Option

Posted on Jan 07, 2022Read on Mirror.xyz

Announcing Perpetual Options Protocol (Option)

We are proud to announce the Perpetual Options Protocol (POP)! The Perpetual Options Protocol allows anyone to create and trade perpetual options for arbitrary assets and for arbitrary conditions. Perpetual Options allow holders to hold an option and as long as they pay the interest they have a right to swap 1 asset for another asset at a set rate at any time they want. By allowing people to create and trade these assets traders and holders can hedge volatility by having options to secure prices while having the optionality to exercise the option when they choose to secure profit or protect loss.

What are perpetual options?

Options are agreements to have the right but not the obligation to buy (calls) or sell (puts) an asset at a given price. They usually have expiration times where they can only be exercised up until (and sometimes only at) the expiration. Perpetual Options are options without expiration times so you can hold them as long as you pay the interest fee to keep them open (by topping up your fee balance). Should you not keep the fee balance high enough the option then expires and cannot be exercised again, needing a fresh option to be created / purchased.

By holding a call option you are able to buy an asset at a set price at any time, as such you can purchase say an ETH call option with a strike (the price that you can exercise at) at $5000. Should the ETH price be beyond $5000 you can still purchase 1 ETH for $5000 even if the price reaches $10000 and make profit. The option lets you have exposure to volatility without having the asset, and so not experience loss from the asset dropping. Options let you also buy puts to sell an asset for a set price, letting you protect profits when an asset you hold drops, or make profit on down side volatility.

Options are valuable tools for traders and holders and perpetual options allow for a much more passive approach as well as bring down premiums as options compensate sellers for the options through streamed fees vs 1 time premium.

Permissionless markets

Just like Uniswap anyone can create a pool between arbitrary assets at arbitrary strikes, but pool all parties that are interested together fungibly. That allows options markets for any token to be created against any token, with any strike.

Fees

Interest fees are able to be fixed or dynamic. By allowing for the fee to be set by a arbitrary smart contract the funding fee model can be used to simulate perpetual markets funding fee models to allow the market to balance between calls and puts between 2 pools, where LPs both offer each side to balance longs and shorts used to manage calls and puts. And where theres high demand for one side market makers and LPs can earn optimal fees.

However this model has fundamental flaws for many option types (like insurance) so the fees can be set at a set rate, set by volatility, set by demand or simply by governance mechanisms.

Insurance

POP can also be used to create decentralized insurance markets by making the strike price an oracle return value, such that sellers (underwriters) can put up ETH collateral and have the oracle set the return strike to (1 ETH - the losses suffered by a protocol (usually 0) in ETH). When a protocol suffers damages and losses (can use TVL twaps and sudden movements / a multisig oracle for losses by protocols) the exercise cost for the insurance token worth 1 ETH (can also price as USD) would become .5 ETH (.5 USD) to claim 1 ETH (1 USD) for a .5x total loss from a hack. The system can then be used for dynamic insurance where the system only pays out for damages suffered not simply 1 USD for a .1 USD loss.

By allowing for oracle based strike rates you can do dynamic non binary options and insurance models. Should a protocol suffer a .25x loss, the option holder earns (claim value - cost to exercise) so for a .25x loss (1 - 0.25) which would be .75 ETH to exercise a 1 ETH call and so (1 - 0.75x) 0.25x losses compensated through profit on the option.

Protocols can easily sell these options to earn revenue through interest and use treasury assets to insure holders with collateral for the options, putting the assets to work. This also allows permissionless insurance to be created / taken out and exercised for any protocol that wants access to insurance without 3rd parties.

The Future for Options

By using complicated systems to create simple tools we are able to change the way traders and holders think about their assets, able to protect downside risk through passive fees rather than single premium purchases that constantly need to be rolled and refreshed. We believe that decentralized finance allows us to not only replicate but jnnovate and create systems that we simply cannot have on traditional finance systems. We are excited to see how these tools are used.

Follow us on Twitter.com/perpoptions on and we will see you at our launch!