not-yet-known not-yet-known not-yet-known unknown 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.

This paper presents Deeper, a design for a decentralized exchange that enhances liquidity via reserve sharing. By doing this, it addresses the problem of shallow liquidity in low trading volume token pairs. Shallow liquidity impairs the functioning of on-chain markets by creating room for unwanted phenomena such as high slippage and sandwich attacks. Deeper solves this by allowing liquidity providers of multiple trading pairs against a common token to share liquidity. This is achieved by creating a common reserve pool for the shared token that is accessible by each trading pair. Independent from the shared liquidity, providers are free to add liquidity to individual token pairs without any restriction. The trading between one token pair does not affect the price of other token pairs even though the reserve of the shared token changes. The proposed design is an extension of concentrated liquidity automated market maker DEXs that is simple enough to be implemented on smart contracts. This is demonstrated by providing a template for a hook-based smart contract that adds our custom functionality to Uniswap V4. Experiments on historical prices show that for a batch consisting of 8 trading pairs, Deeper enhances liquidity by over 2.6–5.9×. The enhancement in liquidity can be increased further by increasing the participating tokens in the shared pool. While providing shared liquidity, Liquidity Providers should be cautious of certain risks and pitfalls, which are described. Overall, Deeper enables the creation of fair markets for low trading volume token pairs.