Back to Database

Crypto

Onchain Options

onchain options

Concept

An on-chain options exchange (and clearinghouse) that targets Tradfi-grade market microstructure (tight spreads, deep liquidity, robust margining) while unlocking new behaviors that existing rails can’t easily offer

Longer Description

Options are a long-duration growth category and a dominant risk-transfer layer in traditional finance. Crypto’s perp-first market structure is missing this native convexity layer.

Options should be thought of as complementary to perps as they uniquely enable things like

• convexity / tail hedging
• vol trading
• structured products —> this is particularly interesting as it allows for more precise exposure representation (prinicpal protection, yield enhancement, etc)
• improved risk budgeting (margin-efficient risk for more sophisticated users, defined risk for retail)

It seems as if the reason on-chain options feel illiquid is because the liquidity is fragmented into individual series and infrastructure struggles to risk-manage portfolios in real-time. Traditional options market makers quote a surface (across strikes/experies) and then manage inventory at the portfolio level (all the greeks)

An on-chain options product should allow LPs and MMs to provide liquidity to a vol surface pool per the underlying and not to each strike/expiry separately. The idea here is to unlock a ton of different strikes/experies without needing per-series liquidity mining

• could enable much more dynamic strike/expiry creation (from hourly/0DTE-like to days/weeks/months/etc)
• professional quoting models with risk limits expressed in greeks
• scale liquidity by scaling risk capital rather than fragmenting it

What you need:

• “clearinghouse” which is effectively a single clearing program that maintains all the relevant information
• margin accounts (multi-collat)
• positions
• pnl + funding + settlement
• liquidation state + auctions

risk engine

the main functions here are twofold

decide if new trades can be accepted

decide how to liquidate positions safely

Other thoughts

• ODTE options are less appealing to target as perps are filling this void (and most likely will continue to eat into this share of activity)
• Microstrategy premium topping the day that IBIT options went live is not a coincidence and reveals something
• The choice of how to build should be an engineering + distribution decision. You need 1) institutional liquidity & 2) deterministic risk/settlement at acceptable latency
• Atomic hedging could in theory solve the leg risk problem in traditional finance, though it is unclear how impactful this would be

Hyperliquid is the most compelling place to build this today.

• you can build defined-risk bounded options using HIP-4 outcomes as the core payoff primitive and while this means they are fully collateralized (which limits “true” vanilla options, i.e. unbounded tails) it is a way to immediately support many retail & structured product use cases
• Example (Call Option as Outcome): A call option on BTC with a strike of $100k expiring End of February. We can define the outcome contract that settles to a lower bound of 0 if BTC < $100k at expiry, and the upper bound is BTC >$100k. We would define the upper bound as some type of capped linear payout, for example the capped call could settle linearly from 0 up to some maximum of $1 payouts as BTC moves. We would still need to define a fixed maximum payoff but let’s assume we set it at $250k in this case. By capping the payoff range the contract is fully collateralized (i.e. the short side’s max loss is fixed and must be posted upfront. There is obvious design space here, for example a $1m BTC capped price is going to force far more collateral posted upfront compared to say $105k).
• this initially means these will be treated as European-style options (i.e. settle only at expiry)
• it’s the simplest initial approach and directly supported by HyperCore’s expiry-settlement mechanism introduced in HIP-4
• we will want to move to support American-style exercise (early exercise at holder discretion) but this introduces complexity obviously —> we have more thoughts on this that go beyond the scope of this thesis overview