OptionPanda: Short-term European Options + Separate Pools to Bring Users More Flexibility and Fewer Risks
Options, despite being as an excellent investment tool with low risks and high potential returns in traditional financial market, have not been performing well in DeFi. Its lackluster can be attributed to the limited performance of the blockchain field as well as the incompatibility between most DeFi option protocols and on-chain options.
To cover this market niche, OptionPanda has devised new option products by innovatively combining the advantages of AMM pools and the blockchain industry. The new option product not only has sufficient trading depth but also fulfills users’ urgent needs for more flexibility and lowers costs.
Maximized assets utilization + decreased risks for market makers
Due to the high fees and long confirmation time of on-chain operations, DeFi options often face the problem of insufficient liquidity. Although the emergence of AMM funding pools has alleviated this problem, the dramatic price changes of cryptocurrencies put make market makers in more risky situations and thus intimidate them from participating. Trading options is far from convenient.
Cryptocurrencies such as BTC and ETH often witness drastic price swings, which is harmful for the liquidity providers. It is possible that some users take all liquidities from the pool or that investors’ revenues are underpaid. Huge risks like these would make market makers hesitant and further compromise users’ transaction experience.
To solve these problems, OptionPanda offers European options with expiration periods of 15 minutes, 30 minutes, 45 minutes, and 1 hour and regulates that the bid price is the same as exercise price.
For liquidity providers and options underwriters, European options better allow them to diversify investment portfolios and reduce risk. Options underwriters are often large institutional clients or market makers, both of which tend to make a portfolio at the beginning of selling options to hedge risks and ensure the preservation and appreciation of assets. As European options have fixed expiration dates, they can decide to hold options till expiration when making the investment portfolio. The concern over expiration is then avoided. Thy do not need to design a new portfolio in the process to fully hedge risks.
At the same time, OptionPanda has two unique designs for the use of funds in the AMM pool. The first move is to divide the option pools into a put option pool and a call option pool, which allows market makers to adjust their capital allocation in both pools at any time to ward off potential losses from one-sided markets. Additionally, OptionPanda also sets a utilization cap rate of 75% for the AMM pool and regulates that the funds are equally allocated across pools of different maturity options. These mechanisms prevent the AMM pool from running out of funds and affecting both sides of the trade.
In this way, OptionPanda protects the interests of both options traders and market makers.
Flexible & transparent pricing + automatic option exercise: speed carefree transaction experience
In terms of options trading experience, OptionPanda boasts two distinctive advantages: flexible and transparent options pricing; automatic exercise of options at expiration.
On the basis of Black Scholes, a formula widely used in the pricing of European-style options, OptionPanda incorporates a dynamic Sigma adjustment mechanism that combines smart contracts and the Chainlink prophecy machine. Such a combination enables real-time on-chain calculation of option prices.
Using the historical volatility sigma as the initial parameter for option price calculation, if more than 90% of the options generated in the auction are sold, it indicates that the market is overheated and investors’ risk appetite is high. Sigma is then adjusted upward by 5% in the next auction; if no more than 50% of options are sold in the auction, then the market is cool and investors have low risk appetite. In the next auction, Sigma will be adjusted downward by 5%.
This mechanism allows users to trade in a more reasonable price by providing flexible pricing adjustments based on the popularity of trading, i.e., demand. This is also more suitable for the crypto market than the CEX pricing method and other pricing methods that rely on artificial volatility adjustments.
OptionPanda’s auto-exercise scheme matches its high-frequency short-term options. For users, it meets their needs of high-frequency transactions; it is beneficial for investors who need to make quick responses to market changes and adjust their trading positions in a short period of time during volatile market conditions. It is also in line with the characteristics of quick confirmation and low fees on BSC.
Most options products are valueless upon expiration which is not applicable for short-term options. If adopted, users would find it rather inconvenient to trade and may even lose some of the gains they would have made. In comparison, OptionPanda’s options are automatically exercised, which not only guarantees trading gains, but also eliminates transaction fees for on-chain operations. Users only needs to make judgments for transactions. Option exercise will be automatically taken care of by OptionPanda.
OptionPanda’s core competitiveness lies in the AMM-based option platforms, the large size and high stability of the pool, and excellent user experience. Its four distinctive advantages consist of flexible pricing, short-term, fixed European options, and automatic exercise all of which are mutually complementary and reinforcing. They not only contribute to a virtuous cycle for the platform but also lay a solid foundation for future development.
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