Crypto Options Trading in the DeFi Space - Justin Alexander

hi everybody i'm justin alexander community manager at siren and this is adam feather contributor at siren siren's a d5 protocol that lets users trade options and earn yield on any token you might be asking why do you have two speakers it's because we wanted to give you guys options all right we're going to talk today about options and how they're being brought into the defy space okay let's start by everyone closing your eyes and remembering back to june 2021 it was the start of our second coveted summer and you were probably starting to worry because your grandma asked you about what an nft was uh but imagine entering the market at this moment uh you have the knowledge you know now what would you do well i know that i would buy right so there's a couple avenues for my entry into the market i can buy the asset and i take profit but remember i not only have the belief i have the knowledge that this market is going up so i choose to leverage my position and take more profit in a traditional leveraged position i'd probably need a sweater because i might lose my shirt liquidation's a real risk in a leveraged trading so liquidations can occur when a trader holds a leveraged position and that market volatility increases uh the risk of the position the exchange could require a capital investment to continue holding this position uh if the trader cannot meet these requirements the position is closed and ie liquidated so in this hypothetical situation i was directionally right but my forecast was still uh my my forecast i was directly right in my forecast but still end up losing so in this graph again a trader leveraged through borrowing may have been required to deposit funds to hold the position because of the dip made the investment more risky and if they could not meet their fund requirements their position could be liquidated by the exchange so this is where options truly shine right they give traders the opportunity to express their opinion in the market without fear of liquidation so volatility has destroyed trader physicians even with the best guesses in directional movement so what are options and what comprise them options are a financial instrument set between two parties to buy or sell an asset in the future at a predetermined price the buyer of the option pays a premium for this right is important to understand a few key factors on the options so a strike price is a predetermined price at which the buyer of the option can buy or sell the underlying asset in this case we're talking about eth an expiration date that's the predetermined date at which the buyer of the option may exercise their their contract at let's say two months volatility is the statistical measure of dispersion of returns for a given asset so ie markets go up and down and that premium is the fee to purchase a capital or i'm sorry a call or put option uh in the price pay it's the price paid for the right of the option provides so here these factors affect the premium the cost of a strike price uh to the market goes up the premium uh price also increases the closer to the expiry the uh the greater the effect on the price and the greater the volatility the greater the effect on the price of the premium as well so there's two types of uh of options contracts we've got call options and this is the right to buy an asset at a specific price the strike price within a specific time period so the expiry calls become more valuable as the underlying asset increases traders often buy contracts rather than the asset itself this max the max loss is the total cost of the contract premium you continue to benefit as the price goes up but only lose the premium if the price goes below the strike price so the increase of the upside while packaging the risk through a known prim premium fee put options are the opposite they give the trader the right to sell an asset at a predetermined price within the specific time period so a put option becomes more valuable as the price of an underlying asset decreases investors often use put options as a risk management strategy the investor buys a put option to hedge the downside risk of an asset held in their portfolio the premium itself is the cost to the hedge of their portfolio both puts and calls allow traders to express their beliefs in the directional movement of the market and volatility so let's just hammer home a few of the specific use cases for options as whole so again leverage a trader could utilize the capital to purchase options contracts over the actual asset next we have hedging so the uh use option contracts as a mechanism to minimize losses of assets held in your portfolio and lastly you have trade volatility so trading based on the perceived volatility of the market to make your decisions um now let's deep dive with adam hey guys so i'm adam like justin said and i'm going to be your merfolk guide into the d5c so um we're going to start looking at just like options within the realm of defy now um crypto options have grown a lot over the past year as we all know um in centralized finance alone the trading volume was up about oh it was up about 443 with the majority of trading happening on dairyvip total trading volume of crypto options was about 404 billion dollars um but defy option trading volume accounted for only about 3.5 billion of this and this was a very small percentage of the total crypto option space most of the trading is happening um from d5 option vaults or dovs is this true oh my bad sorry scared of the mic i guess so uh deep option vaults or dovs which is a fairly passive investment strategy they operate on investors simply staking their assets into vaults which automatically deploy their assets into option strategies the system is limited to short-term predetermined option series and do not allow for traders to buy and sell freely as more protocols within d5 allow for more active trading start to emerge investors will be able to take full advantage of the options they have the options that they have to offer this will allow for increase or this along with tvl increasing dbl inside of the option protocol will allow