Original Title: The Great Return of Options: A New Era for DeFi
Original Source: Three Sigma, blockchain engineering and auditing company
Original Translation: Felix, PANews
The DeFi space is evolving, and the options market has made significant progress. New protocols, products, and strategies continue to emerge, reshaping decentralized options trading. It is crucial to revisit this ever-changing landscape and assess the trends shaping the future of DeFi options. A year ago, the agreements were divided into four main categories:
· Order Book
· AMM (internal)
· AMM (external)
· Structured Products
Since then, protocols in each category have undergone significant changes. Some protocols are actively expanding, while others have pivoted to new models or unfortunately shut down. The outlook is both challenging and hopeful, and survival in this fast-paced environment is not guaranteed.
As @DanDeFiEd (founder of Rysk Finance) mentioned in last year's derivatives talk at the Milan Polytechnic Institute, "Some of you are NGMI." (PANews note: NGMI stands for Not Gonna Make It, meaning unable to succeed). His words have proven to be prophetic. Of the 50% of agreements mentioned in the original report, either have abandoned options business or have stopped operations. The DeFi ecosystem can be ruthless, and only the most adaptable will survive.
But why such a high elimination rate?
Over the past year, points 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 been a key challenge.
Moreover, the rise of points trading has shifted attention and liquidity away from more complex structured products like options.
Have the protocols that struggled last year successfully adapted, or have the increasing focus on perpetual and short-term rewards determined their fate? The answer is as diverse as the projects themselves, but one thing is certain: the road ahead will only become more challenging.
Overall Trend
â[âŠ] According to our estimates, the retail share of options trading volume in the U.S. stock market is [âŠ] 45%, [âŠ] . The growth in retail options share was initially driven by the pandemic in 2020, as retail options traders seized short-term options bets on market direction, and this share has continued to grow. The trading volume share of low-priced options is also increasing, further driving overall options trading volume, especially retail volume. These trends seem to show no signs of reversing.â New York Stock Exchange
âOptions Trading Trends, December 2023
Retail traders in traditional finance (TradFi) are showing 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 indicates a significant increase in the number of positions opened and closed each week.
As retail traders outside the crypto space heavily favor short-term, high-leverage opportunities, a 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"âthe founder said to an unsuspecting VC
· "Huuugeee TAM (Total Addressable Market)"âthe same founder said to the same unsuspecting VC
Throughout 2022, options vaults like Ribbon gained popularity, capturing the interest of the DeFi community. However, as the initial excitement faded, nominal trading volume began to steadily decline from the end of 2022 to 2023. This slump reflects the broader challenges facing DeFi options protocols in maintaining momentum.
However, by 2024, the situation 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. The following are nominal trading volume data:
· September 2021: $392 million
· September 2022: $411 million (up 1.05 times year-on-year)
· September 2023: $78 million (down 0.19 times year-on-year, trading volume down 81%)
· September 2024: $866 million (up 10.99% year-on-year)
In addition to the surge in nominal trading volume, another key indicator of market health is premium trading volumeâthe amount buyers pay sellers for options. Strong recovery data from 2022 to 2024 indicates:
· September 2022: $3.8 million
· September 2023: $3.3 million (year-on-year change: 0.87 times)
· September 2024: $10.3 million (year-on-year change: 3.11 times)
The growth of premium trading volume highlights a 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.
Although nominal trading volume skyrocketed 18 times between 2023 and 2024, the premiums of liquidity providers (LPs) only increased by 3.7 times. This discrepancy indicates that while trading activity surged, a significant portion of it was driven by cheap options, likely out-of-the-money (OTM) options. High trading volume may be impressive, but the lower premium growth suggests that the market is still dominated by low-cost, high-risk options.
Options vs. perpetual contracts: The battle for dominance
Despite the rapid growth of DeFi options, perpetual contracts still dominate.
Although the gap between the two remains significant, it is gradually narrowing. In 2022 and 2023, the weekly trading volume for perpetual contracts ranged from $10 billion to $12 billion, growing to $41 billion by 2024. Meanwhile, the trading volume for options remains about 1/100th of that for perpetual contracts.
