Ep 37 Crypto Options comparison
Crypto Options differences
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Why do we use DeFi Options?
One is to hedge against the price movement. When prices move a lot, you want to protect yourself. So you buy a put option if prices fall, if you are an investor.
You can also use it to bet against the market or bet with the market so you could use options to speculate in the market. A call option if the market goes up.
You could be a seller and earn revenue from selling options. That is easily available in the DeFi protocols.
Difference between DeFi options and CeFi options
Products Available: In general CeFi options are still very much focused on just the top two crypto asset products. Bitcoin and Ethereum. With DeFi, it allows you to expand to a lot of the other crypto-assets easily. Currently, most of the DeFi option protocols are focused on Ethereum but that's just to test it out and because everyone has Ethereum. It's easy to get demand. But it would not be difficult to switch to different kinds of crypto assets or DeFi assets.
Incentivisation method: The DeFi protocols have a token. These tokens incentivise people to become liquidity providers or users. This is quite different from just the traditional CeFi options protocol. With CeFi you've got a market buyer and a market seller who come together to trade. They execute the trade whereas with DeFi it adds a completely different layer because there are tokens involved.
Revenue split When you purchase options you have to pay a premium and this premium usually goes to the seller but in DeFi or with tokens involved you could split them into more creative and interesting ways so you could split them in more than one piece.
Creation: Option contracts are created by the protocol and it's more or less standardised and you get to choose different kinds of customisation.
Trading: You can either trade the contract as it is with all the different specifications or you could trade the tokens that represent the contract in one way or another. There are a lot of different mechanisms involved and no single standardised mechanism.
Settlement: Most of these DeFi option protocols are doing the European options so it settles at the expiry date and this is where automation can come in because if it allows you to make money as an option buyer then it will execute it immediately and then you just settle.
Market makers: There are different types of market makers. You have the liquidity providers, option sellers, stakers and you have different types of people in the space more than just option sellers or the contract creators.
Asset types: In CeFi usually it's bitcoin and ethereum and you might have some other stuff on FTX. DeFi protocols have a lot of different asset types depending on what the liquidity is for these asset types.
Tokens: DeFi protocols have tokens and these tokens could be revenue-generating or they could exist to represent some other asset.
What Else Did You Miss?
HEGIC
Execution
Why do we want to reward the community?
Value Accrual and flow
Opium
Contract Creation
Settlement
Value Accrual
Opyn
DeFi Options Comparison
Token use case
Token value accrual
Contract creation
How the options are traded.
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TLDR:
There is no generic model for DeFi options. They can be used in a few ways, as insurance, to speculate in the market or to earn. Each model is different and thus where innovation lies!
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!