The Longest Dated Options in DeFi

As decentralized financial markets mature, the layers that form grow larger than their predecessor. It’s visible right now, with lending protocols and asset managers leading the Total Value Locked (TVL) in DeFi. However, derivative protocols are so early that they barely make a dent in the total value moving through the DeFi ecosystem. How long will it take for that to change?

The layers of decentralized financial markets.

Options are classed into the derivatives block and they will be used by most protocols in DeFi in some capacity. To share some examples:

  • Options can be streamed to protocol contributors as incentives.
  • Protocols can hedge their treasury’s risk.
  • Asset managers can use them in their strategies to capture additional yield.

Primitive is a full stack protocol, enabling anyone to use options in any desired capacity. Its permissionless, which makes it a composable DeFi Lego that can be added to any arsenal of tools. It delivers options to end users who have an opinion on the market and want to take a directional bet. It also has the capability to create new options with any parameters, enabling other projects to build customized logic on top of the options, like streaming them as a replacement to vesting equity compensation.

Primitive Protocol Tenets

  • Censorship resistance
  • Security
  • Permissionlessness

Future of the Protocol

An options protocol has more pieces than a venue to facilitate trading, it needs a way to make collateral work for the protocol, improve capital efficiency of provided liquidity, govern the options that are created, coordinate the actions of external liquidity, backstop the protocol with insurance, and allow new venues and entities to plug into the ecosystem with ease. Some of these pieces will come from working with other projects in DeFi, while others will be built out as protocol components.

The full options protocol will be an immense network of owners, contributors, and users. It is summarized by this diagram, which will come to life in V2.

The full scope of Primitive that is yet to be built.

Open Collaboration

Delivering options requires external systems to be plugged into the larger internal system of the Primitive Protocol. From the deployment of the smart contracts, minting of tokens, conversion into liquidity, and final swap to the end user’s wallet. Primitive cannot grow as a siloed protocol, it requires open collaboration and partnership. We will actively work with teams in DeFi to create more option markets, and we are starting with Sushiswap.

To jump start the evolution of the protocol, we’ve launched new markets on Sushiswap. Owners of Sushi will now be able to hedge risk or speculate further using Primitive options!

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Sushiswap Markets on Primitive

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The options that are deployed are:

  • $30 SUSHI Call Expiring September 24, 2021
  • $2.50 SUSHI Put Expiring September 24, 2021

These longer dated, out-of-the-money options, are optimal for liquidity providers! They also allow more time for the option market to build liquidity, and generate volume.

Visit the market on the app: https://app.primitive.finance/markets/sushi

Visit the liquidity pools on the app: https://app.primitive.finance/liquidity

Future Collaborators

The Primitive Protocol will continue to work with more teams to deliver options that their users need. The Primitive core team is collaborative, but the protocol is permissionless, don’t hesitate to start building. Join our community discord to talk to the community!

~2x Leverage Using Ether Options

These Ether options have been deployed:

  • $5,000 ETH Call Expiring September 24, 2021
  • $480 ETH Put Expiring September 24, 2021

Visit the market on the app: https://app.primitive.finance/markets/weth

Visit the liquidity pools on the app: https://app.primitive.finance/liquidity

The liquidity of the $5,000 ETH Call option pool enables the call option to be bought and sold, and holding this option has ~2x pseudo leverage on ETH, at current prices. Leverage from options is different from other types of leverage, with its own tradeoffs. As a user, you don’t have to worry about liquidations because you pay an upfront cost to purchase the options. Therefore, the max loss on this leveraged position is the total cost to buy your options.

Option Liquidity Pools

Options can be resold or bought from the pool to close positions, allowing option traders to earn profits without exercising them. Additionally, options can be written using the pool’s liquidity. This gives traders access to a lucrative market: being able to profit from the implied volatility of ether.

These options expire on September 24, 2021, which makes them the longest dated options available in DeFi. This longer period is better for passive LPs for a few reasons:

  • Less activity required.
  • 100% Underlying token exposure, until the strike price is hit. (Limited IL).
  • More time to build liquidity = more liquidity = more trading fees generated = more APY.
  • 15%+ APY in the Underlying Token. (15% APY in ETH, SUSHI)

Advanced Details

Return profile of Primitive ETH Option LPs

The performance of an ETH Primitive Option LP in comparison to Hold and ETH-USD portfolios.

Yes, limited impermanent loss until the strike price is hit and capped downside (in terms of underlying). The only scenario for LPs to lose 100% of their capital is if the underlying assets go to $0 (because they are effectively holding the underlying assets).

If the options go in the money (their spot price reaches the option’s strike price) the LP’s portfolio (LP tokens) changes from a HOLD portfolio (100% Underlying) to a 50%-50% USD-Underlying portfolio, which will start feeling impermanent losses.

When an LP enters a pool, they also get a hedge against their provided options liquidity. Over time, trades might skew in a direction far enough to make this hedge not cover the full position. In most cases, this hedge will take care of your option risk (its literally an option) so that as an LP you remain neutral.

LP returns are estimated to be 15% in the underlying token, which means 15% APY in ETH for the $5,000 ETH call market, and 15% APY in SUSHI for the $30 Sushi call market.

Trade Examples

Example of trades

Use the App

The open-source and free interface to interact with the Primitive protocol is here: https://app.primitive.finance/markets

Join our community

We are talking about this in our discord right now: https://discord.gg/JBM6APT

Follow our Twitter and Medium for Updates!

https://twitter.com/PrimitiveFi

https://primitivefinance.medium.com/

Risks

We have not proven the protocol is secure. That will take time. We have put our efforts into securing the protocol’s contracts through extensive testing and third party review. With that said, keep in mind it is high-risk to use the protocol and that a material loss of funds can occur at any time.

Permissionless options protocol. Built on Ethereum.