· September 2022: Trading volume for perpetual contracts was 85 times that of options
· September 2023: this gap widened to 400 times
· September 2024: narrowed to 160 times
Although the DeFi options space has struggled to match the scale of perpetual contracts, there is still hope for development. When reviewing research from a year ago, it is clear that the industry is growing, despite uneven progress. Most users still gravitate towards perpetual contracts due to their simplicity and strong liquidity, putting options protocols in a more challenging position.
The options space is severely 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? Can DeFi options carve out their own niche market as traders seek more complex strategies, or will perpetual contracts continue to dominate the on-chain derivatives space?
New Faces
With the continuous evolution of DeFi options, some new protocols have emerged. Here is a brief analysis of these new participants:
Order Book/Request for Quote (RFQ)
· Arrow Marketsâlaunched on Avalanche using an RFQ system
· Ithacaâfeatures off-chain order book and on-chain settlement capabilities
· Predy V6âexpected to launch soon on intent-based options
· Valoremâcurrently using an off-chain streaming RFQ system. Unfortunately, it is outdated.
External AMM
Limitlessâa platform with no oracles and no liquidation, where Uniswap LPs can yield by lending their positions to traders/borrowers even when their liquidity positions are out of range.
Structured Products
· 3JaneâRibbon fork, offering early depositors more rewards.
· Strandsâstructured products based on Lyra and CME, allowing traders to tokenize their covered call options.
· SuperHedgeâallows users to deploy assets on platforms like AAVE or Ethena, stake yield tokens on Pendle, and use part of the yields to purchase options.
Other Protocols
· ClearDAOâprovides options SDK.
· Jasper Vaultâoffers 0DTE and 2-hour options with permissioned liquidity and internal pricing oracles.
· Sharwa (Dedelend)âinitially an aggregator for Ryks, Hegic, Premia, etc., the upcoming version will introduce 10x leverage, using WBTC, WETH, and USDC as collateral, supported by Hegic.
· tealfinanceâan aggregator for comparing prices across different platforms (like bitbit).
· Umojaâcreates synthetic options by adjusting positions in the token and perpetual contract portfolio 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 function as trading platforms. The reality is harsh, with 3 out of 6 having exited.
Still evolving:
1.AEVOâemerging as the top competitor in the on-chain options market is simple: points mining. AEVO provides traders the ability to take 10x long positions on a single Bitcoin with appropriate collateral or to buy super low-priced OTM options. For example, 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 whose strike price renders them without intrinsic value. For call options, the strike price is above the current market price; for put options, the strike price is below the market price.)
This has pushed AEVO's monthly trading volume into the billions, setting historical records for the protocol and the entire on-chain options market.
Although nominal trading volume surged, premiums remained low due to the massive number of out-of-the-money (OTM) options. Considering that March's trading volume was $16 billion and April's was $2 billionâdespite the trading volume increasing 8 times, the premium only rose by 50% ($8.2 million vs. $5.3 million). Even without implementing the points mining plan, AEVO remains one of the protocols with the highest nominal trading volume.
2.Derive (formerly Lyra)âafter transitioning from the Synthetix ecosystem, Derive now operates 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.
3.Opiumâonce a foundational infrastructure provider, has now pivoted to focus on zero-day-to-expiration (0DTE) options, reflecting the growing interest of retail markets in short-term tools in TradFi.
Stay away from options business or fail
1.Opynâalthough its options suite achieved early success, Opyn never generated any revenue from it. Since then, the team has shifted focus to perpetual contracts.
2.Psyoptionsâhas ceased operations with no clear direction for development.
3.Zetaâhas abandoned options and is now fully committed to perpetual contracts, which has proven to be more sustainable for them.
AMM (internal)
Protocols that use internal AMM for options pricing. Some protocols have adopted complex liquidity provision strategies, while others are simpler and rely more on the risks of their LPs. Today, 3 out of 10 protocols have already transformed or shut down.
Still evolving:
1.Deriâattracting significant capital on Linea with the launch of the V4 protocol, now offering perpetual contracts and perpetual derivatives, with its liquidity pool serving as the counterparty for all trades.
2.Hegicâlaunched 0DTE options in summer 2024, but its core product, one-click strategies, has remained unchanged for years.
