Original author: Three Sigma, blockchain engineering and auditing firm.

Original text compiled by: Felix, PANews

The DeFi space is continuously evolving, and the options market has made significant strides. New protocols, products, and strategies are emerging, reshaping decentralized options trading. It is crucial to revisit this ever-changing landscape and evaluate the trends shaping the future of DeFi options. A year ago, protocols were categorized into four main categories:

  • Order Book

  • AMM (Internal)

  • AMM (External)

  • Structured Products

Since then, protocols in each category have undergone significant changes. Some protocols have actively expanded, while others have pivoted to new models or, unfortunately, shut down. The outlook is both challenging and hopeful, with survival in this fast-paced environment not guaranteed.

As @DanDeFiEd (founder of rysk finance) mentioned during last year's derivatives talk at the Milan Polytechnic, "Some of you are NGMI." (PANews note: NGMI stands for Not Gonna Make It.) His words proved prophetic. In the original report, 50% of the protocols mentioned have either abandoned the options business or ceased operations. The DeFi ecosystem can be relentless, and only the most adaptable will survive.

But why such a high attrition rate?

Over the past year, token systems and MEME coins have dominated, raising questions about sustainability and value creation. For many options protocols struggling to find product-market fit (PMF), the preference for leverage in perpetual contracts has remained a key challenge.

Additionally, the rise of token trading has shifted attention and liquidity away from more complex structured products like options.

Have the protocols that struggled last year successfully adapted, or is the increasing focus on perpetual and short-term rewards determining their fate? The answers are as varied as the projects themselves, but one thing is certain: the road ahead will only become more challenging.

Overall Trends

"[…] According to our estimates, the retail share of options trading volume in the US stock market is […] 45%, […] The increase in retail options share was initially driven by the pandemic in 2020, with retail options traders seizing short-term options to bet on market direction, and this share has continued to grow. The share of low-priced options trading volume is also increasing, further driving overall options trading volume, especially among retail traders. These trends appear to pose no risk of reversal."

New York Stock Exchange — Options Trading Trends, December 2023.

In traditional finance (TradFi), retail traders have shown increasing interest in high-risk, short-term options. This shift is evident in the data: weekly options trading volume has doubled, climbing from around 100 million contracts per week in 2018 to 200 million contracts per week in 2024. This signifies a substantial increase in the number of open and closed positions each week.

As retail traders outside the crypto space heavily favor short-term, high-leverage opportunities, the question arises: Can DeFi options leverage the same momentum? Or will perpetual options continue to dominate the crypto leverage narrative?

DeFi Options Development

  • "We found PMF" — the founders said to an unsuspecting VC.

  • "Huuugeee TAM (Total Addressable Market)" — the same founder said to the same unsuspecting VC.

Throughout 2022, options vaults like Ribbon gained popularity, attracting interest from the DeFi community. However, as the initial excitement waned, nominal trading volume began to steadily decline from late 2022 to 2023. This downturn reflects the broader challenges that DeFi options protocols face in maintaining momentum.

However, by 2024, things began to change. The introduction of new exchanges and products, such as AEVO, Derive (Lyra's application chain), and Stryke, helped rekindle interest in the space, gradually reclaiming market share. Below are nominal trading volume data:

  • September 2021: $392 million

  • September 2022: $411 million (YoY growth 1.05x)

  • September 2023: $78 million (YoY decline 0.19x, volume down 81%)

  • September 2024: $866 million (YoY growth 10.99%)

Besides the surge in nominal trading volume, another key indicator of market health is premium trading volume — the amount buyers pay sellers for options. Data evidence of strong recovery from 2022 to 2024 includes:

  • September 2022: $3.8 million

  • September 2023: $3.3 million (YoY change: 0.87x)

  • September 2024: $10.3 million (YoY change: 3.11x)

The growth of premium trading volume highlights new demand for DeFi options, as buyers are willing to pay significantly higher premiums in 2024 than in previous years. This reflects a market shift, with new products and more complex strategies driving increased participation and confidence in the options space.

While nominal trading volume skyrocketed 18 times between 2023 and 2024, the premiums for liquidity providers (LPs) only grew by 3.7 times. This disparity shows that while trading activity surged, a significant portion was driven by cheap options, likely out-of-the-money (OTM). High trading volume may be impressive, but lower premium growth indicates that the market is still dominated by low-cost, high-risk options.

Options vs. Perpetual Contracts: The Battle for Dominance

Despite rapid growth, DeFi options still lag behind perpetual contracts.

Although the gap between the two remains significant, it is gradually narrowing. In 2022 and 2023, weekly on-chain trading volume for perpetual contracts ranged between $10 billion and $12 billion, growing to $41 billion by 2024. Meanwhile, options trading volume remains approximately 1/100th of that of perpetual contracts.

  • September 2022: Trading volume for perpetual contracts is 85 times that of options.

