Introducing Dutch auctions for DeFi Option Vaults
Selling ETH options on “gas efficient & optimal revenue” auctions
TLDR; Dutch auctions are part of price discovery in Opium 2.0. Non-interactive and extremely cheap, they are ideal for both blockchain and DeFi options.
The Dutch auction is the open descending price counterpart of the English auction. Here the auction has a start value higher than every interested bidder, and gradually lowered until there is a bidder that is interested at that price.
Pricing of DeFi options
The use of DeFi/crypto options is becoming more and more popular. As usual, the initial demand comes from professional players via centralized settlement but we see that first decentralized versions are growing in popularity too — used both by smart contracts as well as end users! Just like Uniswap got popular after centralised exchanges became mature, DeFi protocols may see an increase in adoption when there is enought centralised markets.
Pricing options (and especially crypto-options) is difficult, in the end it is all about the market price that you can get. Market-makers, crypto hedge funds, and other participants are trying to create valuation models or hedge when possible.
When you want to trade such a complex instrument from a smart contract there is almost no other way than using an auction. Many automated trading strategies utilized by Opium, Ribbon, Thetanuts, and other DeFi Option Vaults are running decentralized auctions weekly. However, those auctions can be inefficient on gas, time, and revenue. According to the game theory, a Dutch auction can lead to optimal revenue and can be better than a normal English auction while being non-interactive.
Why “Dutch auction” is the best for DeFi
First of all, the Dutch auction is one of the best revenue optimizing auctions. According to game theory, it leads to the same outcome as other optimal auctions.
Second, it is non-interactive and gas efficient. Taker only needs to send one transaction, picking up the lot at the desired price.
Third, the auction has an executable price from the beginning and will be aggregated by pathfinders like 1inch.io and others. Thousands of traders and hundreds of liquidity sources are “participating” in the auction together with private market makers and arbitrageurs.
Thousands of traders and hundreds of liquidity sources are “participating” in the auction together with private market makers and arbitrageurs.
Other use cases
Opium is open-sourced and permission-less protocol, meaning that everyone can place any ERC-20 tokens at the auction and get the best available execution at that moment. When placing tokens at the auction, one would need to specify starting (very high) price and min price after which the auction will stop.
Price can decrease with linear or exponential speed over seconds, minutes, or even hours
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