Introducing Wrytes: An on-chain decentralized options protocol
Summary
- Birthday Research is launching Wrytes, an on-chain decentralized options protocol
- It will be launched on the Ethereum mainnet as a beta in Q3 2022 along with liquidity mining rewards
- Developed to tackle existing inefficiencies in the decentralized options protocol landscape, Wrytes has the following capabilities:
1. Automated premium pricing
2. Shared liquidity pools
3. Fractionalized options
The decentralized options landscape
Options are one of the oldest financial instruments in Traditional Finance. Invented in the commodities markets by Greeks looking to speculate in the olive market, options give the buyer the right but not the obligation to buy an asset at a predetermined price on or before an expiry date for a small fee called the premium.
Over time, options have evolved into their own asset class and are now an integral backbone of today’s traditional financial landscape. As a risk management tool, they are nothing more than derivative contracts and in the case of decentralized options, they are smart contracts which have value that is dependent on that of the underlying asset. This asset could be, for example, a stock, a cryptocurrency, or commodities.
Over the past two to three years, the interest in decentralized options has increased steadily with dedicated decentralized options protocols emerging, offering a range of products, from covered puts and covered calls on popular crypto pairs to user-created vaults for highly customized risk coverage.
The composability and interoperability of DeFi is taking structured options product innovation to a new level and improving the investor risk-reward profile. As a result, institutional money which is waiting on the sideline to enter this new lucrative market segment, will soon pour in and define what used to be just a breeding ground for new financial products.
How do decentralized options differ from traditional options, and who are the users?
Decentralized options work similarly to traditional options, in which option buyers can pay a small fee — which is the option premium — to buy the option and place long (call) or short (put) bets on cryptocurrencies within a specific time frame.
One of the differences between traditional options and decentralized options is the additional component of a liquidity pool which liquidity providers can participate in to earn yields. In traditional finance, market makers such as banks underwrite the options, but in DeFi, this is done by liquidity providers instead who play a key role in providing liquidity to the pool which is then used to underwrite the decentralized option.
Wrytes presents a different approach to decentralized options
While there are quite a few decentralized options protocols in the market, Wrytes is undertaking a novel approach to make options in the DeFi space even more decentralized and efficient:
Automated premium pricing
Existing protocols using Automated Market Makers (AMM) may rely on some kind of human input, meaning, options pricing can be modified by protocol owners — which goes against the very notion of decentralized finance of not having a third-party involved.
Wrytes will operate with a true automated premium pricing algorithm, which is determined by:
1. The strike price versus the current price
2. The time to expiry
3. The market demand of the option, which is measured by the number of option purchases between the blocks. If blocks have passed without any options being purchased, the pricing factor will decay exponentially with each passing block. On the other hand, the market demand will increase linearly with the amount purchased if there are purchases.
Shared liquidity pools
Separate liquidity pools for each option series are common in existing protocols, which results in liquidity fragmentation. With separate liquidity pools, this means that each liquidity pool is made of options with the same underlying asset and the same strike price and expiry date. As a result, liquidity providers are forced to spread out their capital, which makes writing options more confusing as liquidity providers must decide which pool — and therefore, which strike price and expiry — they would like to provide liquidity for. Wrytes has been built differently, whereby the same underlying assets are provided to the same shared liquidity pool, regardless of strike price or expiry, which is then used to underwrite the option (structured by the automated premium pricing algorithm).
Fractionalized options
Some existing protocols may only allow option buyers to purchase or trade options on secondary markets as a whole option, without the possibility of dividing them (such as making a purchase of 0.3 units of an option).
Wrytes allows buyers to purchase or even resell a fraction of the option. This allows users who do not wish to buy the option as a whole to purchase or to resell in smaller quantities.
We heard you — Everyone loves rewards!
On top of the existing base rewards that liquidity providers will receive, an additional, limited-time only rewards program will be introduced to all liquidity providers to celebrate the introduction of Wrytes.
- Base rewards: Base rewards will be given to liquidity providers — to earn yield — for providing liquidity to the pool.
- Additional rewards: In addition, Birthday Research will be sponsoring additional DFI over the course of three months once Wrytes is launched on the Ethereum mainnet. This additional rewards program will be similar to conventional liquidity mining rewards, where liquidity providers will be awarded with DFI proportional to their share of liquidity in the pool.
More details on the rewards program to come.
Technical overview
Excited? Us too! Our Product and Engineering teams are working hard to complete the development of the protocol and we expect to launch Wrytes in Q3 2022.
Till then, we will be sharing a series of blogs which dives deeper into the technical overview of the protocol as well as share more details about the reward scheme.
Read more about other projects by Birthday Research or join our community to get updates.
About Birthday Research
Birthday Research is the blockchain R&D arm of Cake DeFi that develops best-in-class blockchain innovations, with the mission of enabling the next bound of Web3 through open-source blockchain research and development.
Birthday Research’s work spans cryptographic research, deep blockchain consensus development, and smart contracts development — with a laser-sharp focus on pushing the industry frontier while tackling the most demanding DeFi challenges of today.
