All is ready, only waiting for the east wind Exploring the possibilities of decentralized options.

Preparations complete, awaiting only the east wind to explore decentralized options.

Author: AC Capital Source: medium Translated by: Sha Ou Ba, Lian Guai

Introduction:

Options are contracts that give the option buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price on or before a specified date. The emergence of smart contracts enables contracts to be automatically executed on the blockchain without human intervention. The conditions and processes for contract execution are clear and transparent, providing a favorable environment for the operation of options.

Since the DeFi summer of 2020, countless teams and projects have started to turn toward decentralization. In the past three years, the industry has once shown a thriving scene, making significant progress in accounting infrastructure, option types, market-making algorithms, and more.

As the market enters a bearish phase, the cost of token incentives continues to increase. The activity of decentralized options, which once expanded, is now declining. Innovation is mainly focused on micro-innovations of financial products, with only a few projects remaining. Market rewards breakthrough innovations that align with blockchain architecture and the decentralized environment. Projects like Lyra, which stand on the shoulders of giants, have formed a DeFi matrix, creating a unique option pricing algorithm system. Despite the shrinking market size, Aevo and Lyra command an absolute market share.

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Compared to the trillions of dollars in off-chain trading volume, the scale of on-chain options is negligible. In traditional markets, the nominal trading volume of options is roughly the same as that of futures. From this data, we can see that the on-chain options market is still in its early stages. In the second half of 2023, as layer 2 network technologies gradually mature, the low-cost deployment of infrastructure technologies for exchange options markets will drive new growth in the on-chain options market.

We have passed the “decentralization is good” DeFi summer, where all decentralized components will be questioned: Why!

What are options?

To understand decentralized options, we first need to address two questions: What are options, and why decentralize them?

Options are simply contracts that give the buyer the right, but not the obligation, to buy or sell the underlying asset at a specified price on or before a specified date. Option holders have the right to execute the contract according to the agreed terms.

Options are a special type of financial contract, which are financial instruments related to price fluctuations. From a qualitative perspective, options not only reflect changes in the price of the underlying asset but also include the magnitude of price changes and differences in exercise time.

Options are financial instruments related to risk pricing. The price changes of options can reflect price attributes that spot and futures prices cannot express, providing investors with more dimensions and tools for risk hedging and portfolio design.

In addition, options have a wide range of uses. Understanding the uses of options can help us identify the precise users of options products. In the traditional world, options have many uses apart from being leverage tools:

1. Risk management tool. Options are risk management tools that can be discussed from a business and compliance perspective. Enterprises and projects constantly face price fluctuations in raw materials and products. In addition to using futures to lock in costs and income in advance, options can also be purchased to obtain the right to buy or sell at a specified price within a specified period of time. This is equivalent to locking in the upper and lower limits of expenses and income, ensuring minimum profit. For financial institutions, derivatives are novel things with a variety and complexity that exceeds stocks and bonds. In terms of regulatory avoidance, options often play unexpected roles. In trading, some traders hold a large amount of chips and may face high liquidity losses when dealing with some risk control liquidation. Therefore, holding some corresponding options during low volatility periods can transform liquidity loss risks into fixed cost expenses.

2. Financing tool. In the financial field, options are also important financing tools. We will not discuss convertible bonds as a combination of options and bonds. Historically, many companies have also raised funds for their companies by selling options. In October 2022, Tesla raised $2.2 billion by selling 5 million call options. These options allow holders to purchase Tesla stocks at a price of $1,100 per share in January 2024.

3. Organizational incentive tool. In many traditional organizations, options are also used to incentivize senior management. This behavior is common in the traditional world. There is a lot of literature on the pros and cons of stock option incentives.

4. Leverage and speculation tool. Many investors use options for speculation. They leverage small capital for large profits, even betting on trading opportunities with time costs or volatility. This is a functionality that many other financial instruments do not possess.

In 2020, with the landing of spot DeFi, decentralized derivatives emerged from traditional finance. Everyone hopes to share the profits of centralized financial institution options business on decentralized platforms. So how do we define decentralized options?

In traditional finance, options have different circulation markets, including OTC trading in addition to exchange trading.

What are decentralized options?

Decentralized options are smart contracts issued on the blockchain with option attributes. Compared with the traditional options market, it is permissionless, transparent, and has no default risk. It has greater composability with other decentralized products. Compared with traditional centralized exchange options or OTC options, the execution of options is guaranteed and automatically executed by blockchain smart contracts. This is the only difference between decentralized options and traditional options.

