Decentralized finance has grown exponentially in the past year from $900M last May to $90B total value locked (TVL) at the time of writing, a whopping 100x in growth 🚀🚀🚀.
DeFi has paved the way for digital asset investors to safely trade, store, and earn on their digital assets without the intervention of a trusted central counterparty.
With new advancements like automated market-making (AMM) pools, lending platforms, and asset staking — investors now, more than ever, need effective ways to hedge their risk.
Despite this need, there is no feasible options protocol within the DeFi space. We’ve identified four key problems with the current state of decentralized options:
💰 Costs Current on-chain protocols are prohibitively expensive in terms of transactions fees, meaning investors have an additional hurdle in fees and timeliness to execute their transactions.
📉 Poor AMM profitability Although constant-product AMMs are able to reasonably provide spot liquidity, options are slightly more complex to price and trade, meaning no liquidity pool has been able to both attract significant TVL and remain profitable. Current protocols are (1) unable to balance their risks, (2) use stale pricing sources, or (3) limit themselves to a fraction of the liquidity demanded.
🏛 Huge collateral obligations Current DeFi derivative platforms have not been able to address the fact that options have unbounded payoffs, without (also) asking users to fully collateralise. Requiring users to fully collateralise significantly affects an investor’s capital efficiency, increasing the implicit costs of trading options.
💧 Liquidity issues Because of the concerns above, a liquidity stalemate occurs. Nobody wants to trade because it’s too expensive, and nobody wants to provide liquidity because it’s too risky!