  • September 2023: This gap has widened to 400 times.

  • September 2024: This has narrowed to 160 times.

Although the DeFi options space has struggled to match the scale of perpetual contracts, there is still hope for development. A year ago, despite uneven progress, it was clear that the industry was growing. Most users still gravitate toward perpetual contracts due to their simplicity and high liquidity, putting options protocols in a more challenging position.

The options space is heavily overshadowed, with many projects continuing to compete for PMF in a market still dominated by perpetual contracts.

The key question remains: where will future demand for DeFi options come from? As traders seek more complex strategies, will DeFi options carve out their own niche market, or will perpetual contracts continue to dominate the on-chain derivatives space?

New Faces

As DeFi options continue to evolve, several new protocols have emerged. Here is a brief analysis of these new entrants:

Order Book/Request for Quote (RFQ)

  • Arrow Markets — Launched using an RFQ system on Avalanche.

  • Ithaca — Features off-chain order book and on-chain settlement capabilities.

  • Predy V6 — Expected to launch intent-based options soon.

  • Valorem — Is utilizing an off-chain streaming RFQ system. Unfortunately, it is outdated.

External AMM

  • Limitless — A platform without oracles and liquidation, where Uniswap LPs can generate returns by lending their liquidity positions to traders/borrowers even when they are out of range.

Structured Products

  • 3 Jane — Ribbon fork, early depositors can earn more.

  • Strands — Structured products based on Lyra and CME, allowing traders to tokenize their covered call options.

  • SuperHedge — Allows users to deploy assets on platforms like AAVE or Ethena, stake yield tokens on Pendle, and use part of the yield to buy options.

Other Protocols

  • ClearDAO — Provides an options SDK.

  • Jasper Vault — Offers 0 DTE and 2-hour options, with permissioned liquidity and internal pricing oracles.

  • Sharwa (Dedelend) — Initially an aggregator for Ryks, Hegic, Premia, and others, the upcoming version will introduce 10x leverage, using WBTC, WETH, and USDC as collateral, supported by Hegic.

  • tealfinance — An aggregator that compares prices across different platforms (like bitbit).

  • Umoja — Creates synthetic options by adjusting positions in tokens and perpetual contract portfolios based on market trends.

Order Book

The order book landscape within the DeFi options space can be divided into two main categories: protocols that provide order books as infrastructure for others to build upon, and protocols that serve as trading platforms. The reality is harsh, with 3 out of 6 having exited. Here’s a closer look at what happened:

Still evolving:

  • AEVO — As a top competitor in the on-chain options market, its rise is straightforward: token mining. AEVO allows traders to long a single Bitcoin at 10x under appropriate collateral or to buy deeply out-of-the-money (OTM) options at very low prices. For instance, an option with a nominal value of $40,000 can be bought for just a few cents if the seller is willing to underwrite it.

    (PANews note: Out-of-the-money options refer to options that have an exercise price rendering them worthless in intrinsic value. For call options, the exercise price is above the current market price; for put options, it is below the market price.)

    This has propelled AEVO's monthly trading volume to billions of dollars, setting historical records for both the protocol and the entire on-chain options market.

    While nominal trading volume has surged, the premium remains low due to the vast number of OTM options. Considering that March's trading volume was $16 billion, and April's was $2 billion — despite an 8-fold increase in volume, the premium only rose by 50% ($8.2 million vs. $5.3 million). Even without the token mining program, AEVO remains one of the top protocols by nominal trading volume.

  • Derive (fka Lyra) — After transitioning from the Synthetix ecosystem, Derive now runs its application chain Derive Chain on the Optimism (OP) Stack. By shifting to an order book model, Derive provides a more efficient trading experience, with monthly settlement volumes between $200 million and $300 million.

  • Opium — Once a provider of foundational infrastructure, it has now shifted focus to zero-day expiration (0 DTE) options, reflecting the growing interest of retail markets in short-term instruments within TradFi.

Stay away from options business or fail.

  • Opyn — Despite early success with its options suite, Opyn has never generated any revenue through it. Subsequently, the team has shifted toward perpetual contracts.

  • Psyoptions — Has ceased operations with no clear development direction.

  • Zeta — Has abandoned options and is now fully committed to perpetual contracts, which have proven to be more sustainable for them.

AMM (Internal)

Protocols using internal AMM for options pricing. Some protocols adopt complex liquidity provision strategies, while others are simpler and rely more on the risk of their LPs. Currently, 3 out of 10 protocols have transformed or shut down.

Still evolving:

  • Deri — With the launch of the V4 protocol, Deri has attracted significant funds on Linea, now offering perpetual contracts and perpetual derivatives, with its liquidity pool acting as the counterparty for all trades.

  • Hegic — Launched 0 DTE options in the summer of 2024, but its core product of one-click strategies has remained unchanged for years.

  • IVX — Offers 0 DTE on Berachain.

