Opyn - DeFi Options Trading Protocol

Nick Sawinyh on 20 Jan 2021

Aparna told us about Opyn backstory, state of defi options market and what’s new in Opyn v2.

Hello! What’s your background, and what are you working on?

My name is Aparna, I’m the co-founder and CTO at Opyn. I got into crypto in 2015, which is when I heard of Bitcoin. I was passionate about cryptography growing up. Bitcoin peaked my intellectual curiosity and I started following all the reddit forums about it. From there, I founded Blockchain at Berkeley, where I taught the largest university accredited Blockchain class. I met Zubin and Alexis through Blockchain at Berkeley in 2017 :D

Opyn is a capital efficient DeFi options trading protocol that allows users to buy, sell, and create options on ERC20s. DeFi users and products rely on Opyn’s smart contracts and interface to hedge themselves against DeFi risks or take speculative positions on different cryptocurrencies.

Options are derivatives contracts that give its owner (buyer) the right to buy or sell a specific asset from the option writer (seller) at a specific price at option expiration date for European options.

Key uses:

  • Used as a hedging device, options provide DeFi traders with risk-reduction strategies
  • For speculators, options can offer lower-cost ways to go long or short different cryptocurrencies with limited downside risk
  • Opyn v2 options give DeFi traders more flexible and complex strategies such as spreads and combinations that could be potentially profitable under any market scenario

Liquid options markets provide market participants with access to hedging, leverage, and financial insurance, making the development of such markets a prerequisite to DeFi’s maturation.

What’s Opyn backstory?

I founded Opyn with Zubin Koticha and Alexis Gauba in 2019 with the mission to build an inclusive, fair, and open financial system. Enabling this vision requires building essential derivatives infrastructure and risk management applications to protect DeFi users. As DeFi continues to grow at its explosive rate, a thriving options ecosystem will be an important next step for its maturation and eventual mass adoption. This is the opportunity we’re focused on unlocking for the entire DeFi community.

In February 2020 we launched v1 (Convexity Protocol), which laid the foundation for DeFi options as the first live ERC20 options protocol. For the first time, anyone could create, buy, and sell options on any ERC20 token. In August 2020 we raised a $2.16mm Seed round to accelerate bringing risk management to DeFi and to further strengthen Opyn’s position as the primary DeFi platform that allows cryptocurrency investors to hedge their Ethereum (ETH) and DeFI investments through options. Financing was led by Dragonfly Capital with participation from Version One Ventures, Uncorrelated Ventures, 1kx, A. Capital, DTC Capital, CoinFund and angel investors.

We used Seed funding to grow the Opyn team, focusing on key research and engineering hires, and to further protocol development and security. Our primary objective as a company is to build the most secure, capital efficient DeFi options protocol, and the team’s depth of knowledge in architecting secure financial systems and quantitative options trading reflects our commitment to building the essential options infrastructure for the entire DeFi community.

In December we launched v2 (Gamma Protocol), the most powerful and capital-efficient #DeFi options protocol. The Gamma Protocol enables more capitally efficient options by allowing users to trade option spreads & combos. Spreads allow long oTokens to collateralize short oTokens, enabling users to post the max loss of a structure as collateral. Other protocol improvements based on v1 user feedback include: auto-exercise for in the money options at expiry, formal verification of contracts, and the ability for anyone to create new options series in Opyn’s options factory, among other features. A trustless options protocol is critical to unlock DeFi’s true potential & we’re committed to working with the DeFi community to build a better, more inclusive financial system.

What are the key differentiators of v2 when comparing against other DeFI options protocols?

There are seven key characteristics that differentiate Opyn v2 form other DeFi options protocols:

  • v2 allows for more capital efficient options trading strategies such as spreads
  • v2 has competitive pricing, as bid / asks are set by market supply and demand
  • v2 allows users to sell options prior to expiry
  • v2 allows for flash mints (possible to mint options without collateral as long as they are burned before the end of the transaction)
  • v2 options auto-exercise for in the money options
  • v2 permits anyone to create new options if the product has been whitelisted
  • v2 allows operators to act / trade on a user’s behalf

Can you give two scenarios when it would make sense to trade DeFi options, and explain the process with Opyn v2?

Absolutely. Let’s take a look at two scenarios: 1) Alexis wants to protect her ETH investment against a downturn in the market, and 2) Mike wants to earn additional income on a portion of his ETH holdings.

Scenario 1: Protective Put (risk-reduction strategy)

Alexis holds 10 ETH that she purchased in October for $100 each. The price of ETH is currently trading at $500 and Alexis wants to lock in a profit and protect herself against ETH dropping back to $100 before December 31st. To reduce her downside risk exposure, Alexis can buy a protective put option with a strike price she’s willing to accept for selling ETH (e.g. $400). The protective put sets a floor price of $400, below which Alexis will not continue to lose any additional money, even if ETH’s price continues to fall until the option’s expiration date (December 31st).

On December 25, the price of ETH falls sharply to $250, and continues to trade at that level until December 31st. Since Alexis purchased a put option with the strike price of $400, Alexis has the right to sell her 10 ETH to the put seller for $400, despite ETH trading at $250.

