Decentralized finance (DeFi) is one of the hottest, fastest-growing areas within crypto. An estimated 4 million-plus people worldwide have invested in DeFi products, according to data from Dune Analytics. The total value of assets locked in the DeFi ecosystem is worth over $100 billion today.
The DeFi market is evolving rapidly, with companies spinning up increasingly complex financial products akin to those that have long taken hold in the traditional finance world. Uniswap created an entirely new segment within the DeFi space as a crypto-native automated market maker (AMM), and the Compound protocol did the same for crypto money markets.
Now, Cega, a new protocol founded by former UBS derivatives trader Arisa Toyosaki, is setting out to create a new category within DeFi — exotic derivatives. Toyosaki, who also headed up marketing at Bitcoin.com, told TechCrunch in an interview that many of the strategies available to crypto derivatives traders today are fairly risky, a motivating factor behind why she founded Cega, which she says is the first-ever DeFi exotic derivatives protocol.
“When the market moves 10%, as a user that is staking into these products, you’re actually sometimes losing your principal. I wanted to think of something that creates that high yield that derivative products and crypto still create, but is also safer, and that’s how I thought of Cega,” Toyosaki said.
Cega’s decentralized application is set to launch in beta later this month on the Solana devnet, though it hopes to expand its offerings to other blockchains and become compatible with the Ethereum Virtual Machine (EVM) ecosystem “pretty quickly,” Toyosaki said. Its first product is a fixed-coupon note, which Cega says offers investors superior yield, downside protection and compounded returns.
Toyosaki has had her eye on the crypto space since 2016 while she was working at UBS in Hong Kong. She noticed the growth of the crypto market then and contemplated launching a crypto derivatives platform, but other founders and finance professionals in the space advised her that she was probably too early. After working in product marketing for a few years, she revisited the idea in 2020 during “DeFi summer,” when decentralized finance started to take off in a big way.
She looked into launching a “vanilla” crypto derivatives platform, which would provide simple call or put options with no unusual features, and realized her true passion was in the exotic derivatives space, structuring more complex, flexible products.
“I think the idea of being able to hold a trading position on not just up or down, but on say, volatility, which is how much up or down is happening, is just so fascinating. You can even bound sideways, you can bet on convexity, you can bet on so many different types of views. You can make things so flexible with derivatives, so I’ve always wanted to see how I could contribute to the rising crypto market and my specialty with derivatives,” Toyosaki said.
Pricing vanilla derivatives is much simpler than pricing exotic ones — vanilla derivatives are typically valued using a Black-Scholes formula, which Toyosaki described as a “plug and chug” strategy. Exotic options, in contrast, cannot be priced using a simple formula.
“We actually have to create multiple mathematical simulations on the distribution of various markets. By doing these stochastic simulations, of 10,000 to 20,000 different scenarios, you’re finally able to create the price of the option. And so the amount of mathematical understanding and engineering that is actually required to price exotic options is a lot more than a vanilla option,” Toysaki said.
The company, founded in 2020, announced today that it raised a $4.3 million seed round led by Dragonfly Capital Partners, with participation from Pantera Capital, Coinbase Ventures, Alameda Research, Solana Ventures and others. The round values Cega at $60 million, Toyosaki told TechCrunch.
Cega launched its fundraising process in January this year with a lower target amount, which it was able to secure in just two days, Toyosaki said. The company ended up taking in more capital than it had first expected and plans to use it to scale quickly this year, particularly by hiring engineers familiar with the Rust programming language used by Solana — a relatively small talent pool today, she added.
The Cega team is comprised of four full-time employees including Toyosaki, all of whom are co-founders, along with three part-timers. The team includes a quant trader with a PhD in stochastic volatility and traders with experience pricing exotic options, according to Toyosaki, which she said gives the company an advantage in terms of understanding the product inside and out.
Although Cega aims to help its users increase their wealth, reducing the risks beginner to intermediate users take in DeFi is also core to its mission, Toyosaki said. She is particularly excited by the opportunity to build a community around Cega and educate people about exotic derivatives trading, she added.
Most of that community engagement takes place on the project’s Discord chat, Cega co-founder and marketing head Winston Zhang told TechCrunch.
“We want the experts in the space to coalesce around the project and really get engaged with the project, because there will be lots of ways for them to, as a community, influence the types of products that we launch and influence the direction that we go in,” Zhang said. “We want to really have the community be a strong voice, and sort of grow that by word-of-mouth.”
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