The decentralized options project is a mapping of the centralized options market. In traditional financial markets, the derivatives market is much larger than the spot market, and the options market is on par with the spot market. With the success of decentralized spot exchanges like Uniswap and Curve, the potential of smart contracts in the financial industry has been demonstrated. Many teams see the future of decentralized futures and even options. Under the halo of DeFi summer, the shortcomings of decentralization are masked, and many teams are committed to the hot construction of decentralized options.

Why Decentralized Options are Important

Decentralized options have many advantages compared to centralized options, including:

• No counterparty risk: Decentralized options are executed by smart contracts on the blockchain, eliminating the risk of counterparty default.

• Greater fairness: Decentralized options are open to all participants, regardless of their location or financial status.

• Deeper capital collaboration: Decentralized options can facilitate more complex financial transactions, such as hedging and arbitrage.

No Counterparty Risk

In traditional options, both buyers and sellers face counterparty risk, which is the risk of the other party defaulting on the contract. This risk is eliminated in decentralized options as they are executed by smart contracts on the blockchain.

Greater Fairness:

In the traditional financial sector, regulatory bodies set up various barriers to entry to prevent fraud. While this protects the interests of users, it inevitably leads to some people losing the opportunity to participate. In decentralized options, all participants must abide by the same rules and regulations, regardless of their identity or status. This makes decentralized options more fair.

Deeper Capital Collaboration:

Decentralized options can facilitate more complex financial transactions, such as hedging and arbitrage. This helps improve the liquidity and efficiency of the financial market.

Decentralized Options Market

New and traditional things differ in many ways, be it from underlying assets to users or channels. Unlike traditional finance, where everything is centralized, decentralized options offer the possibility of differentiated competition.

Decentralized finance is always purely on-chain data operations. The best underlying assets are native on-chain assets. If off-chain assets need to be dealt with, it inevitably involves centralized power and organization. This belongs to RWA business, which requires compliance and cannot avoid the disadvantages of centralization.

In addition, the users of options are also different.

Firstly, the users of traditional options are very specific, while the target users of the decentralized options market are not clear. In traditional industries, industrial capital participates in the options market. Just like the futures market, industrial capital is an important participant in the traditional futures and options market. They may even have some control over the price of the underlying assets. The financial market is a bilateral market for trading risks and returns, and industrial capital is responsible for providing risks and risk capital. In the decentralized options market, the business related to underlying assets is simple and the volume is not large. The truly viable decentralized industry is nothing more than infrastructure such as chains, oracles, data retrieval, and some DeFi projects. For example, the largest of them, BTC, currently has an annual production of less than 400,000 and the underlying value risk that needs to be hedged is less than 100 billion. Without a strong on-chain labor force, it is actually difficult to obtain sufficient industry demand. This means that we do not actually have a rigid demand for a decentralized options market.

Users of on-chain options should lean towards programs rather than humans. The barrier to entry for on-chain options is low for programs, but high for humans. The design of on-chain options trading products should increase interaction between smart contracts and reduce interaction between manual accounts and smart contracts.

Next, there are differences in compliance preferences. Centralized options have sound risk control and compliance systems and can accommodate various types of qualified investors as defined by law, while compliance and risk control systems for decentralized options are incomplete. They engage in businesses not prohibited by law and attract individuals with lower compliance requirements.

Third, decentralized options allow for more underlying assets. The volatility of digital asset prices, which serves as the underlying asset, leads to higher option prices. Many digital assets are unregulated, have high concentration, and the risk of price manipulation is unpredictable. Therefore, for digital asset-related products, it is difficult for centralized exchanges to expand the business of underlying digital assets. Apart from stablecoins and ETH, BTC, it is difficult to develop suitable underlying assets for options. Some decentralized exchanges have designed the concept of “private pools,” allowing market makers to independently assume the risks of exercising certain options, enabling differentiated competition between decentralized options markets and centralized options markets.

Fourth, due to the high difficulty of product use, high barriers to entry, and high compliance risks. Although many projects have adopted marketing strategies such as token airdrops and trading rewards, the participation of funds and product users is still scarce. If the product is not active, it will face the dilemma of poor liquidity. Decentralized exchanges reduce the quantity of exercisable option prices and exercise time. Opyn even created perpetual options, further concentrating liquidity.

Fifth, although decentralized exchanges achieve non-default risk through smart contracts, the assets controlled by the contract under this smart contract must be worth more than the loss risk faced by the options. The insurance premium in the contract is in a state of over-collateralization. The efficiency of fund utilization is generally low.

