Overview
This paper presents a design for amortizing perpetual options, specifically engineered for the operational and adversarial parameters characteristic of blockchain environments. The proposed design aims to establish a foundational risk primitive within Decentralized Finance (DeFi), addressing challenges associated with existing on-chain options models.
Research Context
Financial options are identified as fundamental instruments in traditional markets, facilitating strategies from hedging to speculation. Within decentralized spot markets, the Automated Market Maker (AMM) paradigm has been noted for its transformative impact. However, an equivalent standard for on-chain options has not yet materialized. Conventional approaches to on-chain options often attempt to replicate the mechanics of centralized exchanges, which typically necessitate high-frequency oracles and robust liquidation engines. These components are susceptible to failure during stress events.
Approach
The research focuses on designing an amortizing perpetual option tailored to blockchain environments. This design is leveraged to introduce a decentralized market framework. The framework is characterized by its minimal consistency requirements. The paper demonstrates that this specific contract design acts as a foundational risk primitive for DeFi protocols.
Findings
- The presented amortizing perpetual options design is tailored to the operational and adversarial constraints inherent in blockchain environments.
- This design functions as a foundational risk primitive for Decentralized Finance (DeFi).
- Leveraging this primitive, a decentralized market framework with minimal consistency requirements can be introduced.
- The design enables applications such as endogenous collateralization.
- It also facilitates explicitly priced de-peg insurance.
- The design provides a layer for mutualizing tail risk across protocols.
- This mutualization is achieved without reliance on centralized clearing institutions.