According to the data from The Block Research above, we can see that Ether options open positions and Ether options trading volume have been growing rapidly since January of this year. Combined with the news from Chain News on April 18 that the open interest volume of Ether options hit a record high, growing by 393% so far this year, it is easy to see that the options trading market for cryptocurrencies is becoming more and more active by the day, and we can’t help but ask why more and more people are getting involved in the options trading market for cryptocurrencies. Is the cryptocurrency options track expected to be another breakout point in the DEFI space?
The activity of cryptocurrency options trading is closely related to the nature of the options themselves. Options are the most commonly used hedging and speculative tool by traders in the financial market, and the only financial instrument among derivatives that can trade price, time, and volatility, and there is a golden phrase circulating in the financial market that encapsulates the characteristics of the three-dimensional world of options trading: bull market, bear market, bull market, all contain investment opportunities; direction time volatility The new dimension of trading is opened. It can be said that options have never made trading so free!
So for investors, the flexible use of different options strategies can hedge the exposure to futures and spot positions, and also buy both calls and puts to hedge the risk, that is, whether the underlying asset is up or down, in the three dimensions of time, price, and volatility, traders can gain by exercising one of them. Use options trading well and your future is not a dream.
Current Developments in the Crypto Financial Options Market
Despite the ongoing development of on-chain smart contracts, most of the cryptocurrency options trading still occurs mainly on centralized derivatives exchanges, with Deribit still having an absolute advantage in the centralized options track, currently occupying more than 80% of the total market. This has to do with its first-mover advantage and the fact that its options mechanism is very forgiving, not only being the first to introduce a bilateral order model but also supporting portfolio margin and supporting small amounts of BTC as margin, which can maximize liquidity.
Looking at the decentralized options market, the transition of crypto finance from centralized to decentralized is an inevitable development trend in the long run. The core reason is that the natural advantages of decentralization over centralized platforms are very obvious: higher security and transparency, unlicensed and non-custodial features. And by the very nature of derivatives, futures and options trading requires decentralization more than spot, both in terms of the amount of capital involved and the risk of leverage, with greater losses in the event of centralized exchange fraud.
Many DEFI players have been keenly aware of the huge market potential of the decentralized options track and have started to layout this track, and many noteworthy decentralized options trading platforms have emerged in the crypto market. Although they are in their infancy, it must be admitted that the achievements made by their diversified forms and focus on realistic pain points are really surprising.
The chart above shows the ranking of total options lockups provided by Defi Llama, encompassing seven decentralized options trading platforms. As we can see, all six are deployed on the ethereum chain, except for FinNexus, which is located on multiple chains. Whether it is Hegic, which is the leading platform in the ranking, Opyn, which is steadily gaining ground, or FinNexus, which is rising rapidly, all of them herald the gradual rise of the crypto derivatives market. Of course, other platforms such as KAKI, Pods, Charm, Hedget, Auctus, etc. are also attracting a lot of attention. It can be said that decentralized options platforms have all demonstrated the great progress of the decentralized financial derivatives industry through their respective innovations and in a differentiated form.
Before we expand on the characteristics of each platform, we need to spread a little knowledge about liquidity. For options trading platforms, liquidity is the most scarce resource, it is an infrastructure like existence. Literally, if a pond has a constant flow of water to inject and exchange, it is alive and the ecology of fish and shrimp will be abundant. Similarly with options, the liquidity of the pool is critical, and only with sufficient liquidity can there be an attraction for option buyers to trade. So liquidity is the core essence that reflects the innovation of decentralized option platforms.
The currently available liquidity models are the order book model and the AMM model, where the order book model is geared towards professional traders and the AMM mechanism is more suitable for retail investors. If you are a retail options trader who only occasionally trades options, then Uniswap’s AMM mechanism is already well suited for this function; however, for a professional options trader who needs to perform a series of complex operations such as large volume pending/withdrawing orders and making strategies, the order book mechanism can meet the needs of professional operators to a greater extent. At the current state of the art, the decentralized order book model has low performance, serious Gas fee loss, high transaction costs, and a user experience that is hardly comparable to a centralized exchange. So Layer2’s expansion and upgrade is a very urgent need. Currently, opyn v2, Auctus, Premia are currently exploring the order book model and it is worth watching how they develop to enhance the liquidity of the order book. AMM is one of the greatest inventions in the Defi space, OPYN v1, Primitive, Charm and Siren are all platforms that rely on AMM solutions to buy and sell options, and the AMM model is not There is no one size fits all, and even within the liquidity pool solution, the details vary.