Conclusion

Decentralized options have many advantages compared to traditional options, such as no counterparty risk, higher fairness, and deeper capital cooperation. However, there are also some challenges that need to be addressed, such as a lack of clear target users, high barriers to entry, and low liquidity.

Bottlenecks in the decentralized options market

The decentralized options market is an exciting new asset class, but it is still in the early stages of development. Therefore, before fully realizing its potential, many bottlenecks need to be overcome.

High cost

One of the biggest bottlenecks is the high cost of using the decentralized options market. This is caused by multiple factors, including operating costs, risk costs, and education costs.

• Operating costs are the fees that users must pay to miners for processing transactions on the blockchain. On popular blockchains like Ethereum, gas fees can be particularly high, and certain projects may require oracle quotes. This can make the decentralized options market too expensive for some users.
• Risk costs are another factor that contributes to the high cost of using the decentralized options market. Decentralized options markets are relatively new in the industry, and they lack the same level of historical precedents as traditional options markets. This makes it difficult to provide definitive proof of the security of these systems. The potential risk costs are obstacles to widespread adoption.
• Education costs are another factor that contributes to the high cost of using the decentralized options market. Decentralized options markets are complex and difficult to understand. Users need to have a thorough understanding of how they work in order to use them effectively. This can be a barrier for some users.

Immature Market

Another bottleneck is the immaturity of the decentralized options market. This is not only because decentralized options carry higher risks compared to traditional options markets, but also because the demand for them is not yet strong and consistent. This can make it difficult to find buyers and sellers for options, resulting in lower liquidity. Low liquidity can be mitigated by reducing the number of available options, but this may make trading more inconvenient.

The immaturity of the market is also reflected in the lack of use cases for decentralized options. Traditional options have multiple uses, such as hedging risks, generating income, and speculation. However, decentralized options have not been widely used for these purposes.

Low Capital Efficiency

Another bottleneck is the low capital efficiency of options margins. In traditional financial markets, platforms allow users to maintain a certain level of margin risk. This is based on centralized credit. Platforms can access user information and can recover from users by adding additional margin. However, in decentralized options markets, users are often anonymous and platforms do not have the ability to recover from users. Therefore, platforms must increase margin requirements or risk costs to lower the risk of liquidation.

In traditional trading platforms, users’ assets are held by the platform and can be used as collateral for margins. However, in current decentralized platforms, users must transfer ownership of their assets to the platform in order to use them as collateral.

Decentralized platforms cannot pursue losses beyond their margins from users, so they must reduce the risk of liquidation. Increasing margin requirements or risk costs is a necessary measure.

Immature Infrastructure

Decentralized options markets also rely on immature infrastructure, such as wallets and exchanges. These infrastructures can be complex and difficult to use, and they are not always reliable. For example, storing private keys can be challenging, and wallets can be hacked. In addition, decentralized options exchange interfaces can be cumbersome and difficult to use, and may lack sufficient analysis tools and software.

Despite these bottlenecks, significant progress has been made in developing decentralized options markets. Many new projects are working to address these challenges, and the market is growing rapidly. As the market matures, we expect these bottlenecks to be resolved, making decentralized options markets more accessible and user-friendly.

Structure of Decentralized Options Market

The decentralized options market can be divided into three categories: options issuance, options market-making, and structured products under options.

Options Issuance

Options issuance is the process of creating new options contracts. In the decentralized options market, options issuance can be done by individuals, institutions, or even smart contracts.

Options Market-Making

Option market making is the process of providing liquidity to the options market. In decentralized options markets, option market makers can be individuals, institutions, or even smart contracts.

Structural products under the options framework

Structural products are financial products that utilize options to achieve specific investment objectives. In decentralized options markets, structural products can be created using smart contracts.

Classification of decentralized options

Decentralized options can be classified in different ways based on specific criteria.

By the way, options are priced

Decentralized options can be priced in two ways:

• Centralized pricing: In this model, a central entity (such as a smart contract) is responsible for setting the option price.

• Decentralized pricing: In this model, the option price is determined by the interaction of market participants.

By option type

Decentralized options can be divided into two main types:

• Standard options: These are the most common type of options with fixed strike prices and expiration dates.

• Exotic options: These are more complex options with features that standard options do not have, such as barrier options, binary options, and basket options.

By margin requirement

Decentralized options can also be categorized according to the margin requirements imposed on option buyers and sellers.

