Option Contracts in the DeFi Ecosystem: Opportunities, Solutions, &
Technical Challenges
- Srisht Fateh Singh,
- Vladyslav Nekriach,
- Jeffrey Klinck,
- Panagiotis Michalopoulos,
- Andreas Veneris
Abstract
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This paper investigates the current landscape of option trading
platforms for cryptocurrencies, encompassing both centralized and
decentralized exchanges. Option contracts in cryptocurrency markets
offer functionalities akin to traditional markets, providing investors
with tools to mitigate risks, particularly those arising from price
volatility, while also allowing them to capitalize on future volatility
trends. The paper discusses these applications of option contracts in
the context of decentralized finance (DeFi), emphasizing their utility
in managing market uncertainties. Despite a recent surge in the trading
volume of option contracts on cryptocurrencies, decentralized platforms
account for less than 1% of this total volume. Hence, this paper takes
a closer look by examining the design choices of these platforms to
understand the challenges hindering their growth and adoption. It
identifies technical, financial, and adoption-related challenges that
decentralized exchanges face and provides commentary on existing
platform responses. Subsequently, it introduces a zero-loss liquidity
provision strategy on altcoins that utilizes options with automated
market makers. These opportunities result in a positive return with no
significant risk. It then investigates opportunities in the past using
historical on-chain data to emphasize the number of risk-free
opportunities that DeFi is missing due to the lack of a functional
options exchange on arbitrary ERC20 token pairs on Ethereum. The
experiments show 1015 profitable instances in the past three years on 14
token pairs.02 Sep 2024Submitted to International Journal of Network Management 02 Sep 2024Submission Checks Completed
02 Sep 2024Assigned to Editor
05 Sep 2024Review(s) Completed, Editorial Evaluation Pending
05 Sep 2024Reviewer(s) Assigned
04 Oct 2024Editorial Decision: Revise Major