for higher trading volumes on options within d5 so just like justin said there's a lot of options like upside with options so what are like the benefits of them within the deep size space options within defy allow for markets that are permissionless anyone's able to start start a market on the asset itself instead of being restricted to market makers and other financial institutions lp's are actually able to earn yields on long-tail assets as well but they may not be able to get yields on alternative systems it is also composable so it's allowing for anyone to build on top of these systems and also create innovative option solutions so let's talk about some of the challenges that are here before we can actually take advantage of these solutions these include but are not limited to low capital efficiency low liquidity inferior pricing and some technical complexities these all kind of run into one another and so like low capital efficiency or over collateralization of protocols can result in low liquidity and then the low liquidity along with technical challenges can lead to inferior pricing of premiums making them a less cost effective solution to their centralized finance counterparts this is why passive options strategies such as dovs are the first to be taking off in the d5 space as the infrastructure of the space matures you'll see more protocols develop similar to dairy bit that allow for traders to actively trade options so one of the solutions that we're looking at at siren is at amm for options and so this is using a system similar to uniswap's amm were able to compute prices for the premiums without needing a traditional market maker which is like one of the benefits as well as lp is able to earn passive income by selling option premiums and receiving trading fees from the users with the flexibility of an amm it is programmable which will allow developers to create systems that are different from things we've ever seen before for example a developer would be able to like create an amm that can like sell calls that are only out of the money just like a bunch of crazy things we could start seeing with some of this which is really cool an amm is also composable similar to just the rest of defy and so products can be built on top of this such as dovs and indexes allowing for alternative ways for investors to earn income so there's just a lot of like different ways that you'll be able to like earn your income it'll be not just like one or two like ways of like with regular like trading that there is now in d5 you'll be able to have a whole plethora of like new and alternative solutions there are some challenges associated with this though for example calculations of premium pricing being computationally expensive because of complex financial models being used on chain and so this causes some of the developers and designers to have to choose between either accurate pricing or transact like low transaction fees um there's also developing we're also in the works of like developing better perpetual protocols and this is to provide better risk management for lps to protect them against like long-term indefinite losses um and then the reliance on oracle's so option protocols are fundamentally limited by the quality and availability of these oracles and this creates both an issue of decentralization and accuracy for the option protocols because if we're like only getting our oracles from like two or three sources this isn't really decentralized which is kind of a large point of like a lot of this so let's like take a little bit deeper look into like our amm that we have as you can see we have some uh crypto apes that are doing some trading and some crypto that are going to be providing some liquidity so within uh siren we have tokenized the buy and the right sides of an option which allow option buyers to and sellers or the writers to easily move in and out of positions at any time um it's like let's look at exactly like how the mm might be used a lp will deposit tokens in the liquidity pool allowing for trading to occur on an option through our amm and this could happen with any asset because like there isn't like any restrictions with it like we're talking about it's like programmable and it's um composable and then these tokens are then used as the collateral as the option contract is minted and locked for those buyers traders are then able to buy and sell contracts through the amm at predetermined prices computed by the amm based on an underlying volatility and open interest the market makers are also able to submit their own quotes for wholesale purchases similar to the dovs for a more passive investment strategy that we can work with emm to like kind of get that working just as like whenever there's like larger wholesale um quotes going through the lps are unable to earn their yields and selling premiums is are able to earn yields through selling premiums as well as trading fees to the system the amm is addressing a lot of these challenges within d5 because it allows us to simultaneously fulfill goals of decentralization and solving problems related to the liquidity on chain sorry guys hopefully by the end of this talk you realize that you don't have to travel to the past to have a full knowledge of the markets to maximize your trading the use of the options in d5 gives traders more buying power and freedom to express expressive market beliefs liquidity providers are able to earn yields on trades traditionally that would go back to the bank or a centralized exchange and buyers have a more like involvement within their trading system options are also able to create an ecosystem that allow for more effective transfer of risk that is a cornerstone to any financial system and having effect efficient transparent programmable options infrastructure is a huge step in the right direction for like decentralized future so that's kind of like what we're aiming for with all this hopefully you guys got something out of that so if you want to contact us this is our contact information we'd love to hear from you um we'll be around the conference as well so just come up and talk to us so hope you guys enjoyed that