potential to address key issues in the Solana ecosystem:

"I think when you look at the Solana ecosystem, the biggest issues facing it right now is lack of high quality tokens with quality value, cruel tokenomics and just on-chain liquidity. And that's the goal of that one."

The Armada Platform: Revolutionizing Token Launches

The Armada platform is a comprehensive solution comprising multiple programs designed to enhance the token launch and management process on Solana. Its key components include:

1. Liquidity Bootstrapping Curve: This virtual liquidity bootstrapping pool, inspired by Balancer, allows teams to create custom auction-style curves for price discovery and fundraising.

2. Concentrated Liquidity Market Making: Built on top of concentrated liquidity pools like Orca's Whirlpool or Raydium's concentrated liquidity pools, this program delegates market-making capabilities to institutional market makers, potentially improving liquidity efficiency.

3. Discount Token Standard: An incentivization mechanism offering perpetual discounts on tokens, providing projects with variable incentive options.

4. Governance Integration: Future plans include integration with SPL governance, allowing for a more holistic view of token flows within an organization.

5. White-labeling Options: The platform can be customized and exported as a static site, hostable as an xNFT or elsewhere, tailored to each team's needs.

Tommy highlighted the importance of the concentrated liquidity market-making vault:

"We've just been running some internal testing so far with like other liquidity and, you know, just the volume on SOL USDC pairs alone makes the returns very worthwhile."

Addressing Liquidity Challenges in DeFi

A significant focus of the discussion was on the challenges of maintaining liquidity in DeFi projects, especially during market downturns. Tommy shared insights on how PsyOptions navigated the turbulent times:

"We're fortunate enough to raise a lot of capital in 2021. And we didn't like over hire. We don't over spend on engineers. We are never paying egregious amounts. We trained most of all our smart contract developers."

This prudent approach to capital management helped the company weather the storm and maintain operational stability. However, Tommy acknowledged the ongoing challenge of rebuilding operational cash flow in the current market conditions.

The Future of DeFi: Between Niche and Mainstream

When asked about the future of DeFi and its potential to replace or coexist with traditional finance, Tommy offered a nuanced perspective:

"I think it's gonna be somewhere in the middle of niche and like full scale of tradfi."

He emphasized that while DeFi might not fully replace traditional finance, it has significant potential, especially in global markets where access to traditional financial services is limited. Tommy pointed out that the actual use cases of DeFi in creating a global currency and financial layer will likely be driven by markets outside the developed West.

Educating Investors and Improving Tokenomics

A crucial aspect of DeFi's evolution is educating investors and improving tokenomics. Tommy stressed the importance of thoughtful incentive mechanisms and tokenomics to ensure value accrual and offset selling pressure. He mentioned PsyOptions' efforts in this direction:

"We wrote an article in 2021 about which July 2021, we analyzed a bunch of air drops and the best thing to do with every air drop except for maybe Uniswap was sell immediately. And then we wrote about how you could use options and option air drops to kind of offset some of that and reduce sell pressure by giving slightly in the money or at the money options."

Transparency and User Education

The conversation also touched on the need for greater transparency and user education in the crypto space. Tommy shared his thoughts on potential solutions:

"I have ideas on like transparency of like how tokens are flowing through an ecosystem and that's something that we're gonna work on in this V2 is so you can see, 'cause like right now in Solana users, like things don't really plug in well to like SPL governance and whatnot."

He emphasized the importance of making it clear to users how tokens flow within an ecosystem and the best ways to be involved, addressing a current gap in the user experience.

Personal Journey: From Hardware to DeFi

Tommy's journey from electrical engineering to software development and eventually to DeFi is a testament to the diverse paths that can lead to innovation in the blockchain space. He shared his transition:

"I did a few internships and had a job at a telecom or a satellite internet company, and working on there like team that builds their modem and says like signal testing and whatnot. And it was like a two year lifecycle to like release some like a new piece of hardware, you know, from like start to finish, and you're doing a couple of like projects at once. But like, it was like a long lifecycle."

This experience led him to shift focus to software engineering, driven by the potential for faster development cycles and the growing demand for software skills in the tech industry.

Learning Finance Through DeFi

Tommy's journey into finance was gradual, starting with retail investing in high school and college. His deep dive into DeFi accelerated his learning:

"And so I think it's like over the last like three years, I mean, really from like diving into DeFi full-time and networking, like you just pick it up as you go. And I mean, that's a beautiful thing about DeFi, right? The democratization of this stuff."

He emphasized how DeFi allows for a faster learning curve compared to traditional finance, due to the accessibility of data and the ability to experiment with various financial instruments on-chain.

Lessons from the Crypto Market

The podcast hosts and Tommy discussed the valuable lessons learned from participating in the volatile crypto market. They agreed that experiencing losses can be an effective, albeit painful, way to learn about risk management and the importance of due diligence.

Tommy shared his perspective on trading:

"I'm not a good trader. I've realized that and I still think, I still try to trade, but I'm just not great. I do better when I let code make decisions rather than myself or my emotions."

This honest reflection highlights the challenges many face in the crypto market and underscores the potential value of automated trading strategies and well-designed DeFi protocols.

The Importance of Practical Experience in Crypto

The discussion emphasized the value of hands-on experience in understanding crypto and DeFi. One of the hosts suggested:

"If you really want to get into crypto, the best way to do it is choose a sum of money that you were okay going to zero, put that money on chain and then go speculate, like just speculate like crazy because nothing's going to teach you to be safe."

