⛑️Decenta Protocol

NFT Options Hedging Protocol

Overview

With the massive growth of cryptocurrency applications, on-chain derivatives markets such as options protocols are still in their infancy. The valuation of options protocols is relatively low compared to other DeFi protocols. Ribbon Finance, for example, failed to reach a market cap of more than $100 million at the end of the third quarter of 2022, with a price-to-sales ratio of 2x. Although tremendous growth has been seen in options protocols, there is still a lot of space to reach the level of traditional finance.

The on-chain options protocol is mainly composed of two types of protocols, Central Limit Order Book (CLOB) options and liquidity options. CLOB options is a form of creating actual options contracts and facilitating the buying and selling of options. Liquidity options refers to the creation of options contracts by users to provide liquidity for underlying assets and quoted assets. Protocols like Opyn, PsyOptions, and Zeta Market operate as vanilla order books, while most other options protocols like Dopex, Lyra, Premia, and Hegic use a liquidity pool approach.

In addition to being usable by ordinary users, option pools are also used with many other protocols and structured options protocols for fund management and creating vaults for their token holders. Let's look at the following protocols.

Ribbon Finance is a traditionally structured protocol where bids are ranked from highest to lowest in these auctions once all bids have been placed. Ribbon has always been an innovator in this field and has pioneered yield products combined with Yearn’s yvUSDC. Instead of selling put options against normal USDC, users' USDC collateral is converted into yield yvUSDC, which increases the excess return of the vault by capturing the yield of borrowing demand in the ecosystem as well as the yield of option premium. They are sold in the same sequence (see image above), and Ribbon's option sellings are decentralized because price discovery happens on-chain. They may soon switch to a silent auction mechanism.

NextWhy do we need an options protocol?

Last updated 1 year ago

Overview

With the massive growth of cryptocurrency applications, on-chain derivatives markets such as options protocols are still in their infancy. The valuation of options protocols is relatively low compared to other DeFi protocols. Ribbon Finance, for example, failed to reach a market cap of more than $100 million at the end of the third quarter of 2022, with a price-to-sales ratio of 2x. Although tremendous growth has been seen in options protocols, there is still a lot of space to reach the level of traditional finance.

The on-chain options protocol is mainly composed of two types of protocols, Central Limit Order Book (CLOB) options and liquidity options. CLOB options is a form of creating actual options contracts and facilitating the buying and selling of options. Liquidity options refers to the creation of options contracts by users to provide liquidity for underlying assets and quoted assets. Protocols like Opyn, PsyOptions, and Zeta Market operate as vanilla order books, while most other options protocols like Dopex, Lyra, Premia, and Hegic use a liquidity pool approach.

In addition to being usable by ordinary users, option pools are also used with many other protocols and structured options protocols for fund management and creating vaults for their token holders. Let's look at the following protocols.