Here is a breakdown of some of the platform features, listed in no particular order of ranking.
Hegic, the star of the decentralized options track, is a decentralized options platform based on the AMM model, which solves the liquidity problem of options products by means of liquidity pools and currently offers call and put options on BTC and ETH. According to the data provided by DEFI PULSE, Hegic’s total lock volume change curve from November 2020 to April 2021 is as follows, and the growth rate can be considered fast.
Users can provide funds to form liquidity pools that will be used to automatically sell calls and puts as counterparties to the buyer. The Hegic model’s liquidity pool was initially one-way, divided into a put pool and a call pool, with the DAI serving as collateral for the ETH put pool and the ETH itself serving as collateral for the ETH call pool. The newly introduced v888 model turns the one-way pool into a two-way pool, allowing ETH to serve as collateral for both ETH calls and puts; and creates a two-way pool for WBTC with the same mechanism to provide liquidity for WBTC options. In addition, the introduction of $HEGIC passes enriches the mining rewards of the liquidity pool. In addition to the revenue of the pool itself, users have the opportunity to get $HEGIC passes.
Hegic’s project highlights.
1. Liquidity provider (LP) revenue and risk-sharing. This is a safer way to create and pool options than options contracts created by a single liquidity provider. LPs share in the gains and share in the losses of the options pool based on their share. Hegic v888 uses a two-way liquidity pool where put and call options pools are combined into one pool. If a put option loses money, the call option will make a profit. This two-way nature diversifies and reduces the risk associated with market volatility to a certain extent.
2. buyers have more flexibility and autonomy of choice. Hegic uses a peer-to-peer pool model where buyers can choose their own option terms and can create customized options by selecting the option type, strike price, or expiration date. With this mechanism, buyers are more likely to create an option product that best matches their needs and reduces risk.
3. The UI is very comfortable to operate. While the Hegic model may seem a bit complex, it is very easy for users to trade options on its platform or become a provider of option liquidity pools.
4. higher capital efficiency. the AMM mechanism is excellent in that the returns are shared with the risks, a feature that can accommodate not only giant whale investors but also small retail investors to increase the liquidity of the pool. In v888, Hegic pass holders have the opportunity to receive lock-in rewards, and liquidity providers can participate in mining and win mining bonuses; in addition, option buyers can enjoy Hegic’s token rewards, similar to a partial rebate of the purchase capital cost. This incentive mechanism stimulates the flow of capital to some extent.
Some concerns regarding Hegic:
1. Hegic options are non-transferable and non-tradable, and although Hegic options can be customized to meet the needs of buyers, they are not liquid in the secondary market after they are created.
2. users must actively monitor their option fee allocations. 3.
3. the option pricing model may be flawed. Hegic uses a special simplified version of the option pricing model whose implied volatility (IV) needs to be manually updated based on information available on skew.com. the Hegic v888 protocol uses the 1-month ATM option IV value as the pricing benchmark parameter, and each time the parameter on skew.com changes by -10% or +10%, the option is manually updated. Hegic smart contract, the IV parameter is manually adjusted. In addition, Hegic v888 charges an additional 1% fee on option purchases, all of which are shared equally by the locked-in user. Both mechanisms result in relatively high prices for options, especially out-of-the-money options. As the number of participants in the market increases, arbitrage opportunities may arise between Hegic and other options trading venues.
