Opyn Protocol.

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TLDR below. This is not financial advice.

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General Conclusion

Previously we have introduced to readers the different kind of Options. And today we will take a look at the Opyn platform, which offers Options that can basically combine different positions. Opyn has gone through 2 versions, we will also provide information regarding both. Overall, Opyn is working on its liquidity problem by providing two different methods.

What is Opyn?

Opyn is the first options platform in the DeFi space. It uses Convexity protocol. Opyn allows you you to trade the options contract after creating it from a decentralised liquidity pool.

In general, you pay a premium as a buyer and you can either execute them on expiry or before expiry. These tokens represent options, so, for example, if I’m buying a put or call option for ETH my underlying is ETH. Then it will create an oToken or the option version of this ETH with the strike price and the expiry that I’m looking for. After this I can either create them and hold on to them or I can buy them in the secondary market, which is one of the biggest differences between all the other protocols and Opyn.

You can buy these options (ETH or the oETH) either in Uniswap version 1 or the recently upgraded version 2 using 0x protocol. This is good because it allows for price discovery, which is one of the ways that options can be very powerful in the space. You have continuous price discovery as the option reaches maturity before it expires, and can see where value lies. Furthermore, you can trade this asset and make money out of it by trading these options contracts directly instead of holding the underlying.

Creating oTokens

OPYN Version 1

You go to opyn.co and there you see that you can either buy tokens or sell tokens. You can see different types of options and you can buy UNI or you can buy put or call or you can buy wBTC. There are a few assets for you to play around with and you can buy them with USDC so you can buy or sell protection. If you are selling, you get to earn premiums and if you are buying you pay the premiums.

OPYN Version 2

Version 2 is slightly different where you go to the 0x protocol and purchase these option assets and you can also create them under the trade function. The concepts are both the same in that you put in your strike and you put in the expiry or how long you want these options to last for, and then the oTokens or the oETH will be minted in which you will pay the different premiums.

Trading oTokens

Version 1

Trading is a lot more interesting because it opens up the conversation of price so if you go to the website you will see that there is this Opyn monitor which uses Uniswap. You can either go to Uniswap and look for it and trade there, or go directly to the options platform, opynmonitor.xyz. That platform has the different kinds of assets available (wBTC and UNI for now), the expiry dates which is the last Friday of every month, the strike price, the expiry, the open interest, the implied volatility and all the other stuff and you can trade.

Version 2

You go to gammaportal.xyz and there you go to trade via an order book, which is quite different to version 1 which uses AMMs. AMM uses bonding curves to price assets. Version 2 uses 0x protocol and an order book. The central limit order book and the tables being created are very similar to the traditional way options are traded so you can look at the call, the put, the different greeks, the different implied volatility which actually changes and the different price for it and then purchase them according to your needs.

Liquidity problems and solutions

When we talk about decentralised systems, we want to talk about the depth of liquidity because without anyone supplying the liquidity asset or the liquid side of options, you can’t buy them.

There are two ways Opyn is dealing with this:

The first one is a short-term method which is to limit the amount of strikes trading until there is liquidity. With this method, more people are adding ETH and from there you can create oETH so the options version of ETH. Then you can create more options contracts that people can trade. To do this, they need 160% of collaterals, so they need $160 worth of ETH to create $100 worth of options contracts. However, in the long run this method is not very scalable.
In the long run, they’re fixing this by creating an AMM that has two assets. You have ETH and USDC. Instead of ETH and USDC, it trades USDC and oETH (the options of ETH). This can be very versatile because you don’t need to have a specific strike price or expiry. You can create any strike price and any parameters that you want and the pool itself will be minting the ETH option contract. You can be trading it with USDC. This way we are pricing in volatility and we are also getting price discovery for the option asset.

Mechanism Design

Decision Making

Governance in Opyn right now is being managed by the core team and soon they will decentralise it once it’s a little bit more stable. This makes complete sense because derivatives or options are very complicated products. You don’t want to start decentralising it from day one and have the governance or decision making given to people who don’t understand derivatives at all.

Initially, governance is managed by a core team to get the things up and running and then it will be distributed to the different kind of community members with some (understandable) limitations to what they can do — for example they can whitelist assets but they cannot have access to the funds.

Resolution Mechanisms

There are different types of users in the space with different kinds of functions. The owner can whitelist or blacklist collaterals. The pauser can pause the entire operation for an emergency pause or partial pause when there’s huge volatility in the market.

This makes sense because in the S&P or the New York Stock Exchange this happens automatically when there’s too much volatility or too much fluctuation in prices and trading stops for 15 minutes. This is something very important that we have to think about when we’re trading these kinds of more complicated sophisticated products.

Token Design

oTokens V1

oTokens are minted with a smart contract using 160% in collaterals. How it works is that if I am a seller and I want to sell ETH options. I put my ETH in a vault and the vault will be creating oTokens, so $160 worth of ETH creates $100 worth of oTokens.

All these oTokens are minted and then traded on Uniswap. Of course when they’re minted, they’re going to be minted with specific expiry as well as specific price. Specific because ETH put at $3000 expiring in one month and ETH put at $3200 expiring in one month are two very different assets because these are two different Uniswap pools.

Because I am putting my ETH in there and I’m owning the vault, I get to earn transaction fees when things are being traded on the Uniswap pool and in addition I get to earn premiums when people are purchasing the oTokens.

oTokens V2

In version 2, the difference is that it is cash-settled using the order book method. It’s matching the different kinds of orders and that’s how you get price discovery as well. oTokens are minted so when you put in ETH. It mints out oETH that can be traded in the centralised order book method and then traded in the gamma portal.

Upon Expiry in V2

In the AMM pool, you have USDC that provide liquidity and once options expire they are calculated in cash dollars which is also priced in USDC and the option is cash-settled. The good thing is that this is all exercised automatically and is priced automatically and is settled between the buyers and sellers.

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TLDR: Opyn is developing and trying to engage more users by providing different Options mechanisms for testing. Although we cannot conclude that the Options design is better and more stable, it is clear that the design of Options has many ways. It is just making it fit for today’s infrastructure, more optimal and cheaper for the users.

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