3.IVXâprovides 0DTE on Berachain.
4.PremiaâV3 adopts a hybrid model, combining CLAMM on Arbitrum One with on-chain order books on Arbitrum Nova. Monthly trading volume ranges from $6 million to $15 million, and the team plans to launch premium V4 to improve collateral and introduce perpetual contracts.
5.Ryskâafter the success of V1, Rysk is now focused on building Rysk V2, which will create vaults for decentralized order book DEX, allowing market makers to sign orders from these vaults.
6.Stryke (formerly DoPeX)âsuccessfully transformed their AMM by introducing CLAMM and managed to turn the tide. Over the past year, monthly trading volume reached $20 million to $50 million. During the rebranding process, Stryke also transitioned from their dual-token model (DPX/rDPX) to SYK, phasing out the rDPX token. Now, xSYK represents the staked version of the SYK token.
7.Thalesâprovides support for trading binary options and on-chain derivatives on the Ethereum network. Although the protocol serves a niche market, monthly trading volume has remained around $5 million. However, by the second half of 2024, trading volume had dropped to $1 million per month, lower than earlier highs this year.
Stay away from options business or fail:
1.Ntropikaâseems to have never successfully launched. Despite raising $3.2 million from a tier-one venture capital firm in August 2020 and another $12 million from NFT sales in 2022, there has been virtually no activity since then. Rug pull? Development issues? The community is unaware.
2.Oddzâinitially an options-AMM protocol, Oddz later pivoted to become a perpetual options aggregator.
3.Sirenâoriginally based on AMM, has now shifted 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 leverage third-party spot AMMs (like Uniswap or Balancer) as a base layer, allowing others to trade options seamlessly. Today, all three are operational.
1.GammaSwapâlaunched 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 about $130 million in nominal trading volume, averaging $13 million per month.
2.Panopticâafter several alpha tests on L2s and alt-L1s, is preparing for its mainnet launch, expected to go live by the end of 2024.
3.Smileeâlaunched on Arbitrum, Smilee offers wETH, wBTC, GMX, and ARB options. Since its launch in March 2024, the protocol has had a nominal trading volume of about $71 million, averaging $10 million per month.
Structured Products
This sector once held the largest share of DeFi options TVL, but its luster has clearly dimmedâwith 9 out of 13 protocols having adjusted or discontinued their products.
Still evolving:
1.Cegaâcontinues to offer knock-in and knock-out vaults, expanding beyond Solana and integrating Pendle YT tokens for additional yields.
2.PODSâstill active, purchasing options using yield assets (stETH, aUSDC), providing a unique approach compared to other structured products.
3.Ribbonâalthough TVL has declined, the team's focus has shifted to AEVO, but Ribbon is still operational.
4.Thetanutsâcontinues to operate, with its recent vault focusing on Pendle's PT token.
Stay away from options business or fail:
1.Cally and Putty Financeâboth protocols are struggling to find market-fit products as the NFT market cools down.
2.JonesDAOâabandoned its options vault, marking their exit from the options space.
3.Katanaâacquired by PsyFi through a merger deal on April 4, 2023.
4.Knox Vaultsâintegrated into the Premia V3 ecosystem as part of a broader strategic shift.
5.Polynomialâpivoted to become a derivatives L2, now focusing on perpetual contracts.
6.Polysynth (now Olive)âclosed its options vaults and pivoted to become a universal aggregation liquidity layer across L1 and L2.
7.Primitiveâhas not gained significant traction. The team is currently focused on building Pluto (Pluto Labs)
8.PsyOptionsâdespite acquiring Katana, PsyOptions closed its vault and other products in June 2024.
9.StakeDAOâno longer offers options vaults.
Will history repeat itself?
The resurgence of on-chain options trading volume led by order books like AEVO and Derive signifies a positive trend, but it raises important questions about decentralization. Just like the perpetual market, complete on-chain and decentralization may no longer be as attractive as before. Instead, protocols are shifting towards centralized L2 or application chains for better control of 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 highly likely that within a year, several of the protocols listed here will no longer be operational, proving the ruthless 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 size still about 100 times larger than the options market, the challenge for options protocols is to make their products accessible to inexperienced users.
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