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Over the past decade, DeFi has undergone a significant evolution, contributing to the growth of the financial market. In traditional markets, derivatives play a critical role in financial systems by enhancing liquidity, managing risk, and price discovery. In the crypto space, perpetual futures dominate derivatives but provide a limited degree of hedging or risk management.
Options address these limitations by empowering investors with versatile tools to manage and transfer risk across different timeframes and scenarios. This blog explores the mechanics and current market conditions of options trading, and more, in the cryptocurrency market.
Understanding Options
- Call Option: Grants the holder the right to purchase an asset at a predetermined price within a specified time frame. Traders use call options when they expect the asset’s price to rise.
- Put Option: Provides the holder the right to sell an asset at a predetermined price within a specified time frame. Traders use put options when they expect the asset’s price to fall.
Example: An investor buys a call option for Bitcoin at a strike price of $30,000, with the current price at $25,000. The investor can buy at the lower strike price if Bitcoin’s price exceeds $30,000 by the expiry date. Conversely, an investor buys a put option for Ether with a strike price of $2,000, while the current price is $2,500. If Ethereum’s price drops below $2,000 by the expiry date, the investor can sell at the higher strike price.
What is Options Trading?
An option is a derivative, and options trading involves contracts that grant the holder the right, but not the obligation, to buy or sell a specific asset at a predetermined price by a certain date. In cryptocurrency, this underlying asset is a digital currency like Bitcoin or Ethereum. This flexibility distinguishes options from traditional asset purchases, offering strategic alternatives in volatile markets. This type of trading essentially reduces risk because there is no obligation to buy or sell. Traders can settle these contracts using fiat or cryptocurrencies.
Options trading protocols in Web3 are decentralized platforms that facilitate options trading through smart contracts. These protocols eliminate intermediaries, reduce fees, and enhance transparency.
In May 24, the volume of BTC options was ~ $50.2 billion, and ETH options totaled $33.06 billion. At the date of writing, the aggregated open interest of BTC options was $19.47 billion, and that of ETH options was $8.44 billion. Further, the TVL in options protocols stands at $203.89 million.
Current Challenges in Options Trading
Options trading in the traditional Web2 world faces various limitations. The dependence on intermediaries like brokers and exchanges leads to higher costs and slower processes. Centralized systems are also vulnerable to technical issues, cyber-attacks, and insolvency. Lastly, transparency issues and the risk of insider trading and manipulation are also quite common. Additionally, geographic restrictions and minimum requirements exclude smaller investors.
But when we consider options trading in Web3, there are many protocols that are solving the above mentioned issues however they face a common challenge – Low traction when compared to centralized protocols. This is primarily due to the fact that most of these protocols are challenging for new users to adapt to due to their complexity, and use automated market makers, which may suffer from fragmented liquidity.
Ithaca Protocol is an emerging project in this space that aims to address these gaps in the decentralized world. It features an auction-based system for order matching, which helps to improve liquidity as compared to conventional order book models. Additionally, order processing occurs off-chain, which reduces blockchain congestion and speeds up transactions. For more information, let’s move on to the next section.
Ithaca Protocol: a Non-Custodial Composable Options Protocol
Ithaca Protocol is a non-custodial composable options protocol established by a former Goldman Sachs partner and an executive from Amber Group, with backing from Cumberland and Wintermute Ventures.
It is the first in the industry to provide executable prices across a wide range of options, including vanilla options, digital options, option strategies, forwards, and structured products, encompassing more than 250 prices across different strike prices and expiration dates. Notably, the unique offering of digital options allows the platform to support the full range of option strategies to express any market view.
Its auction-based matching engine enhances liquidity and optimizes the efficiency of orders placed. With Ithaca, users are empowered to tailor their exposure to any expected market move and desired scenario. Further, Ithaca levels the playing field by giving users direct access to risk-sharing engineering with just a few clicks.
For the first time across the DeFi, CeFi, and TradFi sectors, Ithaca enables users to access sophisticated financial engineering functionalities previously accessible only to market makers, OTC desks, and exotic trading desks. Off-chain matching, Arbitrum on-chain settlement, and Axelar cross-chain bridging constitute the foundational components of Ithaca’s architecture.
Currently, the beta version and Season One of the Ithaca Airdrop Program are active. The Airdrop Program has been designed to incentivize liquidity, reward early adopters, and advance ecosystem development. By trading and engaging with the platform, users can earn points that could convert to up to 2% of the total eventual token supply at the end of Season One, with more to come later
How to Get Started
- Start Trading — Enter an order in the Ithaca app or try some of Ithaca’s unique pre-packaged strategies.
- Apply to Get Funds — Apply to get $1,000 to trade on Ithaca, and you get to keep 30% of any profits, with no downside. This is Ithaca’s Argonauts program – a community initiative to encourage emerging traders with little or no options trading experience.
- Join the Community — Follow Ithaca on Twitter or meet the team on Discord or Telegram.
Conclusion
The crypto market, along with DeFi, continues to grow at a rapid pace, however, the market has always faced criticism due to its high volatility. Options trading has emerged as a popular solution as it provides investors with strategic flexibility and also serves as a risk management tool. With numerous advanced features and industry-first offerings, platforms like the Ithaca Protocol are poised to lead innovation in this field. As the market continues to evolve, opportunities for investors to hedge against volatility and speculate on price movements remain abundant.
