Buying options

It is likely that the exchange-rate risk relative to the dollar or euro will be managed in the future not by a stablecoin but instead by financial options—derivatives giving the user the option, but not the obligation, to buy or sell an asset. Users looking to manage risk will pay a slight premium to buy protective puts against their cryptocurrency positions.

A put is the right to sell an asset at a specific price. A protective put is a put purchased against an asset you already own, for less than it's worth now. In the event that the price of an asset drops below the strike price, which is the price at which an option can be executed, the option can be used to secure a greater price for the underlying asset.

The problem with existing exchanges, where options are concerned, is that there is no mechanism to enforce the option in the event that something goes wrong. Commodities were traditionally considered the most risky sort of investment. You could trade at 20:1 leverage, and if the market moved against you would have only 5% margin call! Either put in more money or lose all of it.

At least in the case of commodities, however, if a producer fails to deliver their contract of wheat or soybeans or oil, the exchange is liable. Options will need to be enforceable by escrow (the exchange holds the crypto against which the option is written) or another mechanism. Buying an option against Ethereum held in someone else's local wallet would have what is known as counterparty risk, or the risk that the other party not live up to their expectations in the event that the market moves against them.

Other contracts, such as shorts and futures, also have counterparty risk, and it might be that, in the future, rather than depending on a Tether or a bit USD to handle our fiat hedges, we have regulated exchanges with crypto or cash in escrow ready to pay out if things don't go our way.