4. the risk of undercollateralization blowout. In Hegic’s old model, options in the asset pool were collateralized and delivered through physical collateral, and users did not have to worry about insufficient collateral for the asset pool. However, v888 uses cash delivery. Since the liquidity pool is bi-directional, it is possible to sell both call and put options. As an example, the ETH pool, which consists of only ETH, can sell call options. Therefore, the call option holder can exercise the option at any time regardless of market price movements, meaning that since the pool is denominated in ETH as liquid collateral, the price of the collateral appreciates as the price of ETH rises. For call option users, there is no concern that the ETH pool is under-collateralized, but there is a risk that the put option will not deliver properly due to a drop in the price of the coin. Currently, Hegic does not specify in its documentation the current collateralization requirements and how to handle extreme situations, but it would be safer and more prudent to keep the collateralization ratio above 100% or make it dynamic based on market conditions.
5. Liquidity providers will have a difficult time hedging risk. Since there is no price slippage in option pricing, it is difficult to maintain the balance of risk for an ideal call and put option relative to the option pool. For example, on November 21, 2020, approximately 75% of the total options trading volume in the ETH pool was in ETH calls. The high imbalance of a 1:3 put/call ratio skewed the options pool’s risk away from neutral, similarly to the WBTC pool. Option liquidity pool users may still need to be forced to manually hedge against the potential risk of a sharp market rise even if they trust the pool’s risk diversification mechanism. Currently, this potential risk does exist, and Hegic compensates for it by way of mining incentives.
Overall, Hegic currently has some pressing issues that need to be addressed, but with the highest market cap and total lockup, Hegic’s position as the industry leader in the decentralized options track is undeniable. Decentralized options are just getting started, and Hegic will likely continue to lead the pack for some time to come.
Simply put, FinNexus is a dual-chain decentralized options Dapp built on Ether and Wanchain, with a unique MASP composite asset pool liquidity pool model that aggregates liquidity across multiple options classes. finNexus is officially deployed on the Coinan Smartchain (BSC) on March 29, 2021, and users can transfer FNX between the two chains via a third-party cross-chain bridge. The cash-settled delivery model enables trading of options on multiple different underlying assets, enabling the versatility of option protocols, while significantly improving capital utilization and reducing Gas fees compared to physical delivery and full margin models.
FinNexus’ project highlights:
FinNexus refers to the FPO as a universal, domain-wide options platform. So named because the FPO liquidity pool supports all underlying assets and can be built on top of multiple public chains, FPO is live on both Ether and Wanchain through a joint UI interface, with future collaboration expected with public chains such as Elrond, Kardiachain, and others. Unlike any previous platform, the first version of FinNexus’ option protocol will be launched on the Wanchain blockchain, with faster transactions and lower fees compared to Ether. In addition, it will use Wanchain’s cross-chain mechanism in all aspects to enable options based on Bitcoin and other crypto assets.
2. FPO v1.0 is a distributed point-to-pool and point-to-contract option model. Like Hegic, the advantage of aggregated liquidity is that it can concentrate the liquidity of all market participants so that it can achieve the optimal goal of use efficiency through the decentralized mechanism of the agreement. Risks and benefits are also shared equally by all liquidity providers, so that no individual user is at high risk, and all participants can share the rewards fairly.
3. MASP mechanism. The so-called MASP (Composite Assets Collection Liquidity Pool) model is called Multi Assets Single Pool, which means that a variety of different option assets are gathered into a unified liquidity pool, and this liquidity pool provides margin and liquidity support. It can solve the problem of insufficient liquidity of decentralized options to a certain extent. It is the core mechanism and innovation of the FPO platform agreement. Compound assets mean that FPO supports multiple assets and types of collateral assets. Now, FPO v1.0 supports BTC, ETH, MKR, LINK, SNX options. The underlying assets supported by the agreement may not even be limited to encrypted assets, integrating financial assets in the real world such as gold, gasoline, stocks, or indexes. In addition, by cooperating with Chainlink, FinNexus can realize real-time on-chain price feeding of multiple types of assets, and it is entirely possible for such assets to be included in the underlying assets of options.
