Opyn Finance: A Capital Efficient Options Protocol | Deep Dive
Review Date: June 7th, 2021
Introduction
Opyn Finance is a DeFi protocol focused on financial products known as options that are commonly used in Hedging a portfolio to reduce risk in uncertain market conditions. The options market is around $300 trillion and with the recent rise of Deribit volume the leading centralized exchange for BTC and ETH options due to Institutional interest; DeFi options could be in their infancy and set to be one of the strongest asymmetric opportunities in the cryptocurrency asset class. Backed by some of the strongest names in DeFi such as Dragonfly Capital, Opyn Finance looks to be a leader in the ecosystem of decentralized options.
Opyn Finance
Options are financial instruments primarily used for hedging a spot position allowing traders to reduce risk in uncertain market conditions. There are numerous other applications such as earning Yield via particular options strategies as employed by Ribbon Finance and to provide easy access to leverage allowing traders to risk less capital to maintain exposure to an asset’s movement. Options have a strike price and maturity date meaning that on a specific date in the future the price of spot must be greater than or less than the strike price depending on if it’s a call or put option.
Opyn V1 commonly known as Convexity protocol aimed to offer call and put options for traditional crypto assets such as WETH and WBTC. Put options are particularly important in crypto due to the volatile nature of assets meaning that investors would like the ability at any time to purchase ‘insurance’ that would protect their portfolio from a large downside movement. An example being ETH is trading at $3800 and an investor becomes worried based on euphoric market sentiment; that trader purchases a put option that has a strike price of $3200 that expires in a week’s time. Within that week the price of ETH crashes all the way to $2200 but the put option holder has the ability to sell ETH at $3200 profiting the difference between the strike price of the put option and the current spot price. Hence put options behave similar to insurance for an investors portfolio.
V1 allowed the creation of any option market through the instantiation of a new contract through an Option factory contract [2]. This allowed anyone to create an options market for any whitelisted asset with a specific strike price and expiry date. Each options market is defined by a oToken which is a tokenized ERC-20 of an options contract. These tokens can be created by those who sell options by locking up collateral for a period of time which allows these tokens to be minted.
Opyn V2 offers European, cash-settled options that auto-exercise upon expiry [3]. European options mean that the option holder can only exercise the option upon expiry (on option maturity). Cash settled means the options are settled in the collateral asset used to enter the contract, often USDC being the form of collateral on Opyn instead of spot assets such as WETH and WBTC used in the Hegic options protocol.
Opyn V2 focused on improving capital efficiency by introducing spreads that allow long oTokens to collateralize short oTokens [4]. This can be best explained by an example. Support a trader wants to buy a $300 ETH Put option but also wants to sell a $400 ETH Put option. Instead of using $300 and $400 as collateral respectively, the trader can purchase the $300 ETH Put option and use that as collateral to sell the $400 ETH put option so only requires an additional $100 as collateral instead of $400. Since oTokens are simply ERC20 tokens they can be traded on a decentralized exchange and have their prices be set by the free market. Opyn integrated with 0x due to superior gas efficiency and oTokens primarily trade on this DEX.
Another feature of Opyn V2 is limit order functionality allowing traders to buy and sell options at a specific market price instead of current market prices [4]. This functionality is all executed from the 0x DEX integration. Traders do this by locking up collateral for the limit order which can be cancelled at any time, then waiting until the limit order is filled or partially filled to which they will be notified of their executed trade.
On-chain Analytics
Analyzing on-chain data for Opyn V2 we can see that there has been $5.79mm in total option trade volume with around $200k volume being traded per day [5]. We can compare this to Hegic’s total historical volume of $180.4mm for WBTC call/puts and $238mm for ETH call/puts [6]. The current total value locked (TVL) is sitting at $34.1mm and with 1380 total wallets that have interacted with the protocol. Options are complicated products so retail at this present time will not be entering these types of financial instruments; in fact options data is often used to gauge sentiment for smart money. This is why the users of this protocol are remaining stagnant at this present time.
Backers
Initially Opyn Finance raised $1.96mm lead by Dragonfly Capital (Haseeb Qureshi & Tom Schmidt) with participation from 1kx, Uncorrelated Ventures and prominent angel investors such as Balaji Srinivasan, Robert Leshner (Compound Finance) and Spencer Noon [7]. On February 3rd 2021, Opyn closed a Series A round raising $6.7mm lead by Paradigm. Additional backers included the likes of Kain Warwick (Synthetix) & Stani Kulechov (Aave) [8].
This funding was used in the development of Opyn V2 also known as Gamma protocol. The funds and individuals backing this protocol are very strong but there is yet to be released a governance token that allows protocol users to vote on the future direction of the protocol.
Summary
Opyn Finance is at the forefront of the DeFi options ecosystem with protocols such as Ribbon Finance and DeFi Dollar actively integrating Opyn to build structured DeFi products and stablecoin loans. Over $320mm in options volume has been executed on Opyn since its inception. The launch of Opyn V2 further improved on it’s permission-less architecture for creating options markets by improving capital efficiency by implementing spreads, limit order functionality for options and also gas efficiency by integrating into the 0x DEX. Backed by the strongest funds in DeFi and prominent individuals in the DeFi ecosystem, Opyn looks to be a leader in the emerging option market which we can only expect to increase from here on out.
References
- https://v2.opyn.co/#/
- https://opyn.gitbook.io/opynv1/protocol-overview
- https://opyn.gitbook.io/opyn/faq
- https://medium.com/opyn/opyn-v2-limit-order-tutorial-10efe115ac50
- https://duneanalytics.com/loren/Opyn
- https://duneanalytics.com/slash125/hegic-v2
- https://thefintechtimes.com/opyn-raises-1-96mm-to-expand-the-worlds-only-decentralized-finance-defi- risk-management-platform/
- https://medium.com/opyn/opyn-closes-6-7mm-funding-round-led-by-paradigm-b2a259890dc
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