Options are one of the most versatile financial instruments in DeFi.They allow traders to make money in virtually any market environment — bull, bear, or kangaroo. Yet given counterparty risk, most DeFi protocols require 100% collateralization of assets, leading to capital-inefficient markets.
At Opyn, we’re focused on building a flexible protocol that allows developers to create financial products that increase capital efficiency within DeFi. Using gamma protocol’s on-chain options infrastructure, anyone can combine any derivatives contract into a structured product for anyone else to consume.
DeFiDollar is one project improving capital efficiency of on-chain debt. Opeth is a synthetic instrument that combines put options and the underlying asset. This combo, put option + underlying asset, has a lower bound and can be used as collateral to issue stablecoins.
Opeth Use Cases:
Leveraged ETH Upside + Yield Farming
- Stablecoin loans allow traders to pledge put options’ powered Opeth as collateral to participate in yield farming or portfolio diversification strategies. In this scenario, the investor can borrow up to the value of their put option’s strike price in the collateral asset and use the loan to participate in high yield generating protocols or diversify their portfolios through other DeFi investment opportunities. This scenario allows the most efficient use of capital.
Reduce Downside Protection Cost
- One way to protect your investment portfolio during a bear market is to buy put options. Put options function as a form of insurance for your underlying assets. Stablecoin loans allow traders to subsidize put option costs ahead of, or during, a bear market. While put options give investors downside protection, Opeth stablecoin loans can subsidize or completely offset costs through yield farming gains.
How Does Opeth Work?
- A trader wants to borrow $800 on $1000 ETH.
- The trader identifies available ETH puts on Opyn with a strike price of $800
- The trader deposits 1ETH in the Opeth minting portal and pays the options premium to purchase the $800 strike put option
- The trader can then borrow up to $800 of stablecoins from any protocol accepting the Opeth as collateral, valid until the option’s expiry.
What Happens at Expiry?
- Option Expires Out Of The Money (worthless)
- If at expiry ETH remains above $800, the user returns $800, takes their ETH back, due to the option expiring worthless (out of the money)
- Option Expires In The Money
- If at expiry the ETH price drops below the strike price ($800), then the put option is exercised to sell the underlying ETH for $800.
- The protocol using Opeth as collateral will issue < $800 to keep a reasonable buffer
- Opeth increases Capital efficiency. Traders can borrow up to $999 on $1,000 collateral as long they can afford the put option premium.
- Opeth opens up the market for broader collateral inclusion. Given physically-settled DeFi options settlement is guaranteed on-chain, even relatively illiquid assets can be used as collateral.
- Flexible use cases for traders using DeFi options as party of their investment strategy
- Opeth and options liquidity aggregator will act as standalone products, and any protocols can add Opeth as collateral.