Introducing Wasabi, an innovative decentralized NFT options protocol. Wasabi is founded by DKODA Labs, a dedicated team of engineers, scientists, traders, and artists building primitives for NFT-based economies. 

This is part one of a series of three Wasabi introductory articles detailing who we are, what we’re building at Wasabi, and the bold vision we have for NFT primitives. Let’s dive in!

For the first time, traders and liquidity providers can speculate affordably, hedge, and generate income on any NFT or ERC based digital asset through Wasabi. Any individual can be a liquidity provider, supporting an option pool that users can trade options against. In addition, Wasabi mints option contracts as ERC-721s, which means that they can be traded, exercised, or aggregated into more complex financial instruments such as ETFs. More on that in parts II & III.

We built Wasabi as a core primitive that others can leverage to create a wide range of applications and use cases around permissionless derivatives, insurance, and NFT-based financial services. We aim to shape the building blocks to allow limitless innovation in the NFT space. We’re excited to embark on this journey with you all! Let’s start by outlining the basics of options and the use cases Wasabi brings today.

What are Options?

If you’re already familiar with options, feel free to jump to the next section.

Before we dive into the benefit of options, what are options? There are two types of options, CALL options and PUT options. A CALL option gives you the right, but not the obligation, to buy an asset at a set price. A PUT option gives you the right, but not the obligation, to sell an asset at a set price. When buying a CALL or PUT option, you must select a strike and an expiry date. A strike determines what price you can buy/sell the asset at. An expiry date determines the date up until you have the right to exercise your option for an American option. 

Let’s put this into the context of NFTs. Say you bought a CALL option for a Bored Ape with an expiry date of February 24th with a strike price of 50 ETH. This means that from now until February 24th, you can exercise your option to buy a Bored Ape for 50 ETH. Realistically, you would only exercise your option if the price of a Bored Ape was higher than 50 ETH, meaning you get a discount on the market price.

Conversely, say you bought a PUT option for a Crypto Punk with an expiry date of February 24th with a strike price of 100 ETH. This means that anytime until February 24th, you can exercise your option to sell a Crypto Punk for 100 ETH. You would likely only exercise the PUT option if the price of a Crypto Punk was lower than 100 ETH.

So why are options useful with NFTs?

1. Speculate: Many blue chip NFT collections have high floor prices that make them inaccessible for individual traders. NFT options allow individuals to speculate on NFT prices affordably, having to pay a small options premium compared to the high floor price of some NFT collections. Ultimately, this lets smaller fish in the pond participate in the NFT ecosystem. Options help the entire ecosystem by increasing adoption, user activity, and liquidity.

2. Hedge: There are currently no effective products to hedge your NFT price. NFT futures have volatile & expensive funding rates while remaining inefficient due to collateral requirements and the risk of being liquidated. NFT options allow holders to hedge short-term price movements at a low cost.

3. Earn: NFT holders don’t have a sustainable way of earning interest on illiquid assets such as NFTs. By depositing NFTs into Wasabi options liquidity pools, our conservative estimations have shown that depositors would have generated up to 48% interest annually by depositing than merely keeping their NFT to sell at a later date.

Creating Options on Wasabi

These benefits sound great, but where do the options come from? They definitely don’t appear out of thin air like magic internet money. Options on Wasabi are created when liquidity providers deposit NFTs or ETH. Depositors can define pool parameters such as the min/max expiry and premium received. From there, the pool will automatically issue options to collect premiums and collateralized NFTs.

To write a CALL, LPs first deposit the underlying NFT as collateral to their liquidity pool. Every time a CALL is purchased, an NFT in the liquidity pool is locked as collateral to issue the CALL option, giving the holder the right to buy the underlying NFT. Similarly, LPs deposit ETH into pools to sell a PUT. A PUT provides the holder with the right to sell an NFT to the pool for a predetermined ETH amount, so liquidity providers must be willing to buy NFTs with their deposited ETH. One important thing to note is that the options on Wasabi are American options. This means the contract can be exercised any day up to the expiration date, unlike European options, which can only be exercised on the expiry date itself.

The Larger Opportunity

For the first time, the value of stocks represented through daily options trading in the U.S. surpassed the spot value last year. This doesn't include other derivatives like futures, swaps, etc., which far exceed equities' market capitalization. That’s why Wasabi believes that NFT options have the potential to become a $6B market annually. It is a blue ocean field with no leader, and Wasabi will cement itself as the premier NFT options platform. Initially, we expect Wasabi’s primary use case to be for blue chip NFT collections (PFPs). In the long run, Wasabi enables exotic new DeFi use cases such as decentralized ERC-20 options, credit default swaps, and ETFs for any ERC standard-based economy. 

DKODA Labs aims to build an ecosystem of tooling that will be necessary to support the many different builders, service providers, and users who want to participate in NFT markets. NFTs will form the bedrock of countless verticals as this foundational technology commands wider adoption. Wasabi is the first step towards that goal. 

If you want to speculate, hedge, or earn yield on your NFTs, drop in our testnet and try out our platform. There’s an ongoing trading competition with attractive prizes for the top traders. After that, we’ll go live on the Mainnet at the end of Q1. In the meantime, if you have any questions, hop into our Discord to learn more.