  • Premia — V3 adopts a hybrid model, combining CLAMM on Arbitrum One with on-chain order book on Arbitrum Nova. Monthly trading volume ranges from $6 million to $15 million, and the team plans to launch premium V4, improving collateral and introducing perpetual contracts.

  • Rysk — After the success of V1, Rysk now focuses on building Rysk V2, which will create vaults for decentralized order book DEX, allowing market makers to sign orders from these vaults.

  • Stryke (fka DoPeX) — Successfully overhauled their AMM by introducing CLAMM, managing to turn the tide. Over the past year, monthly trading volume has reached $20 million to $50 million. During the rebranding process, Stryke also migrated from their dual-token model (DPX/rDPX) to SYK, deprecating the rDPX token. Now, xSYK represents the staked version of the SYK token.

  • Thales — Supports trading binary options and on-chain derivatives on the Ethereum network. Although the protocol belongs to a niche market, monthly trading volume has consistently remained around $5 million. However, by the second half of 2024, trading volume has dropped to $1 million per month, below earlier highs this year.

Stay away from options business or fail:

  • Ntropika — They seemingly never successfully launched. Despite raising $3.2 million from a tier-one VC in August 2020 and another $12 million from NFT sales in 2022, there has been almost no activity since. Rug pull? Development issues? The community remains in the dark.

  • Oddz — Initially an options-AMM protocol, Oddz later shifted to become a perpetual options aggregator.

  • Siren — Once based on AMM, it has now transitioned to an oracle/RFQ system, with off-chain pricing managed by a select group of whitelisted providers (known as Siren Guardians).

AMM (External)

What does external AMM mean? These protocols utilize third-party spot AMMs (like Uniswap or Balancer) as a base layer, enabling others to trade options seamlessly. Currently, three are operational.

  • GammaSwap — Launched on Arbitrum, GammaSwap offers over 20 assets. A key development is that they now use an internal spot AMM (Delta Swap) to support the platform, rather than Balancer or Uniswap. Since its launch in January 2024, the protocol has facilitated approximately $130 million in nominal trading volume, averaging $13 million per month.

  • Panoptic — After several alpha tests on L2s and alt-L1s, it is preparing for its mainnet launch, expected by the end of 2024.

  • Smilee — Launched on Arbitrum, Smilee offers wETH, wBTC, GMX, and ARB options. Since its launch in March 2024, the protocol's nominal trading volume has been approximately $71 million, averaging $10 million per month.

Structured Products

This field once commanded the largest share of DeFi options TVL, but its luster has clearly dimmed — 9 out of 13 protocols have adjusted or discontinued their products.

Still evolving:

  • Cega — Continues to offer knock-in and knock-out vaults, expanding beyond Solana and integrating Pendle YT tokens for additional yield.

  • PODS — Still active, using yield assets (stETH, aUSDC) to purchase options, providing a unique approach compared to other structured products.

  • Ribbon — Despite a decline in TVL, the team's focus has shifted to AEVO, but Ribbon remains operational.

  • Thetanuts — Continues to operate, with the recent vault focused on Pendle's PT token.

Stay away from options business or fail:

  • Cally and Putty Finance — Both protocols are struggling to find market-fit products as the NFT market cools.

  • JonesDAO — Has deprecated its options vault, marking their exit from the options space.

  • Katana — Acquired by PsyFi through a merger on April 4, 2023.

  • Knox Vaults — Integrated into the Premia V3 ecosystem as part of a broader strategic shift.

  • Polynomial — Shifted to become a derivatives L2, now focusing on perpetual contracts.

  • Polysynth (now Olive) — Closed its options vault, pivoting to become a universal aggregated liquidity layer across L1 and L2.

  • Primitive — Has not gained significant traction. The team is currently focused on building Pluto (Pluto Labs).

  • PsyOptions — Despite acquiring Katana, PsyOptions shut down its vault and other products in June 2024.

  • StakeDAO — No longer offers options vaults.

Will history repeat itself?

The resurgence of on-chain options trading volume, led by order books like AEVO and Derive, signals positive trends, but it raises important questions about decentralization. Like the perpetual market, complete on-chain and decentralization may not be as appealing as before. Instead, protocols are shifting toward centralized L2s or application chains to better control the key parameters needed to build efficient order books.

New protocols like GammaSwap and Smilee offer hope for attracting new users to options trading, but the market remains brutally unforgiving. As the saying goes, history doesn't repeat itself, but it often rhymes. It is very likely that within a year, several of the protocols listed here will no longer be operational, proving the relentless and fast-evolving nature of the DeFi market.

However, despite the challenges, the increase in options trading activity is undeniable. With the perpetual contract market still approximately 100 times larger than the options market, the challenge for options protocols is to enable inexperienced users to utilize their products.

Further reading: All set, just waiting for the wind: Exploring decentralized options