What is the difference between DeFi+Options compared with traditional options?
The option instruments offered by traditional brokerage firms and Asteria are no different. The options pricing mechanisms are all the same. We’ve created the same option products for cryptocurrency as the option products for stocks offered by traditional brokerage firms. So, onboarding options traders won’t be complex for Asteria. Our underlying assets are cryptocurrency, and their underlying assets are stocks. Offering options products on cryptocurrency is a monumental achievement in the cryptocurrency space.
Asteria’s system implementation that allows for cryptocurrency options products is by DeFi, which has never been done before. Furthermore, DeFi’s implementation in our model enables a new form of ownership of the principal capital used to secure option products. In traditional capital markets, the principal on options products is owned by the financial institutions; they collect interests for staking their money. With Asteria’s protocol, this type of ownership is given to ordinary people who now can back option products and receive interest on their principal by staking, just like how banks and traditional financial institutions make money. This difference makes all the beauty of decentralized finance against the conventional banking system. And it is how Asteria made DeFi and options work together.
The centralized cryptocurrency option trading is concentrated in Deribit. Unfortunately, even after years of development, its trading volume is still not comparable to spot and perpetual swaps/futures. In traditional financial markets, the trading volume of the options market is usually double-digit times the sum of the spot market and the futures market. The following figure shows the difference between the scale of options and perpetual swaps in the traditional financial and cryptocurrency markets:
There are two fundamental reasons:
1. The liquidity of options contracts becomes scattered in the market due to different parameters such as different expirations, strike prices, etc. This makes the cryptocurrency options market, which is currently not very popular, eventually more fragmented;
2 Options require relatively high professional skills, especially for option sellers or market makers. Due to the slow regulatory process of cryptocurrency, senior player institutions from Wall Street can yet to participate. Resulting in an unliquidated seller side.
After the rise of DeFi, the practitioner team has made different attempts. Decentralized options have undergone three main development processes: off-chain order book matching → tokenized option contract traded on spot swap AMM mechanism → Peer-to-Pool trading mode. However, the off-chain order matching did not solve the problem of fragmentation in the options market. Although the spot AMM tokenizes the contract, multiple fragmented trading pair pools are formed on swaps. At the same time, automated market makers have to face the impermanence loss, which is quite painful. Peer-to-Pool perfectly solves the above problems. The buyer can customize the parameters of the option contract, but the seller only needs to stake the collateral as the market maker. In this way, both buyers and sellers have significantly reduced the barriers to enter the market.
The Peer-to-Pool transaction model places high requirements on market makers’ capital management capabilities. Asteria sees that no platform or protocols have done enough in this regard, so we decided to build a high return, high security, high automation, and highly customized option protocol and platform.