Panoptic Protocol: Revolutionizing On-Chain Options Trading in DeFi

In defining a healthy financial system, options are usually considered as the foundational architecture both in decentralized and traditional finance. Exploring sets of data from DeFiLlama in 2022, there are already more than 30 on-chain options protocols with a Total Value Locked (TVL) exceeding $830 million. While most of these options protocols emulate Traditional and Legacy Financial Markets (TradFi), the reliance on Call and Put options with fixed expiration dates and pre-specified strike prices fragments liquidity and makes adjusting positions expensive and cumbersome. Consequently, accurate pricing of options via the Black-Scholes model might not be readily achievable since all the operations that occur on-chain come with significant technical limitations. It is worth noting that on-chain option protocols are fundamentally limited by the quality and availability of their oracles, which rules out a large number in the long-tail of assets traded on decentralized exchanges. A solution that has come to line light to salvage these aforementioned problems is Panoptic

Panoptic protocol is an innovative perpetual options protocol deeply integrated into the DeFi ecosystem, designed to surmount the various technical limitations and obstacles faced by existing on-chain options protocols. Panoptic accomplishes this by leveraging the trading dynamics of Uniswap v3 to enhance its functionality and effectiveness to disintermediate the settlement of options contracts.

The Panoptic protocol strategically incorporates Uniswap v3 Liquidity Provider (LP) positions as a fundamental component to enable the efficient trading of long and short options (Lambert, 2021b). With the integration of intelligent contracts, the Panoptic protocol seamlessly interacts with any Uniswap v3 pool contract, facilitating the creation, trading, and market-making of perpetual put and call options in a decentralized, secure, and resource-efficient manner.

The Panoptic protocol implements the following key innovations:

1. Permissionless options: Panoptic protocol introduces permissionless options by leveraging the repositioning of liquidity within Uni v3 pools. The protocol enables users to adjust the liquidity placement in relation to the spot price, thereby creating short or long option positions. This approach empowers users to actively manage their options exposure within the protocol while utilizing the flexibility provided by Uni v3 pools.
2. Oracle-less Black-Scholes pricing: The pricing of options within the Panoptic protocol follows a streaming premium model. The premium is determined using a path-dependent pricing formula that ultimately converges to the well-known Black-Scholes pricing model. This approach ensures that the options’ pricing accurately reflects their underlying assets’ dynamics and converges to a widely accepted pricing standard as time progresses.
3. Distinct user roles: Buyers and sellers will mint long and short options by directly interacting with the Panoptic smart contracts. Liquidity Providers (LPs) will provide fungible liquidity to the Panoptic pool without risking their capital.
4. Disentanglement of trading fees and Liquidity Providers (LP) rewards: Liquidity Providers (LPs) will accumulate yields by “lending” their liquidity to options sellers and buyers for a small fee. Options buyers and sellers will pay/receive a premium proportional to the fees generated by their Uni v3 options position.
5. Risk Management: In the Panoptic protocol, options sellers assume the majority of the risk. They have the ability to sell under-collateralized options, with a capital inefficiency ratio of up to 5x. Additionally, the protocol allows for the deployment of multi-leg options instruments within a single transaction. Users can create complex options strategies involving up to four puts or calls, further enhancing the versatility and efficiency of trading options within the Panoptic ecosystem..

6. Composability: Panoptic protocol supports the creation of multi-legged options with user-defined payoffs, which can be tokenized as ERC1155 tokens. These tokens are designed to be tradable and compatible with various DeFi and staking protocols. It interoperability enhances the flexibility and utility of Panoptic options within the broader DeFi landscape.

Check out our whitepaper and documents for more information about Panoptic and perpetual options.

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