4. Option pricing mechanism. Options in FPO v1.0 are priced according to the Black-Scholes model. When a user purchases an option on FPO v1.0, the option price is automatically calculated by the Black-Scholes formula embedded in the smart contract. The key parameters of the pricing options include real-time feed prices of underlying assets, such as BTC / USD, ETH / USD, LINK / USD, MKR / ETH and SNX / USD. In addition, the source of IV data is a decisive factor in pricing. Unlike Hegic’s IV, which requires manual input based on skew.com data, FPO uses Deribit’s real-time price feed data to automatically provide key data points for the FPO v1.0 smart contract. In addition, another difference between FPO and Hegic is that FPO adds an adjustment factor to the pricing formula to dynamically adjust the risk balance of the fund pool.
5. FinNexus uses a price difference settlement mechanism while using cash delivery. The spread settlement mechanism means that the utilization rate of funds can be improved. In addition, FinNexus uses USDC stable coin as margin settlement. Compared with BTC or ETH for margin settlement, USDC is suitable for options on various underlying assets, while BTC settlement is more suitable for BTC. Options. Therefore, the expansion of USDC settlement options is better.
6. Multiple security mechanisms: The current rapid development of the DeFi market is accompanied by high risks, and security mechanisms are particularly important for protecting user assets.
FinNexus is a rising star in the decentralized options market. Its FPO is a distributed peer-to-pool options model, similar to Hegic, but it has its own characteristics. Its universal design allows FPO to include any encrypted assets, even physical assets in the real world, and it has great potential in combination with other DeFi projects and strategies. At the same time, the pricing mechanism in its contracts is more dynamic, which can automatically balance the risks in the pool. Let us continue to look forward to FinNexus being able to continuously improve its mechanism in the future and continue to give people fresh ideas.
Opyn is an on-chain options platform based on the order book model based on the general option agreement “Convexity Protocol”, which is positioned to provide users with insurance services through option transactions.
In the early days of its establishment in 2019, Opyn conducted a business trial of margin trading and transformed it into an insurance platform in February 2020. Users can purchase insurance for their Compound deposits to avoid the platform’s technical risks and related financial risks. At the end of March 2020, Opyn launched the first batch of protective options for ETH holders. These tokens are ETH put options that provide liquidity through Uniswap, so these products can be regarded as insurance products for DeFi users. So Opyn was not born for speculation. Opyn v2 has been launched, and users can trade WBTC and WETH call and put options.
Some features of Opyn:
1. The seller must mortgage in full. Unlike the traditional financial option model, Opyn requires the seller to fully mortgage in terms of margin requirements. In traditional financial options trading, the margin needs to be locked in the trading account, and at the same time, the required ratio of margin is much lower than that of Opyn. The obvious advantage of this is that the contract does not have to worry about the risk of liquidation or even default due to insufficient seller’s margin; while MakerDao has suffered losses due to the liquidation mechanism. Even if the price fluctuation of the underlying asset causes the option seller to suffer potential losses, it does not need to be liquidated, because the assets for physical delivery of the option contract have been mortgaged and stored in the oToken smart contract for the creation of specific options.
2. Currently Uniswap is still the main trading place of oToken. Liquidity providers may bear the risk of impermanent loss (Impermanent Loss, IL). The liquidity of LP is not deep enough, and it will be difficult to form a large-scale decentralized oTokens trading market. At present, Opyn is forced to take the initiative to bear non-permanent losses (IL) to achieve the start of decentralized options secondary market transactions. Of course, in opynV2, the team also discussed how to solve this problem. I believe that with the upgrade of Uniswap V3, liquidity will also improve.
3. Different from the peer-to-pool model of Hegic and FinNexus, Opyn v2 uses the traditional order book model. Options in Hegic and FinNexus pools can only passively participate in transactions, while option sellers in Opyn pools can sell options according to specific option terms, making the strategy combination more flexible and diverse. The traditional order book model has the advantage of being time-verified, but for on-chain transactions, high gas fees are not a small expense, which makes it impossible for retail investors with insufficient funds to participate. We can only expect the Layer 2 expansion plan to be improved as soon as possible to help reduce transaction fees.
