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DeFi Option Exchanges
DeFi alternatives to Deribit and other centralized exchanges

Background

  • Future and option contracts are used to hedge risk or create synthetic exposures
  • In crypto world, volumes in option trading have skyrocketed.
  • Deribit and Binance are among the top centralised exchange for options.
  • There have been a couple of attempts to build decentralised option exchanges.

Option basics

Option contracts give buyers the right, but not the obligations, to buy or sell underlying assets with a pre-specified price, or strike. In exchange of this right, buyers will have to pay a premium to the sellers prior to entering the contracts. This premium is used to compensate the situations where either the underlying asset price is above the strike in case of call option (to buy the underlying assets), or below the strike in case of put option (to sell the underlying assets). In both cases, the options expire 'in-the-money'. On the flip side, if the asset price is below the strike for a call option, or above the strike for a put option, the buyers get nothing back as the options expire 'out-of-the-money'.
Normally premium is only a tiny fraction of asset price. For example, typical 1-day Ethereum option would cost around 2% of Ethereum price, while the option could potentially yield 10% in one-day movement, giving buyers 5x return in just one day! Therefore, options are the ideal instrument to have leveraged positions on crypto prices.

Option DeFi Space

  • Many protocols emerged and flourished, although the volumes are dwarfed in comparison to Deribit and Binance.
  • There is a limitation to capacity and product offerings, mainly due to issues such as:
    • Lack of good volatility oracles
    • High gas fees
    • Significant imperfect loss for liquidity providers, which is a result of inadequate or non-existing risk management
    • Fat-tailed, non-normal price changes and non-stationary volatility
  • In addition, there is no venue to trade volatility as a separate investment.
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Background
Option basics
Option DeFi Space