Today, I continue my learning with DeFi perpetual options.
The concept of perpetual options was proposed by SBF (co-founder of FTX) and Dave (research partner at Paradigm) in May 2021. They introduced this new type of financial derivative in a paper, which described that perpetual options provide traders with long-term option exposure, are simple to operate, risk-free, and do not require the cost of rolling positions.
Paper link: https://www.paradigm.xyz/static/everlasting_options.pdf
once pointed out that although the concept of positions is not emphasized in general derivatives textbooks, it is crucial in practice. For example, the "crude oil package" incident was essentially a "position" issue.
Rolling Positions
However, these put options will eventually expire, and if the investor wishes to maintain the hedge, they must roll over the option positions.
To maintain her position, she must perform such operations monthly, i.e., buying and selling (rolling positions).
Thus, two issues arise:
In this process, A may trade with market makers who typically charge a fee for such buy and sell operations, known as the spread. The cost of rolling positions can be quite high. Rolling positions also involves additional work and risk. For example, A might simply forget to roll the position, resulting in the loss of the hedge, or she might make a wrong trade due to a mis-click or operational error, which could lead to additional costs and risks. Even if the operation goes smoothly, the entire process is still stressful and time-consuming, preventing A from focusing on other more valuable tasks (such as moving bricks at a construction site or delivering food for Meituan).
similar.
Perpetual Futures
BitMEX launched perpetual futures for cryptocurrencies in 2016.
This fee is calculated based on the difference between the mark price (the trading price of the perpetual futures) and the index price (the market price of the underlying asset, such as ETH).
Forexample:If the current price of ETH perpetual futures is $2000,USDand the current market price of ETH is $1900,USDthen the longs must pay the shorts a funding fee of mark price - index = 2000 - 1900 = 100.
Conversely, if the price of ETH perpetual futures is $2000,USDand the market price of ETH is $2100,USDthen mark price - index = 2000 - 2100 = -100, meaning the shorts need to pay the longs 100 daily.
Perpetual Options
method.
The funding fee is calculated based on the difference between the trading price of the option and the payoff of the option (mark price - payoff).
. Based on the above formula, the funding fee is 150 - 100 = 50.
| Perpetual Put Futures | Perpetual Put Options | |
|---|---|---|
| Strike Price of the Contract | 2000 | 2000 |
| Current Price of ETH | 1900 | 1900 |
| Mark Price of the Contract | 2000 | 150 |
| Payoff of the Option | - | 100 |
| Index of the Futures | 1900 | - |
| Funding Fee Formula | mark price - index | mark price - payoff |
| Funding Fee Calculation | 2000-1900 | 150-100 |
| Funding Fee | 100 | 50 |
Both perpetual options and perpetual futures fall under the category of "perpetual derivatives based on funding fees." They apply different functional forms to the same concept of funding fees, thus generating different types of perpetual derivatives.
The specific price calculation formula is as follows (I didn't understand it):
Deri Protocol
Deri Protocol is the first protocol to implement perpetual options.
It uses a method called Proactive Market Making (PMM), which is a type of Automated Market Making (AMM) algorithm.
In Deri's whitepaper, the architecture of the protocol is detailed (as expected, I didn't understand it either).
The link to the whitepaper is https://github.com/deri-protocol/whitepaper/tree/master (bookmarking ≈ reading).
Although these concepts may be somewhat complex to understand, the trading interface of Deri is actually quite simple.
LP (Liquidity Provider) Interface
Trading Interface
An ETH call perpetual option with a strike price of $2000 is similar to a regular token, except that the floating price of this token is calculated using the very sophisticated formula mentioned earlier.
