Derivio believes that structured derivatives should be accessible to everyone. This means that the products we build should be approachable for retail designers and appealing to sophisticated traders/hedgers. One example of a structured derivative that is accessible is digital options. A digital option is a type of option that offers a payout if the underlying market price exceeds a pre-determined strike price. For a digital option, users must choose whether they think the market will go up or down in a set time range (the next 5 minutes to an entire day) and place their trade. If they choose correctly, they receive a fair payout based on current market dynamics. If they choose wrongly, they lose what they bet.
For retail users, digital options abstract away the complexities of traditional options and other perpetual derivatives. When users trade on a DeFi options protocol such as Premia or Lyra, they must consider factors such as gamma, theta, and vega, and how mispriced the options are. In addition, they are faced with a large variety of strikes and expiries and bad trade execution due to massive spreads.
Instead of dealing with all the complexities of traditional options, users of Derivio only have to predict up or down and choose a preferred time frame. Similarly, when comparing digital options to perpetual derivatives, you don’t need to think about the amount of leverage used or when to take profit.
One great use of digital options is event trading. Over the past year, CPI data releases or Federal Reserve rate hikes have often resulted in volatile markets in one direction. Rather than opening a position with a perpetual future and deciding when to take profit, one could easily use a digital option to express a view on the market direction as a result of the event.
Despite the simplicity of digital options, they are still appealing to sophisticated traders, allowing them to hedge directional risk with a clear risk exposure and payoff. For further ease of use, users can use any token within the liquidity pool basket as collateral. For example, if you wanted to buy a digital option on LDO, you could use any stablecoin USDC/USDT/DAI or APE/AAVE/CRV/LINK/UNI/LDO as collateral.
Digital options are a great introduction to options and structured derivatives. Once users become more familiar with derivative concepts and comfortable with trading derivatives, they will eventually explore more advanced structured derivatives within the Derivio ecosystem. We believe that in addition to building simple structured derivatives for an optimized user experience, there is a potential opportunity to build a larger suite of advanced options products that cater to a broader audience. Products such as exotic options, structured notes, and warrants will allow individuals to gain price exposure with unique payoffs and different levels of risk, greatly increasing the total market Derivio can capture.
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