• Full margin: In this model, option buyers and sellers have to deposit enough collateral to cover the full cost of their positions.

• Partial margin: In this model, option buyers and sellers only need to deposit a small portion of the full cost of their positions.

Automated option market makers

Asset pricing has always been at the core of the financial industry. How to price options and establish pricing mechanisms is the crown jewel of on-chain options models. The closer the pricing is to the equilibrium price, the more it stimulates trading, thereby increasing capital utilization and generating higher returns. Market making mechanisms are one way to solve the pricing problem. Years of practice have shown that both exchanges and market makers are profitable businesses, naturally attracting capital and projects.

Automated market makers are an innovation in the DeFi industry. From the first-generation spot market to the futures market, even the options market now has market-making algorithms. The leader in this field is Lyra.

Lyra

Lyra’s option market making incorporates the successful experiences of DeFi predecessors such as Synthetix and GMX, establishing a liquidity pool as the counterparty to all options traders, using pooled funds to absorb potential risks. Lyra classifies options risks into Delta risk (the risk of option prices changing due to underlying asset movement) and Vega risk (the risk of option prices changing due to underlying asset volatility). Delta risk is hedged by the futures pool, while Vega risk is absorbed by the liquidity pool, which charges corresponding fees. In Lyra’s design, option quotes ultimately become the basic pricing of the BS model plus risk adjustments. Risk adjustments will change with the net risk exposure of the liquidity pool.

Lyra’s market-making method can effectively solve the option pricing problem for highly liquid assets. Highly liquid assets lead the market and dominate the mainstream. Only BTC’s market value exceeds 75% of the total market value of alternative tokens. Whoever dominates the market can dominate the entire options market. However, the drawback is that these large-scale underlying assets have long been marked as key targets by centralized exchanges. The downside of concentrated risk only becomes apparent when there is risk. Long-term habits have made people dependent on convenient and practical centralized exchanges.

Deri

Deri is also a comprehensive financial trading platform. The platform’s role is as a market maker. Quotes are generated using the DPMM model, which is similar to Lyra. First, use the BS model to generate the standard quote for the options, then introduce platform positions as adjustment parameters. Use price guidance to bring the net position close to zero.

Optix

Optix is designed as a market maker + trader structure, using independent funds, self-sufficiency, and fair competition. Optix platform allows for multiple liquidity pools, each pool being associated with a set of oracles and responsible for independently determining the pricing of the products it covers. An asset pool can serve as collateral for multiple products. In this way, Optix delegates the pricing power of the products to independent strategic asset pools, where each pool acts as a market maker. Optix is more like an asset management tool for option collateral, addressing the management of option costs and expenditures.

Since the asset pools are self-sufficient, Optix has a higher risk tolerance. In addition to accepting highly decentralized and highly liquid underlying assets such as BTC and ETH, it can also accept other ERC20 assets. If Lyra’s pricing activates liquidity in the mainstream market mathematically, then Optix activates trading in the long-tail market by using game theory. Pricing of mainstream assets is certainly important, but providing quotes for long-tail assets is also a guarantee of option functionality.

Looking at the underlying assets of Optix, many small coins still face difficulties in being implemented on the platform, and the expansion of underlying assets is limited. The fundamental reason is the lack of motivation for market-making in small coin options.

Premia

Premia’s design philosophy is to treat all traders equally. It uses an order book model for quoting and trading. It provides automated market-making algorithms for ordinary investors without market-making experience, and professional asset pool services for institutional and professional investors.

I believe that accurate market-maker quotes are a necessary condition for efficiently creating liquidity. Therefore, the automated market-making algorithm is its core asset. Although Optix and Premia both have centralized components, such as price data connected to oracles that may come from private sources, we cannot prove that hybrid systems cannot generate efficient liquidity.

LianGuainopic

LianGuainopic is a strategy that uses Uniswap LP as an option replicator. To create options, you need to provide liquidity to the public pool. To hold options, you need to withdraw liquidity from the pool.

LianGuainopic also uses a fractional collateral system. Compared to closed centralized options, the liquidation risk is only known at the time of liquidation. Traders can read on-chain data and combine it with liquidation solutions to help them measure counterparty risk. In other words, option prices can better include counterparty risk. Relevant practices are just beginning, let’s see how it progresses.

