Today is 29th of February, 2024. Yesterday, bitcoin price broke $60k again. As someone who has been watching this industry closely for years, I can feel lots of emotions rushing to my head. Being part of something early is a truly magical experience. First, they want to crush you, then they want to join you.
Atlas, back to the topic. As more and more traditional players join the industry, the demand for more sophisticated financial products is on the rise. Compared to centralized exchanges (remember FTX?), DeFi has the advantage of being transparent and secure (self-custody).
Futures vs. Options
Futures and options are both commonly used derivatives instruments in traditional finance. Yet in the context of crypto, perpetual future (aka perps) is a dominant force. Institutions and retail investors use it to express their market view in a capital efficient way. However, what comes to my mind today after another flash crush yesterday (very common in crypto) is that options perhaps is a better instrument for this market as it cannot be “stop hunted”. For example, if there is a flash drop, your position won’t get wiped out completely.
The downside though, is that option is a lot more complex to understand. The time decay element of options pricing, for example, is not easy to grasp for the uninitiated. On top of that, the liquidity is often not as good as the futures. Still, it is a powerful tool can be used in replacement or in combination with futures for hedge or speculation purpose without worrying about liquidation in a highly volatile market environment.
Options Trading in Crypto
Deribit is the largest CEX in crypto that hosts options trading. Other crypto native exchanges offering options trading include Binance, OKX and Bybit. However, due to liquidity requirement, options trading is limited to majors only. And this could be an opportunity for onchain options exchange.
Onchain Option Exchanges
As an avid twitter/x user, I already see options popping up on my timeline more and more. Here, I am going to share a few names that are making buzz in onchain options trading.
Aevo
Backed by Paradigm and Coinbase, Aevo is a derivatives trading protocol built on Ethereum Layer 2. It is a full service exchange provides spot, perps, options and pre-launch tokens trading. In terms of options, it only provides options trading in bitcoin and ethereum, mirroring the large CEXs. based on my limited observation, Aevo options market has the best onchain liquidity. The following is a snapshot from 28th of Feb. You can see options did $3 billion representing a 42.62% volume whereas perps did $4 billion and accounts for 57.35% of the volume.
Premia
Built on Arbitrum, the defaco DeFi chain of Ethereum, Premia specializes in options trading only. Maybe due to this focus, Premia Academy hosts one of the best education content on options.
In terms of liquidity, it is much lower than Aevo. But it does provide much better coin coverage to include other blue chips aside from BTC and ETH.
Rysk
Rysk is another dedicated options exchange built on Arbitrum. In terms of liquidity, it is at $2 – $3 million, much lower than both Aevo and Premia. What is interesting about it though, is the embeded option strategies for users to pick and replicate. I can see how the strategy library drives quicker adoption.
You might have noticed the low liquidity level of onchain option exchanges from the screenshots I provided here. Fragmented liquidity and high fees are indeed the main obstacles for DeFi. It was the case for spot and perps, and even more so for options. But as we see more and more institutions starting to allocate to crypto asset class, I remain optimistic on the future of DeFi. Slowly, then suddenly.