The options for Defi Options trading

Ever heard of Hegic, Opyn, FinNexus

They are all Defi options trading apps.

Not exactly new nor wildly popular, I have only just come to know about them being a crypto laggard. Option is not a simple derivative to offer (for market makers) and definitely not an easy instrument for noob retail investors to grasp.

Just thought it's interesting to see how these new unicorns innovate and conceptualize options trading in the decentralized space without a traditional order book mechanism. Below are a couple of articles which I have read to satiate my curiosity and some information worth highlighting tagged with my comments in blue below. 

Cryptocurrency options competition: What are the characteristics of FinNexus’s liquidity aggregation solution?

"Unlike spot or futures, the liquidity of options is more difficult to obtain. For spot, there is only one category, and for futures, there are at most several categories. For options, because there are different expiration dates, exercise prices, and bullish and bearish options, many different categories can be arranged and combined."

There are basically buy (call) options and sell (put) options with different permutation of the categories as mentioned above. 

Depending on the market conditions, liquidity might be extremely low because there could be few put options on sale (without a market maker's sell side) or very few buyers (if there is no suitable option out there to meet their buy criteria).

Without liquidity, it's a dead market.

"Among the few decentralized options products, only two products are actually launched, namely Opyn and Hegic, and these two products also have problems such as lack of liquidity, low capital utilization, and scarcity of options. In addition, in the field of decentralized encrypted options in the early stage, there is no professional option market maker, and there is a lack of professional hedging tools. Even if someone is willing to participate in market making, there will be a great risk of loss."

Yes, so without sufficient liquidity (nobody to help you offload your options), spread is going to be high and risk of loss is high.

"Compared with the decentralized options platform Opyn’s full-margin physical delivery mechanism, FinNexus adopts a price difference settlement mechanism, while using cash delivery."

Means upon option expiry, the losses / gains in option price is settled via 'cash' (eg. USDC) instead of the underlying asset?

Decentralized Liquidity Pools: A Deep Dive With FinNexus Options

This article touches on what's liquidity pool in general and, in the later part, how Options Collateral Pools work.

The concept:

"Hegic and FinNexus move the option contracts on-chain with peer-to-pool models. Liquidity is collected together in the collateral pools. The pools are the counterparties to all the options with different terms, while providing collaterals to them. Risks and premiums are shared equally across the entire group of liquidity providers so that no individual participant is at high risk and all participants can share in the rewards."

Ooh, so the pool will 'generate' the option contract that you want based on the asset availability there? Pool = Option seller

"Collateral pools for options behave differently from better known lending and AMM liquidity pools. The pools provide liquidity and collateral for options, while rewarded with option premiums and undertaking risks. It is possible to lose money in cases of the unilateral market price movement of the underlying assets. But in the long run, it could bring some favorable rewards for the liquidity providers."

This is because options fetch higher prices in times of volatility so a unilateral market will not favour options trading.

Unfortunately, I do not have reviews to share about the various platforms as I have not participated in any of them personally. I am also unlikely to participate in the near future because I would only go for the tried-and-reviewed (despite the possibility of missing out on any explosive upside) as I do not wish to become canon fodder. Furthermore, I have nothing much worthy of hedging with options. (Not to mention, fastest way to financial suicide is using high leverage for options.)

Note that different options trading Defi protocols may deploy different settlement mechanisms, pool concepts and tokenomics, so more research will need to be done to better understand prior to participating. Cos unlike traditional option trading houses (you get either the American style or European style), Defi trading houses can set their "own rules" and be "freestyle".

MASP does seem like a novel and workable concept that has the potential to attract liquidity providers and traders as the Defi footprint expands. However, risk still boils down to the security of the underlying protocol and reliability of its smart contract in executing complex trades and reward / earning distribution. 

Blockchain Options
Welcome to the world of Defi derivatives

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Disclaimer: Contents of this blog are personal opinions and NOT financial advice to buy or sell any mentioned securities, commodities or assets. I am in no way affiliated to any articles or platforms mentioned, neither am I using them.


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The contents of this blog are author's personal opinions and do not constitute advice to hold, buy or sell any securities, commodities or assets mentioned. I do not guarantee the accuracy and reliability of any information provided, and shall not be liable for any losses incurred from reading my posts or using the materials herein. This blog may contain affiliate links to external sites.