Hegic

Hegic was founded in 2020 and is considered a pioneer in decentralized options. Unlike later entrants, Hegic was born in an era when on-chain costs were very high and there was ideological resistance to centralization compromise. Therefore, in the pricing model, Hegic simplifies complex option prices related to time, exercise price, and volatility into a model only related to market price and interest rate. The longer the exercise period, the higher the interest rate. There is no doubt that this design has limitations. When the volatility is high, the fair price of the option should be higher than the Hegic quote; when the volatility is low, the opposite is true. Option prices do not reflect supply and demand.

In terms of risk dilution, Hegic allows option buyers and sellers to counter each other, and all losses of the options are borne by the provider of the funding pool.

Aevo

Aevo replicates the business of traditional centralized options exchanges on Layer 2 networks. Adhering to the business logic of executing complex calculations offline and recording the final results on the chain, Aevo is a hybrid exchange. As a Layer 2 network + order book options exchange, Aevo has full collateral margining functionality and a clearing process similar to centralized exchanges. It prioritizes liquidating assets and closes profitable positions if the margin is insufficient. However, the insurance coverage of this platform is still inadequate. It should be noted that Aevo is also a hybrid business platform, in addition to options, it has many other businesses, such as perpetual contracts and lending, etc. On top of the basic business, Aevo has also created wealth management products. Like Lyra, it also forms a financial matrix.

Conclusion

Over the past three years, we have seen decentralized pricing systems become more complete and efficient. With the improvement of infrastructure, the on-chain options track is gradually maturing. Like the majority of on-chain projects, the goal of decentralized projects is not to be as good as centralized projects, but to do better in certain aspects. We have almost reached the same performance level, and now we need to find the needs that centralized projects cannot meet.

Structured Products

With the development of the decentralized options market, decentralized structured products based on options are also constantly innovating. However, the current innovation is not closely related to the decentralized attributes and blockchain architecture. Similar shadow products can also be seen in centralized options tools.

Structured products are products that use smart contracts or other programs instead of human interaction with decentralized options.

We know that options are valuable as hedging tools. Just like buying insurance, users with hedging needs are willing to pay premiums to hedge. But the premise is that the design of the options product can address the actual risks faced. For example, someone participates in AMM with an expected annual return of 20%. Through futures, the risks of unilateral asset price fluctuations and losses without funding sources can be hedged. If you can spend some money to hedge the losses without funding, let the remaining annual return be higher than US treasuries. Then, this is a risk-free arbitrage mechanism. This mechanism can provide continuous profits for options sellers, rather than zero-sum games.

Ribbon Finance and Theanuts Finance are both dedicated to raising funds to implement a single secured bullish option + bearish option sales strategy. They aim to improve the profitability of centralized exchanges. Through the sale of options, funds can obtain long-term continuous positive cash flow. Since the options sold are short-term out-of-the-money options, the chances of being exercised are small. As long as the options are well designed and controlled, it is possible to form a phenomenon of sustained profitability in the short term. The reality is that Ribbon Finance uses external institutions to auction options to determine prices, losing the pricing power of options. Currently, many structured products are in a loss-making state.

Cega provides structured financial products. If the underlying asset portfolio does not reach the extreme price (a 50% decline) within 27 days, funds in the asset pool will grow. Otherwise, it will be paid to the counterparty. Essentially, it is also a bond + out-of-the-money put option.

BracketX provides short-term (2-day) products that bet on the range of volatility. Within the agreed time range, whether the underlying asset triggers the boundary of the price channel will determine who pays whom. This product is a simple options portfolio. This increases the tools for gambling and reduces the difficulty of gambling operations.

There are also platforms like Hegic, which provide one-click deployment of corresponding options combination strategies.

The birth of a large number of structured products highlights the characteristics of trustless and unregulated derivatives on the chain. It breaks monopolies and reduces the issuance threshold of options derivatives. However, it is not difficult to find that the design of structured products itself has no relationship with decentralization and blockchain. Similar financial products can also be found in centralized exchanges. The intelligence of structured products still needs to be strengthened.

Quirky options design

Options issuance

Generally speaking, options trading platforms have their own options issuances. It is worth noting that options trading platforms focus on source traffic, and niche markets such as quirky options may not be effectively covered. Therefore, many quirky options projects have emerged.

Quirky options

Quirky options largely serve the chain ecosystem, with Y2K Finance being the most prominent. It mainly establishes a binary option to counter stablecoin decoupling, and the price of options is determined by the chip distribution of the option participants. The drawback of Y2K Finance is that its return rate is unclear and the pricing of options will constantly adjust based on the sizes of the bets made by buyers and sellers. For investors, this means participating in a gamble with unknown odds.

