Crypto options has seen significant growth in the last few years. Despite currently being in a bear market, the open interest in ETH options are at an all time high, approximately $8b. On the other hand, the open interest for ETH futures are down by over 50% from the peak of the market in Q4 2021.
More traders, both retail and institutional, are getting more sophisticated and are starting to trade more complicated derivatives — particularly options and structured products. Many institutional trading firms have set up options desks in the last year, and multiple top 10 exchanges have also rolled out options offerings to their users.
In DeFi, we saw the first wave of options protocols being created in 2020 — most notably Opyn and Hegic. However, these early options protocols struggled to get meaningful traction. Throughout 2020, the total TVL of the options category was below $10m, and the cumulative notional volume traded on these protocols were below $100m.
This changed in April 2021, when Ribbon figured out a way to package these options contracts into a familiar structure for DeFi users, a.k.a “vaults”. This form factor which is now known as a DOV (“DeFi Option Vault”) worked extremely well and got significantly traction off the bat. Within the first year and a half since launching the first vault, Ribbon traded >$10billion of notional option volume, and TVL skyrocketed to over $300m. At the end of 2021, the significant majority of option volumes on-chain were driven by Ribbon Vaults.
Although DOVs are simple to understand and use, they are often too simple and inflexible for serious traders. DOVs only allow users to sell options, not buy them; users can also only sell one type of option (weekly, OTM options). This fulfils the needs of passive retail users, but does not satisfy the requirements for a pro trader.
To solve these problems, we’re introducing Aevo, a next-generation options exchange. Aevo is a high-performance, order-book based decentralized exchange that comes with all the features necessary for a pro options trader. This includes a robust margining system (with portfolio margin), as well as hundreds of instruments to trade, including daily/weekly/monthly/quarterly options. All of this is built on a custom EVM rollup that was designed for scale, and rolls up to Ethereum for security.
Aevo aims to become the #1 venue to trade options on-chain. The 3 main advantages that Aevo brings users are:
100+ instruments, with many strikes and expiries
Deep liquidity, by partnering with the best options trading firms in the world
Instant onboarding, deposit USDC from any EVM-chain
Eventually, Aevo will be integrated with Ribbon as the venue where Ribbon’s options contracts settle. This means that Ribbon Vaults can drive consistent flow to Aevo (currently ~$80m a week), and Aevo can allow for much more sophisticated vault structures to be built on top — a perfect harmony of vault + exchange.
For example, Ribbon users’ funds may no longer need to be locked up from a week-to-week basis. They can exit their vault position anytime by simply closing the position on the exchange. Users will also be able to take profit on or cut losses on their vault positions, since there will be a venue with high liquidity to trade these positions.
On the other hand, Ribbon Auction participants will also benefit greatly from this integration. Instead of sitting on oTokens in their wallet until expiry, market makers can use these vault positions as real positions on an exchange — giving them margin to trade more things, take profit, hedge, and so on. We think this will attract much more interest in the Ribbon Auctions and will make pricing more competitive.
Eventually, by becoming the best options exchange and settlement platform in DeFi, we think it will make sense for other DOV projects to build on top of Aevo and leverage the liquidity of the exchange. Someone could spin up a DOV that sells daily options, or does some other type of complicated strategy, and use Aevo as the underlying venue for where these options contracts clear.
Aevo will be launching in Q4 this year. At launch, users will be able to trade 100+ ETH with deep liquidity. We will launch a closed beta in October, and public mainnet by the end of the year.
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