Making DeFi Options capital efficienter 🤌
Back in June 2021, Opyn announced the release of its partial collateralised options margin system, the first step to improving capital efficiency in DeFi options. Rysk now take the next steps with:
- Stable-collateralised call options (Naked Call options!)
- Non-stable-collateralised put options (Naked Put options!)
- Modified liquidation system.
Capital Efficiency? Who cares?
Capital efficiency is the ratio that compares profits against the value spent to generate and maintain those profits. In the context of options: an option that is fully collateralised (say with 1 ETH) is less capital efficient than a partially collateralised identical option (say with 0.5 ETH (so long as there is a margin system to make sure the collateral is greater than the value of the options written). More capital efficient systems are important because they allow you to do more with your portfolio, meaning you can generate more yield.
Let’s say you have $100 and you want to short an option, with a fully collateralised system you might need to collateralise with all $100, now with a partially collateralised system you could collateralise with $60, meaning you can do what you want with that spare $40, meaning you can generate more returns for your funds… as long as you make sure that the collateral meets the option’s margin requirements.
Naked Call and Put Options
Until now in order to write an ETH call option you needed to use ETH as collateral and to write an ETH put option you needed to use stables as collateral. The rysk-opyn gamma protocol allows the protocol and users to write ETH call or put options with ETH or stable collateral using the partial collateralisation mechanism! Meaning option writers now have much more flexibility with this new and improved margin system. Why did rysk devs DO THIS?
As with most things, this innovation to DeFi options came out of necessity. The Rysk Dynamic Hedging Vault aims to maintain a delta neutral portfolio by writing and buying options. The problem with having access to only ETH-collateralised calls and stable-collateralised puts is that when shorting you can never realistically be short delta. This is because a short put is long delta and a short call collateralised with ETH is usually going to be long delta too. So in order to short delta by writing options you need a way to write calls with delta neutral collateral i.e. stablecoins.
This means that the Rysk DHV (and in the not-too-distant future, options writers selling options to the DHV) can write partially-collateralised put and call options using just USDC! This makes for better capital efficiency for everyone, easier to track yield for Rysk DHV Liquidity Providers and access to a new options instrument.
Modified Liquidation System
A change made to improve the reliability of the liquidation system involved making the liquidation process much easier to understand and manage for everyone and more straightforward for liquidators, meaning rysk could help found a more reliable options liquidation market. We are actively working with parties interested in becoming liquidatooooors, if you are interested reach out to Jib0xD or Dan.
What’s next?
- The Rysk DHV takes full advantage of these features for its own options writing and in the future, users will be able to write these options themselves and sell them to the DHV, during the Rysk Alpha phase we have experienced 3x collateral reductions over a fully collateralised model, and we’re only getting started as we further optimise this model.
- Get in touch with Jib0xD or Dan if you want to build standalone structured products with the new naked put and call functionality on top of the rysk-opyn gamma protocol on Arbitrum. We would love to work together on novel products and see how these products can interact with rysk products, to build a stronger ecosystem.
- Rysk intends to keep on taking steps towards improving option capital efficiency and instrument flexibility. E.g. using collateral from an owned call to collateralise an owned put with the same expiry, portfolio margining and a few things we can’t speak about yet ;). If you are interested in getting involved reach out to: Jib0xD, Anton or Dan.
Join the rysk community
If you are interested in learning more about pushing the frontier of options instruments, market neutral returns and derivatives in DeFi you should hang out on our Discord.
Apply to partake in Rysk Alpha if you haven’t already: https://medium.com/@rysk-finance/rysk-alpha-club-want-in-d36fa5ddb49e
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Before Rysk you were in crypto and stables; after Rysk you will be in crypto, stables, and Rysk.