Perpetual Options

In addition, some projects that are competing for source assets have also created perpetual options to aggregate liquidity and reduce the complexity of options. The birth of perpetual options means a more aggressive exploration in terms of exercise time. If American options extend the exercise window of European options, then perpetual options only need to break down the entire wall and can be exercised at any time. Accordingly, perpetual options give up the sensitivity of options to time risk. It is not suitable to speculate on volatility based on the time value of perpetual options. Perpetual options are a brand-new product. Although they have higher freedom and avoid direct competition with centralized exchanges, there are few auxiliary pricing tools and the learning cost is high. As a result, the entry effect is not ideal. Without enough benefits, users lack learning motivation. Opyn and Deri are comparatively well-known in these perpetual options projects. Opyn is the pioneer of perpetual options, and its parent company LianGuairadigm helps it take the lead. Deri expands to perpetual options based on perpetual futures business and adopts a similar strategy to Synthetix, providing “comprehensive” financial services.

Smilee Finance

Smilee Finance has been developing products with no financing loss risk, hoping to price and trade the risk of no financing through products. The design of the product adopts the design of perpetual options, and the price of perpetual options is measured by the BS model. For the product, the entire smile curve is divided into three sections: bull, bear, and full. When choosing a bull market or a bear market separately, leveraged speculation can be increased.

Opyn

Opyn uses options to increase risk hedging tools. Compared with Smilee, which directly targets the risk of no source of funds, Opyn hopes to adapt to the risk of no source of funds through Squeeth+ traditional financial tools. The squeeze return is curved. Like other newly born financial instruments, Squeeth also faces the dilemma of high learning cost and difficult promotion.

The ecosystem status of the decentralized options track

The decentralized options track hardly exists. For the ecosystem, either pursue traffic or cash flow. Social and gaming platforms excel in traffic, and various wallets improve user experience. Traditional options users are high net worth users, accounting for only about 1% of spot users. Therefore, options cannot be used as a tool to attract users. For cash flow, both trading and lending. In trading, decentralized perpetual options have offered contracts with 200 times leverage, leaving no room for options to have leverage.

So, do options have the function of attracting the ecosystem? Not really.

As mentioned earlier, the characteristics of options are price fluctuations and risk management. The blockchain market is still in its early stages and has not yet developed fine-grained risk control.

When decentralized options approach the funding efficiency of centralized options platforms, in an era of rapid integration between traditional capital and blockchain, RWA is gradually moving from idealism to reality. With the changing composition of investors, capital preferences will shift from high-risk, high-return to low-risk, moderate-return. Perhaps now is the key moment of transformation.

We are currently in the period of Layer 2 wars. It is challenging for each infrastructure to stand out relying on traditional successful applications. Controlling risks and forming a financial system with different risk preferences may be the key to winning the DeFi war in the Layer 2 battles. Who still remembers the contribution of UST to Luna? Not all investors like significant volatility.

Spot markets have already succeeded, and futures markets have also succeeded. Is the spring of options selection still far away?

Conclusion:

After DeFi Summer, the decentralized derivatives track has developed rapidly. At present, a series of projects have been formed based on BTC and ETH as core labels, with ERC20 options and exotic options as wings. There is a lack of relevance between the projects, and an options trading aggregator has not been found yet. There are not many opportunities for cooperation with other blockchain industries at present. Some projects hope to break through the liquidity between options and spot markets, and options and futures. In the era of high traffic value, the operation of the DeFi matrix will significantly reduce operating costs.

I personally believe that the future of decentralized options should be the pool mode, automated market-making mode, and platform vs. individual mode, where all participants bear extreme risks together. Structured products formed by options are still evolving. Creating low-risk, medium-low-yield chain products is the key to winning in structured products.

In the use of decentralized options, the characteristics of the blockchain have not been highlighted. The number of participants in on-chain options is much less than that of centralized exchanges. If there is no significant profit, players have no motivation to learn about decentralized systems. The blockchain industry has not yet formed a scale and there is no obvious need for risk management. In addition, traditional functions such as options financing and options incentives have not been reflected in on-chain businesses. This is one of the signs of the immaturity of DAO.

Compared with decentralized spot exchanges that allow tokens to be traded on-chain at low costs, and decentralized futures exchanges that allow users to form leverage up to hundreds of times without borrowing, options are not in a core demand position. The current competition lies in the second layer network. The competition at the chain level is about fund flow and personnel flow. How to increase trust is currently a more important function. However, we should not underestimate risk tools-options. Options give us the opportunity to redefine the attributes of on-chain assets.

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