Everest Options V2 — A New Experience.
Options are still very new to the world of DeFi and even more to the Avalanche ecosystem; with that in mind, Everest Labs is working hard to provide a complete options trading experience for the Avalanche community.
At their core, options give a trader a choice to either buy or sell an asset at a predetermined price at a specific time in the future. This can enable a considerable upside for experienced traders and even be used as a hedging mechanism against price changes in the asset.
The Options AMM
In a few words, Everest Options V2 will be a decentralized application used for creating, trading, and redeeming fully-collateralized, cash-settled, European- Styled options contracts for any ERC20 token on Avalanche directly on-chain using an Automated Market Maker designed explicitly for options.
An excellent way to think about the Everest DAO Automated Market Maker is to think of it as a pool of capital. Liquidity providers put up collateral that stands ready to meet buyer option demand as it shows up. When a buyer comes along and wants to buy an AVAX call option, it will interact directly with the AVAX automated market maker. The AMM then locks up the appropriate amount of AVAX collateral to underwrite the option, and each type of underlying collateral will have its own AMM. LPs earn yield by collecting options premiums and trading slippage.
Early adopters are going to be eligible for a future airdrop of EVRT.
One of our AMM's most exciting design choices is that the AMM itself is priced using the black-Scholes formula, so all options underwritten by the AMM use the BSM model as an input. There's a slippage factor that’s added on to the BSM price. If a trader comes in and buys a lot of options that will lock up a large portion of the underlying collateral of the pool, the BSM price will increase.
Another interesting design choice for the AMM is that the AMM can underwrite many options of the same kind. For example, the AVAX AMM can write AVAX calls with different expiration dates and price strikes. This allows LPs to retain a passive role, and they lock up once their AVAX in the AVAX AMM, which can then offer many different types of AVAX options to meet all kinds of buyer demand.
A third feature of the Everest DAO AMM is that options buyers can then sell their options back to the AMM, which means that option buyers don’t have to hold their options all the way to expiration, and they can actually take profit earlier before the option expires. This also means that the Everest AMM will accumulate a portfolio of options and the underlying collateral over time. As the options in the AMM expire, the Contract will automatically exercise the options and reclaim any collateral from those options.
When an LP provides liquidity to an AMM, the market value of the AMM will determine the pro-rata share of the LPs contribution. The LP will then receive a receipt in the form of a token representing the pool's direct pro-rata portion. When LPs want to withdraw collateral from a pool they can either withdraw the mixture of the underlying pool that would be options and the underlying collateral or pay a small fee to receive only the underlying collateral back.
In essence, the LPs are the people underwriting the options. The AMM facilitates the transaction of underwriting the options in meeting buyer and seller demand. Still, ultimately all the LPs collectively share the profit and loss from the options that are underwritten.
The Settlement Layer
When the AMM mints a new option to meet buyer demand, it interacts with the settlement layer, locks up one unit of collateral, and mints a bToken and a wToken. You can think of a bToken as the buyer side, and the wToken as the seller/writer side, the buyer of the option receives the bToken, the AMM accumulates the wToken, because we are dealing with fully collateralized options the wToken can no greater loss than one unit of collateral, and the buy token can have no greater gains than one unit of collateral. Together, the bToken and the wToken are equal to one unit of collateral.
bTokens allow holders to buy (for calls) or sell (for puts) the underlying asset at a predetermined strike. wTokens allow holders to withdraw collateral if the option has not been exercised or withdraw the payment from an exercised option contract after maturity. At expiration, the settlement bot will grab prices from chainlink and input them into the settlement layer. This will determine the final underlying settlement price and the value of the bToken and the wToken. Here is an example:
- An LP deposits X units of AVAX into the AVAX/USDC Call Pool.
- A trader buys 100 AVAX calls from the pool, paying a premium to LPs for the right to own the option.
- The AMM mints 100 bToken (buy-side) and 100 wToken (writer/sell-side) with a strike price of $100.
- One hundred bTokens go to the trader, and 100 wTokens stay in the pool.
- After the option expiration, let’s say the underlying price is $400, the settlement bot will go out and fetch the value of $400 and input it into the settlement layer, this is the final price of AVAX at expiration, so the 100 AVAX calls, therefore, has $30000 of profit on a $400 asset. There’s one unit of AVAX locked up in the settlement layer for each call option contract, which means that in total, we have 75 AVAX of bToken value, which leaves 25 AVAX of wToken value. Together they are equal to 100 units of AVAX, the amount the trader bought, but at expiration, the bToken has the right to claim 75 AVAX, and the wToken has the right to retrieve 25 AVAX.
In this case, bToken represents a Call, and wToken represents a Covered Call.
When options expire Out of the Money (OTM), and there is no exercise, each wToken unlocks precisely 1 unit of collateral back into the pool. When bToken holders are In the Money (ITM) and exercise their options, wTokens unlock the USDC paid during the exercise.
About Everest DAO
Everest DAO is an innovation-driven project focused on tackling new and exciting products that range from DeFi, DAOs, NFTs, and more. Our goal is to deliver on products users want and increasing market efficiency. We provide our Dapps with fast-settlement and low fees through the Avalanche Network.
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