Why Are OptionPanda’s Underwriting Pools Better Than Traditional AMM Pools
Investors have been favoring the DeFi option for its massive market potential. However, due to the low transaction depth as well as insufficient liquidity and security plagued the blockchain, a particularly popular DeFi option product is yet to appear. Everyone is preparing to be the leader.
OptionPanda’s Innovative Option Products
Although OptionPanda is a newcomer in DeFi options, it arrives at the field with a myriad of innovations.
OptionPanda offers users high-frequency European short-term options whose expiry dates range from 5 minutes, 15 minutes, 30 minutes, 45 minutes to 1 hour. This design is more suitable for the crypto market where prices change rapidly, and allow users to use their insights to earn high returns.
In accordance with its high-frequency option products, OptionPanda has updated its option pricing mechanism. That is, in addition to the Black-Scholes formula that widely used in European option pricing, it has also added a dynamic volatility Sigma adjustment to reflect market prices more flexibly. Smart contracts automatically calculate and generate the option prices without any manual intervention required, making transactions completely transparent.
Different from the competitors’ practice, OptionPanda’s options are automatically exercised at expiration. This automation will save transaction fees for users.
As high-frequency option trading requires high liquidity for sufficient option collateral, OptionPanda innovatively establishes AMM call/put option underwriting pools and at the same time creates a variety of application scenarios for the tokens in the underwriting pools.
OptionPanda’s option underwriting pool token is a certificate issued by OptionPanda to liquidity providers. It has multiple attributes. That is, it is a deposit certificate, proof of equity, and an application token that releases liquidity from liquidity providers. The option underwriting pools are established by OptionPanda on the basis of the AMM mechanism. They generate and settle options on a regular basis.
Problems of Traditional AMM Pools
The automatic market-making mechanism (AMM) is a key contributor to the DeFi popularity. Before AMM, decentralized transactions required on-chain ordering, matching, and transactions, which was very time-consuming and complicated. Let alone high gas fees and user-unfriendly. AMM solves these problems and ushers in an era of decreased transaction cost, more liquidity, and convenience, which has paved the way for DeFi’s wider user base. The subsequent incorporation of AMM with liquidity mining further adds to the attractiveness of the already popular DeFi.
AMM is as important in the field of on-chain options as in DeFi. It solves the liquidity problem that has been plaguing on-chain options and thereby makes it more convenient for users.
But the critical issue of the AMM mechanism is that its capital utilization rate is low and risks are still relatively high. Liquidity providers, in order to earn market-making fees, have to lock up a large number of funds and sacrifice the liquidity. In option trading, although there is no impermanent loss, users are still subject to the risk of trading loss. Therefore, it is very urgent to balance risks and returns and to improve capital utilization.
AMM makes DEX popular but it has now constrained DEx’s further popularity. Thus, only further innovations can bring on-chain options promising future. OptionPanda has conducted an in-depth study of the AMM fund pool and armed itself with specific innovative approaches to solve users’ pain points.
Separate Call/Put Option Pools for More Refined Liquidity Distribution
Traditional AMM pools have a set of drawbacks. Take Hegic for instance. Hegic is one of the early projects that has incorporated the AMM mechanism. It divides the funds based on token types and uses them as transaction counterparties and collaterals. Everyone can provide funds to the liquidity pool, and the funds provided will be automatically sold as call or put options. This means that to contribute liquidity is to sell options. Liquidity providers share risks as well as benefits when providing liquidities. In the case of the one-sided market, liquidity providers and market makers not only are at the risk of loosing money, a low utilization rate of their funds but also lack protection mechanisms in their benefits in the volatile market.
OptionPanda divides the AMM underwriting option pools into a call pool and a put pool. Market makers can choose the pool that they think is more profitable to provide liquidity.
Before investing in market-making funds, if the liquidity provider believes that the probability that BTC or ETH will increase in the near future is high, they can inject liquidity into the call option underwriting pool, which has a greater chance of generating benefits. For market makers, they can provide liquidity into both pools to increase the utilization rate of funds and thereby maximize the chance of earning income in different markets.
The upcoming Uniswap V3 also adopts a similar approach. In Uniswap V3, liquidity providers can choose to make the market in a specific price range to increase capital utilization while reducing impermanent losses.
OptionPanda’s multi-directional call-put design embodies the same philosophy as Uniswap. Through creating separate pools, OptionPanda offers liquidity providers a more refined liquidity distribution plan, which will attract more market makers to expand the capital pool, and further improve the depth and liquidity of options transactions.
Besides this design, OptionPanda has also made more improvements to protect market makers’ interests. For example, it regulates that only 75% of funds in the option underwriting pool can be used for option generation and evenly distributed among options in any period. This not only facilitates the completion of options transactions but also protects market makers from being severely affected by drastic market changes.
LP Token to Release Locked Liquidity
Another pain point of AMM is that a large number of funds are locked, which means that liquidity providers sacrifice the liquidity of funds to gain profits, and at the same time suffer market risks. OptionPanda releases this part of the locked liquidity by introducing various applications of LP Token.
In OptionPanda, LP Token is liquidity providers’ principal proof and equity proof. LP Token holders can redeem the corresponding market-making assets from the underwriting pool. With the equity proof, LP Token holders will get the profit from options transactions in the option underwriting pool where they are located. The profits are distributed in proportion to options held.
In addition, LP Token can also be used for mining and trading. OptionPanda’s platform token is OPA and the underwriting pool mining constitutes a major source for the output.
Since LP Token represents asset ownership in OptionPanda’s underwriting pool, it has value and can be traded in DEX or used for mining and lending in other DeFi products. Moreover, the separate pool mechanism and the liquidity of LP Token enable liquidity providers to directly switch their LP Token held. They can switch between different assets without going through the procedures of liquidity deposit/withdrawal, which saves them both time and costs.
