DeFi Derivatives Series: (2) DeFi Derivatives Ecosystem — Options
‘verse2’ has now determined that the mainstay of the Derivative Protocol is the (Perpetual Futures) Option. To define in a few words the Option addressed in this volume, an Option is “a right that can be exercised by the owner.”
Since Options are used omnipresent in TradFi to reduce the “risk to uncertainty” and the Crypto market has more dramatic volatility inherent, it seems clear that enormous demand behind Options will be created with the entry of professional/institutional investors.
The contracting and execution of Options on Smart Contract facilitates the realization of derivative products that cannot be implemented even on TradFi or CeFi. A variety of hedging and profitability structuring products tailored to market demand are now on a constant trajectory, and market participants’ trading, previously limited to existing trading, can now address diverse market uncertainties through the use of Options and Futures. Specific options issuance and sales and monetization models will be shared throughout each Protocol Detail Research. In this edition, as in the previous editions, we would like to briefly introduce the major option players in the Defi Derivatives ecosystem.
1. Opyn
Opyn is a Protocol that provides the infrastructure to support Decentralized Options trading and supports the growth of the DeFi (Decentralized Finance) market by offering Tokenized options in the form of ERC20.
Project Structure
* Users can directly set expiration dates, strikes, etc., to issue Options, which will be converted into Tokens and automatically realized under Smart Contract.
* Each oToken is issued in European, cash-settled, or auto-exercise upon expiry form, with different conditions (expiration dates, strike, etc.) depending on the user’s initial issuance conditions.
* In the case of Opyn, options are issued and settled on the basis of collateral and have mechanisms that greatly enhance capital efficiency while increasing stability through model variables such as expiration dates, liquidation, and events.
* Opyn has, for the first time, introduced a partial collateral model for Options transactions, allowing for high leverage as in traditional financial markets.
* Opyn’s primary user is protocol, which creates structured products that issue and sell Opyn. It expects to be kept as out the money and profits through the difference in issuance.
* Gamma Protocol, Perpetual Vault, and other diverse infrastructure for the growth of the Decentralized Options market.
TVL Trends / $92M (2022.07.25)
verse2 Insight
Opyn’s development was accompanied by the growth of DOVs (DeFi Option Vaults) such as Ribbon Finance. As the DeFi Protocol introduces a variety of DOVs as a new profitability model and the overall market grows, the value of Opyn as a front runner in the early DeFi Option market will increase. It remains to be seen if the automated execution of trades by Contract will give credibility and convenience to the Opyn model and act as a new horizon for the Partial Collateralization system.
2. Squeeth
Squeeth (ETH²) is a new financial derivative invented by Opyn. Squeeth is the first Power perpetual and offers traders permanent Exposure to ETH².
Project Structure
* Squeeth is a derivative that follows ETH² and is structured to take advantage of convexity to suffer greater gains in a rising market and fewer losses in a falling market in contrast to the normal 2X leverage.
* A Squeeth Short Position is similar to taking a Short Position against your price straddle and is exposed to a sustained “-” gamma.
* Similar to taking a Long Call Option Position, such as in the case of a Squeeth Long Position, but there are no Strikes or expiration dates, exposure to a persistent “+” gamma, and no need to Roll the position.
* When ETH is deposited, the protocol executes an automated strategy, “Crab.” (This is a delta-neutral strategy with Short Squeeth/Long ETH., Similar to Straddle Selling with Periodic Rebalancing); in addition, Bull and Bear strategies can be used, but are not currently launched.
TVL Trends / $92M (2022.07.25), (Same as Opyn’s TVL.)
verse2 Insight
It is a protocol initiated by Opyn, who opened the foundations of the early DeFi Option market, and is notable not only for introducing a financial model that is not feasible in the real financial market but also for combining it with the Options strategy. It simplifies trading with Long Position (Squeeth purchase) and Short Position (Squeeth issuance and sale), and in the case of Short Position, it is a strategy of betting on a constant value of volatility like Straddle, so the more stable the market is, the more valuable the project will be. The more stable the market becomes, the more valuable the project is likely to be. Unlike the initial conception of the model, the problem exists of not being able to follow the value of Ethereum with a price volatility advantage.
3. Dopex / $22.17M (2022.07.25)
Based on the Options Pool and SSOV (Single Staking Option Vaults), this protocol is an embodiment of ERC20-based Options Token issuance and trading (individual trading + Pool-based trading) on a single platform.
Project Structure
* Users seeking to sell volatility in the existing CeFi Options Protocol must determine the strikes and maturities that provide liquidity while continuously scanning the acquiring side.
