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Black Scholes (Morten) formula


and decentralized finance paradigm

Black Scholes (Morten) formula and decentralized finance paradigm


Black Scholes (Morten) formula and decentralized finance paradigm

Can the two be really bridged? Do they need to be bridged?

A dollar today is worth more than a dollar tomorrow, which is worth more than a dollar a week from now. That is the simple takeaway from Black Scholes formula or what is often referred to as the "Time value of money" algorithm. It is used by each and every financial institute and entity for a multitude of purposes. This is single most important formula in a financier's armoury or a mergers and acquisition boutiques valuation methodologies.

Time Value of Money - Where is it used? And, how does it help?

It is used everywhere. And, it is meant to be used/applied by people in conjunction with all their information and knowledge to create the basis for various financial analysis. For example, an M&A analyst will understand the business fundamentals, translate these into plausible financial projections, then use the black Scholes (or Time value of money) formula to value the business as a whole to fix a buy/sell price.

Or in a financial derivative setting, the bankers and issuers will consider all the information they have on the underlying asset, the potential price movement in the future, the crowd wisdom they begin to collect on the future price movement as well as other indirectly related market or geo-political information, etc. and then use the black Scholes formula (along with a bunch of other mathematical variables such as beta, vega, rho, etc. that we won't go into now) to price a derivatives contract.

Now as we begin to chart the decentralized finance (or DeFi) pathway and seek ways of creating financial markets where there is no place for such centralized parties, to use their knowledge and apply the tried and testes financial formulas; we will realise that there is a real need to automate the functions that such centralized parties provide.

Some of the functions that the centralized parties provide in the financial markets are vital for a smooth functioning of the markets, but that does not mean that we are stuck with such centralized parties forever.

How can we move from Centralised to Decentralised Financial Systems?

With the technologies available to us today and with the amount of interconnectivity and interactivity between the people today we do not need the centralized parties to perform the role of a hub to the spokes of the traders.

At www.closecross.com we have created a traders-only derivative platform where we replace the use of the black Scholes formula by centralized issuers with a smart contract executed automated system of what we call the "Knowledge value of time" algorithms. The Knowledge value of time (or KVOTA for short) algorithms allow for an automated substantiation of the risk that a market entrant takes on at the time of entry into a derivatives contract and translates that into a different rate of return at the maturity of the derivative contract.

It is this essential innovation and automation of the risk-reward variables that allows CloseCross to not just do away with the centralized derivative issuer but the entire financial value-chain that goes into derivatives trading. Learn more about how KVOTA and multi-party prediction/derivative floors enable potentially amazing returns without the need for leverage in an absolutely transparent and people-only environment. Signup today to check out the DeFi Derivatives Platform.


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Written By
Vaibhav Kadikar
Founder, CloseCross - Decentralized derivatives driving democratic participation

The products offered by the Company are complex in their nature and not appropriate for everyone. You may lose some or all of your money. Read our Risk Information and Terms of Use for more information.