2023 Theses - Part 2

Our ‘2023 Theses: Network Coverage’ report covered our analysts’ theses at the app-specific, monolithic, L2, and infrastructure layers of the blockchain stack. The predictions are independently curated by our individual team members, so the views of one analyst may differ from another. Part 2 will cover trends we are seeing at the dApp layer that some of us believe will continue into 2023. This is not financial advice, but rather a look into how our team is navigating the crypto landscape as we kick off the new year.

DeFi Options Vaults AMMs have their Uni V3 moment

Ren Yu Kong

In 2022, much like the wider DeFi TVL, TVL of options protocols were in continuous free fall. While DeFi TVL decreased from $190.5B to $46.78B, representing a 75.44% drawdown, options protocols TVL took a drawdown from $631.39M to $127.41M, representing a 79.82% drop.

Traditional options vaults like Ribbon realized that continuously selling volatility isn’t successful when there’s an industry-ending event occurring every quarter. Options vaults AMMs like Premia and Lyra realized that trying to market make options using generalized formulas for the entire volatility surface is extremely difficult. The largest constraining factor is the efficient pricing of implied volatility within the black-scholes formula, with AMMs having to factor in inefficient liquidity and inconsistent demand which results in non-competitive spreads and vastly under/over-priced options.  On centralized options exchanges, volumes pale in comparison to spot or perps. The only pairs with deep enough liquidity to facilitate institutional trading are BTC & ETH, with a complete lack of liquidity for more extreme strikes and expiries. DeFi options protocols have much less liquidity than the leader in crypto options trading, Deribit, which is already well-known for its lack of liquidity.