* Dopex will allow Options to be traded with minimal interaction through an “Options Pool.” At this time, the LP Provider acts as the Options Selling Position.
* The LP Provider can deposit the underlying assets into the pool, which will be utilized as liquidity for users seeking to purchase Call/Put Options.
* At the end of each epoch, Pool participants are allocated the premium paid for all Options associated with the Pool and DPX Token compensation in proportion to their Pool holdings.
* If the Options purchaser makes a net profit, the Pool participant will receive rDPX, the Rebate Token, in the event of a loss incurred by the pool. (This corresponds to 30% of all losses incurred in the pool.)
* The protocol has a two-token model of DPX and rDPX, where DPX is a Governance Token, and rDPX is a token issued in compensation (determined based on the net loss incurred at the end of the epoch) for losses incurred by the Pool participant.
TVL Trends
verse2 Insight
dopex has the advantage of being able to guide users with different types and demands based on the Options Pool and SSOV. This is based on the simplicity of the structure (interest farming demand/Options Trading demand/Options Margin Trading demand, etc.), but SSOV allows users to easily purchase options directly on the relevant vaults, without the process of purchasing options on the existing order book infrastructure. SSOV allows users to easily purchase options directly on the relevant vaults without the process of purchasing options on the existing Order Book platform. Similarly, users can easily take a Sell Option position at a specific Strike Price by simply staking the asset in SSOV, unlike the traditional Order Book base.
4. Premia
Premia is an automated Options market that provides high capital efficiency for Options traders through real-time price development based on demand-supply.
Project Structure
* Premia allows users to trade options in the Call/Put Pool and exercise options at any time regardless of maturity.
* The existing options pricing model based on Black-Scholes is not suitable for DeFi options pricing. This means that there will always be an error compared to Black-Scholes derived values.
* Premia options pricing is determined by C*BS. The C value is adjusted by demand supply. This means that users can evaluate option prices through C and decide whether or not to add LPs to the Options Pool.
* Premia helps LP providers optimize their portfolios through a feature called Smart Deposit Router. (in the direction of minimizing the variance of each Pool C while maximizing the average C)
* Premia aims to enable delta-heading and other hedging strategies related to Greeks (delta, vega, gamma, etc. indices)/Spread through Meta-Vaults, Short Position on the volatility of specific assets, Options margin trading across other platforms, etc.
* The protocol fee is 3% of the Options price when buying Options and 2.5% of the Strike Price when Striking Options. 80% of the total fee goes to the xPREMIA holder and the rest to the Treasury.
TVL Trends / $6.37M (2022.07.25)
verse2 Insight
It is a Pool-based Options protocol. It is noteworthy that they have developed their own Options price calculation methodology, which they call the C-Level. The team is developing an infrastructure that will support the realization of Options’ original purpose, i.e., various Hedging and Margin trading, etc. We believe that it is one of the most complete teams in the Options market today.
5. Lyra
Lyra is an Options Protocol implemented on Optimism, Layer 2 of Ethereum, with the goal of providing a fast and stable trading experience.
Project Structure
* Lyra calculates Options prices based on the Black-Scholes model, which is based on dynamic input (Price, Time, Implied Volatility).
- Implied Volatility refers to the “expected” price volatility of the underlying asset by maturity, and IV is the most important factor that determines Options pricing and differentiates prices between traders in a trade.
* Lyra’s first Options AMM automatically formulated Options prices to reduce LP risk and allow for more LP supply and options trading.
* Lyra is implemented in Optimism because it was designed to Hedge risk through Synthetix (allowing for zero slippage, unlimited liquidity, and easy Long/Short).
* Lyra allows users to buy/sell Call/Put Options in each Market Pool, providing liquidity to the Market Pool and allowing interest farming through Staking.
* Lyra requires a collateral deposit to sell Call Options, which has the same effect as a user taking a Covered Call position.
* The ability to provision protocols is guaranteed through the Lyrassms Security Model, and staking USDC/LYRA through the Security Model allows users to receive staking compensation.
TVL Trends / $8.19M (2022.07.25)
verse2 Insight
Lyra is a Pool-based Options protocol that allows users to trade Options on a Pool basis for a highly convenient user experience. Other key differentiators from other Options protocols are the existence of an incentive Pool to support the solvency provided by the protocol and its design based on AMM. Future versions of the protocol will be designed to be distributed to multiple L2s outside of Optimism and will gradually grow through other LyraAMM-based vault implementations.
6. Ribbon Finance
Ribbon Finance is a Blockchain protocol that embodies Structured products, a combination of Options, Futures, and other derivative and fixed-interests products.