4. Diversification of collateral. Using income or interest-bearing tokens as collateral, option sellers can obtain two sources of income. While earning interest and governance token mining, they can also obtain profit from option fees by selling options. opyn v2 will allow interest-bearing assets such as compound cTokens to be used as collateral for options (for example, ETHUSDC put rights are generated through cUSDC collateral). In return for the mortgage, the seller will receive the interest of interest-bearing token collateral such as cUSDC and COMP tokens. From the perspective of option buyers, the option premiums for options with such tokens as collateral may be lower compared to options with non-income tokens as collateral.
Summary: Opyn is the first decentralized option project with automatic market maker (AMM) liquidity provided through Uniswap. Opyn options can be easily combined with various strategies for buying and selling options through their generalization. I hope that Opyn will continue to upgrade and update, and it will have the opportunity to fully demonstrate in this turbulent era.
It is a decentralized non-custodial option agreement that allows users to cast, trade, and exercise call and put options in a decentralized manner. Auctus option contracts are tokenized and compatible with the ERC20 standard, so options are tradable and transferable, and support DEFI integration. Currently, WBTC and ETH options are tradable on its platform, which uses a combination of order book and liquidity pool to provide liquidity.
Highlights of Auctus:
1. In order to increase liquidity, Auctus has a sell-side option pool model, which is currently in the beta test version. Liquidity providers can obtain option premiums by automatically selling options. Auctus has launched 4 call and put option liquidity pools as option sellers, with different strike price ranges and expiration date ranges, and the fund pool will be updated over time. At present, the liquidity pool as the seller Auctus only targets basic users, and it may be integrated with its order book in the future.
2. Auctus’ goal is to allow the creation of tailor-made liquidity pools, which means that option sellers can determine the range and expiration date of the exercise price they are willing to cast and sell, as well as the minimum implied volatility they are willing to sell. IV will be adjusted according to the utilization rate of the fund pool.
3. Auctus launches strategic portfolio products (Vaults). Strategic portfolio products (Vaults) are passive investment strategies that combine other decentralized interest-bearing, yield agreements, and options. Certain combination of strategies can provide capital protection for the principal, so it can adapt to most risk appetites. Nevertheless, the strategy portfolio still faces the risk of smart contracts. The advantage of the strategy combination is that it saves gas costs through collective transactions and automatically distributes profits to bring returns to users. The first strategy combination on Auctus is 3POOL-ETHCALL. It can provide users with partial bullish positions in ETH under the premise of guaranteeing a return on principal. The mining income of CRV Governance Token will automatically purchase ETH call options. Auctus may later launch other combinations of strategies, such as bullish or bearish strategies, or IL hedging strategies.
Finally, auctus options are tokenized, and liquidity is generated through order books and liquidity pools, but this method is different from the aggregate liquidity pools of Hegic and FinNexus. What’s interesting is that Auctus proposes to use different strategies to create a combination of strategies, and extensively uses option products, making full use of the properties of option insurance and speculative tools. Auctus is a very functional platform. The original meaning of this word is “growth”. Let us wait and see how Auctus will grow in the decentralized options track in the future.
This article chooses to compare some of the current decentralized options products. The space is limited and it is impossible to exhaust all options items. As we all know, the development and change of projects in the blockchain field are very rapid. If there is progress and updates in the future, the progress of these projects will be tracked to update the article. Those with lofty ideals are welcome to come to discuss and supplement.
Through enumeration and comparison, we can see that each platform has a different focus on solving pain points, and therefore presents diversified development potential. No matter which area of actual demand is focused on, the innovative ideas behind it have brought together an increasingly lively situation. At present, the centralized options platform Deribit is firmly in the leading position. In the long run, decentralization instead of centralization is an inevitable trend of development. As a veritable blue ocean, the decentralized options track is bound to usher in more participants and richer and more interesting decentralized models. I believe that many new options projects will be launched in the DEFI field soon. Of course, we hope the options track In the not-too-distant future, a hundred flowers can truly blossom. I hope that under the baptism of time, a good option platform can be updated iteratively, gain a firm foothold, and continue to write legends.
Disclaimer: The content published in this article represents the author’s personal views and has nothing to do with ChainNews’ position. The content of the article does not constitute investment advice, please refer to it carefully.