Takeaway: Hedging with put options allows individuals to reduce risk at a reasonable cost. Think of buying a put as an insurance policy, limiting your downside risk. Long puts can be used to insure your investments against a downturn. To buy this insurance, the options buyer needs to pay some amount of premium upfront. In exchange for this premium, the options buyer limits his / her downside risk and enjoys all the upside in a cost-effective way.

To buy a protective put on Opyn:

  1. Select your preferred Options Series from the dropdown in the top left corner of the trading dashboard and select the desired Expiry Date from the dropdown menu
  2. Select your preferred Strike Price
  3. Scroll down below the options section and enter your position size in the order box
  4. Select the Approve USDC button, and confirm with MetaMask. This step authorizes the Opyn platform to use your USDC for the trade.
  5. Select the Buy oToken button, and confirm with MetaMask. This step purchases your oToken(s)
  6. Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

Scenario 2: Covered Call (income generation)

Mike holds 10 ETH that he purchased in October for $100 each. The price of ETH is currently trading at $500 and Mike is looking for a way to generate additional income. Mike predicts the price of ETH will remain relatively flat or drop until December 31st. To earn additional income, Mike can sell a covered call with a strike price that is out of the money (e.g. $600). In this example, a covered call is constructed by holding 10 ETH and then selling (writing) call options on those 10 ETH. The call option gives the call buyer the right to purchase ETH at a given strike price (e.g. $600) at a set time in the future (expiration date).

On December 25, the price of ETH falls sharply to $250, and continues to trade at that level until December 31st. Since Mike sold a covered call with the strike price of $600, the call option will expire worthless (out of the money), allowing Mike to keep 100% of the option’s premium (the option’s price).

Takeaway: Selling covered call options can generate income from options premiums with the hope the option expires worthless. Selling calls against assets you own (known as a covered call) is a widely used income generating strategy. A call option is out-of-the-money when the underlying asset price is below the strike price. The options writer (seller) keeps the premium as profit.

To sell a covered call with Opyn:

  1. Select your preferred Options Series from the dropdown in the top left corner of the trading dashboard and select the desired Expiry Date from the dropdown menu
  2. Select your preferred Strike Price
  3. Scroll down below the options section and enter your position size in the order box
  4. Select the approve WETH Wrapper button, and confirm with MetaMask. This step approves the Opyn platform to wrap your ETH, which will be used as collateral for the trade.
  5. Select the Issue oToken button, and confirm with MetaMask. This action issues your oTokens for the selected options series
  6. Select the Approve oToken button, and confirm with MetaMask. This action approves the 0xProxy contract to spend your oToken so you can sell it on 0x
  7. Select the Sell oToken button, and confirm with MetaMask. This action sells your minted oToken on 0x
  8. Select Done, and confirm your position on your Opyn v2 Dashboard or on Etherscan

What are your goals for the future?

Throughout 2021 we plan to dramatically improve the capital efficiency of v2 by enabling users to: reduce margin requirements for naked options, trade options on margin, trade options on even more assets, and trade in greater size than ever before. By reducing margin requirements for naked options, users will be able to create the first ever partially-collateralized options positions in DeFi, with margining and liquidations built-in! This significantly reduces capital requirements compared to covered strategies.

Additionally, we’re developing an options-specific AMM, which will be very beneficial for liquidity. At Opyn, we want to focus on liquidity and we feel getting strong competitive liquidity requires an AMM, but we want to support liquidity wherever it comes from (be it AMMs or orderbooks). We want to enable and build the tools that allow robust liquidity from a variety of MMs/LPs/users. Getting more professional market makers involved in DeFi and crypto is helpful for the space as a whole.

Moreover, given options are incredibly versatile financial instruments, we are committed to fostering and incentivizing the developer community to build on top of the Gamma Protocol to further develop the DeFi options ecosystem. We’ve had very successful community projects incorporating Opyn in the past, and we plan to significantly increase resources available to developers in 2021. We’ve already started to share Ideas for what you can build with Opyn v2.

What are your future thoughts for the DeFi market?

We’re still in the early stages of DeFi, and given its recent trajectory, TVL seems to ~2x every 3 months. Continuing to build a comprehensive ecosystem of dapps will be key for DeFi as it further cements its place within the financial landscape. In the near team, we’ll start to see significant improvements to DeFi protocols that focus on making them more secure and user-friendly, which will reduce barriers to entry for retail crypto investors and eventually institutions.

I’m really excited about building an inclusive, fair and open financial system! My hope in building is Opyn is that we will build a financial system which allows someone, regardless of where they are born, to have access to secure financial services.

For the DeFi options market specifically, it’s important to remember that options are amongst the most widely traded of derivative assets in traditional finance, with yearly exchange volume of more than $635 trillion (not including OTC options trading). As we continue to push the boundaries of a more capital-efficient and highly liquid DeFi options market, success will mean enabling the developer community to build a robust DeFi options ecosystem. As previously mentioned, a liquid DeFi options market will provide DeFi users with greeter access to hedging, leverage, and financial insurance.

Where can we go to learn more?

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About the author
Nick Sawinyh
Nick Sawinyh is an LA-based crypto entrepreneur. After having spent over four years in the blockchain industry, Nick founded DeFiprime in 2019, with the idea to provide information about emerging DeFi ecosystem. He owns modest amounts of various cryptocurrencies.

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