Distributed capital researcher Keyu took stock of the evolution and current development of on-chain options protocols, analyzing the advantages and disadvantages of five options protocols: structured products, options infrastructure, automated market makers (AMMs), central limit order books (CLOBs), and protocols that utilize concentrated liquidity pools. Keyu also discussed reasons for favoring CLOBs.
Considering that the overall monthly trading volume of cryptocurrency options is only $40 billion, it may take another market cycle for traditional on-chain options to gain significant traction. Currently, the volume of futures trading on DEX relative to CEX is about 2%. If we assume that on-chain options will achieve a market share similar to on-chain perpetual options, the expected trading volume of on-chain options should be about $800 million, which may not be enough to incentivize market makers to provide liquidity on-chain.
Derivative source code that utilizes centralized liquidity LP positions may be a solution to the liquidity problem, as there is already a large amount of liquidity in centralized pools. These products (Infinity Pool, Blockingnoptic, Itos, Smilee, etc.) offer significant differentiated products compared to CEX, such as the ability to speculate on long-tail assets. Their main challenge is convincing liquidity-concentrated LPs to re-deposit their liquidity into their pools.
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In the long run, I am bullish on CLOB-based on-chain options protocols that first utilize off-chain order book matching and on-chain settlement similar to dYdX, and then gradually move the order book on-chain as the underlying blockchain infrastructure improves.