This advice, while not financial advice, highlights the unique learning opportunity that the crypto space provides. By engaging directly with protocols and experiencing the risks and rewards firsthand, users can gain a deeper understanding of how these systems work.

Looking Ahead: PsyOptions and the Future of Solana DeFi

As the podcast concluded, Tommy shared his excitement for the future of PsyOptions and the Armada platform:

"Check out our Modify on Twitter. We'll be posting updates and going public probably in the next month or so, at least before breakpoint. I'm just, yeah, high conviction, really excited for that product, given this environment."

This enthusiasm reflects the ongoing innovation in the Solana ecosystem and the potential for new DeFi products to address current market challenges.

The conversation with Tommy Johnson provided valuable insights into the evolution of DeFi on Solana, the challenges faced by projects in the space, and the innovative solutions being developed. As PsyOptions and other projects continue to push the boundaries of what's possible in decentralized finance, the Solana ecosystem seems poised for further growth and maturation.

Facts + Figures

• PsyOptions placed first in a Solana hackathon alongside Mango Markets, which led to the formation of their company.

• The company raised significant capital in 2021, allowing them to weather the subsequent market downturn.

• PsyOptions acquired Tap Finance from Singapore to enhance their structured products capabilities.

• The Armada platform, a new initiative by PsyOptions, aims to improve token launches and on-chain liquidity on Solana.

• Armada includes a liquidity bootstrapping curve, concentrated liquidity market making, and a new discount token standard.

• Internal testing of the concentrated liquidity market-making vault on SOL/USDC pairs has shown promising returns.

• PsyOptions trained most of their smart contract developers in-house, avoiding overspending on hiring.

• The company analyzed airdrops in July 2021 and found that selling immediately was the best strategy for most, except possibly Uniswap.

• Tommy Johnson transitioned from electrical engineering to software development before entering the DeFi space.

• PsyOptions has been in the Solana ecosystem for approximately three years, starting around October 2020.

• The company is planning to go public with updates on their Armada platform within the next month, before the Breakpoint conference.

Questions Answered

What is PsyOptions and how did it start?

PsyOptions is a DeFi company founded by Tommy Johnson and his twin brother after participating in Solana hackathons. It began as a project to automate options trading strategies on Solana, winning first place in a hackathon alongside Mango Markets. This success led to investor interest and the formal establishment of the company, which has since evolved to offer various DeFi products and solutions on the Solana blockchain.

What is the Armada platform?

The Armada platform is a comprehensive solution developed by PsyOptions to assist projects in token launches and improve on-chain liquidity on Solana. It includes multiple components such as a liquidity bootstrapping curve, concentrated liquidity market making, and a new discount token standard. The platform aims to address key issues in the Solana ecosystem, including the lack of high-quality tokens with valuable tokenomics and insufficient on-chain liquidity.

How did PsyOptions navigate the crypto market downturn?

PsyOptions navigated the crypto market downturn through prudent capital management. They raised significant capital in 2021 but avoided overhiring or overspending on engineers. The company trained most of their smart contract developers in-house and didn't chase insane yields or engage in risky lending practices. This approach helped them maintain operational stability during challenging market conditions, though they are still working on rebuilding operational cash flow.

What are Tommy Johnson's views on the future of DeFi?

Tommy Johnson believes that DeFi will occupy a space between niche and mainstream finance. While he doesn't see it fully replacing traditional finance, he believes DeFi has significant potential, especially in global markets where access to traditional financial services is limited. He emphasizes that the actual use cases of DeFi in creating a global currency and financial layer will likely be driven by markets outside the developed West.

How does PsyOptions plan to improve tokenomics and user education in DeFi?

PsyOptions is working on improving tokenomics through their Armada platform and future developments. They plan to create more transparent systems that show how tokens flow through ecosystems and integrate better with governance structures. For user education, they're focusing on making it clearer how users can best participate in different ecosystems and understanding the risks and rewards of various DeFi products. They've also written analytical pieces on topics like airdrops to educate users on optimal strategies.

What advice does Tommy give for people wanting to learn about crypto and DeFi?

While not providing financial advice, Tommy and the podcast hosts suggest that hands-on experience is crucial for learning about crypto and DeFi. They recommend choosing a sum of money you're comfortable potentially losing and using it to actively engage with various protocols and products on-chain. This practical experience can provide valuable lessons about risk management, how different DeFi products work, and the overall dynamics of the crypto market.

How did Tommy transition from electrical engineering to DeFi?

Tommy's journey from electrical engineering to DeFi was a gradual process. He started in hardware engineering but became interested in software development due to the faster development cycles and growing demand for software skills. His interest in finance began with retail investing in high school and college. The deep dive into DeFi came later, accelerated by his full-time involvement in the space and the networking opportunities it provided. He credits DeFi with allowing for a faster learning curve in finance compared to traditional routes.

What new products is PsyOptions currently working on?

PsyOptions is currently focusing on three main initiatives. The primary focus is the Armada platform, which aims to improve token launches and on-chain liquidity. They are also developing better tokenomics solutions for the Solana ecosystem. Additionally, they are working on an options-based Automated Market Maker (AMM). These products are designed to address current challenges in the DeFi space and provide more robust tools for projects and users in the Solana ecosystem.