Project Description
* Ribbon Finance’s flagship product is Theta Vault, which generates income on deposits based on a weekly automatic Options selling strategy.
* Theta Vault is currently managed based on the Covered Call (Covered Call: acquisition of underlying assets + Call Options selling) and Foot Options selling strategies.
* Theta Vaults’ Options strategy execution is being driven by Opyn’s oTokens. oTokens are ERC20 token representations of Options, and each oToken has a strike price and maturity.
* In order to execute Theta Vaults’ Options strategy, an oToken must be issued in a separate Vault, which must be able to Short (sell short).
* The Vault locks up the user’s deposited funds to Opyn as collateral, then mints and sells the oToken.
* The Vault Liquidity Provider is allocated a premium for selling Options in an Out the Money situation.
* Liquidity providers will be compensated with their own token, the RBN, in addition to the premium for selling Options.
TVL Trends / $87.19M (2022.07.25)
verse2 Insight
Ribbon Finance has contributed to the growth of the DeFi Options market by providing high returns relative to risk with a protocol that led to the popularization of DOV (DeFi Option Vault). Many DOV standards were born based on this protocol, and following V2, they are planning the launch of V3 and improving their services to enable a variety of strategies in terms of products and users. The growth of Ribbon Finance, which supports a wide variety of structured vaults as the demand for Options is extended, is also expected to accompany the growth of Ribbon Finance.
7. ThetaNuts
Thetanuts Finance is a Vault-based Options protocol that automatically executes Crypto-based structured strategies, similar to Ribbon Finance, but differs in detail strategy.
Project Structure
* Thetanuts Basic is operated based on the Covered Call, Covered Foot strategy with an automated Options strategy execution Vault.
* Ribbon Finance uses the Full Selling strategy (selling Foot Options, similar in general profit flow to Covered Calls), whereas Thetanuts Basic’s Vault uses the Covered Foot strategy, which provides greater profits in falling markets. Strategy, which offers greater gains in falling markets.
* They are currently operating a Stronghold Vault, which differs from the Basic Vault in that it is operated through a more complex Options strategy.
* Users will benefit from automatic Options strategy execution, and their earnings will be auto-compound. When you Swap (Deposit) your assets, you receive a Stronghold Token representing your interest in the corresponding Stronghold Vault.
* Each Vault sells Options on behalf of its users, and auction participants bid to purchase Options. The auction is conducted Off-Chain through Paradigm’s OTC platform.
TVL Trends / $17.41M (2022.07.25)
verse2 Insight
The overall service usage process is similar to Ribbon Finance, but unlike Ribbon Finance, which supports Weekly and Monthly Options, Thetanuts supports Weekly and Bi-weekly Options. A DOV-based Options protocol that has recently received significant interest from the ecosystem and which previously had no significant differentiation from Ribbon Finance is now a DOV Options protocol that executes a differentiated Options strategy through Stronghold Vaults. The new protocol is based on the support of major market players. It is based on the support of major market players and presents a new character of DOV to the market.
The growing demand for derivatives creates the groundwork for the development of Options, which naturally promotes the growth of DOVs (DeFi Option Vaults). While counterparties are essential to Options trading, Crypto’s Options ecosystem has an inherent problem of not having enough counterparties as an initial state.
As a device to partially solve this problem, the concept of Liquidation Pool was introduced in various protocols, and the current state of the protocol was structured so that the pool’s assets are collateralized, and the issuance and settlement of Options are performed.
The growth of Decentralized Derivatives is dramatic, starting with Long/Short Futures and growing in diverse directions, including Perpetual Futures and Power Perpetual. The Options space is also advancing, starting with Vanilla Options (Call/Put) issuance, followed by Perpetual Options, DOV implementation, and other new elements being introduced ahead of the curve. As the Crypto Options trading market becomes more sophisticated and improves its current reliance on the Liquidation Pool, and moves away from a compensation structure that relies on proprietary token incentives, Options will become an expansive new theme.
verse2 maintains its faith that DeFi Derivative will be the new Keyword in the Crypto market.
The “DeFi Derivatives Protocol Research” will then share a detailed analysis of the core DeFi Derivatives protocol, starting with Perpetual Protocol v1.
This article is <DeFi Derivatives series : (2) DeFi Derivatives Ecosystem — Options> provided by verse2. If you would like to read the entire series, please see the list below. We recommend you read the articles sequentially.
1. DeFi Derivatives Series: (0) Why DeFi Derivatives?
2. DeFi Derivatives Series: (1) DeFi Derivatives Ecosystem — Futures
3. DeFi Derivatives Series: (2) DeFi Derivatives Ecosystem — Options
