These are some of the most pressing challenges we observed building crypto option products in the DeFi space:

  1. Few Option Market Makers Remaining On Solana: The collapse of prominent crypto firms in 2022 has left few option market makers operating on Solana. As of March 2023, no significant option trading exchanges exists, primarily due to insufficient market-making liquidity.

  2. High Upfront Cost to Secure Market Making Liquidity For Options: The technical complexities and infrastructure necessary for trading and hedging options across multiple exchanges demand substantial upfront investments (starting at six figures). Without significant trading volume, achieving a break-even point for market-making incentives becomes difficult for exchanges.

  3. Poor Liquidity with CLOBs due to collateral requirements for quoting: CLOBs, based on the Serum and OpenBook models, necessitate collateral posting for option market quoting. This requirement makes it capital-inefficient to quote across the entire volatility surface, resulting in poor CLOB liquidity, even in under-collateralized systems.

  4. Dearth of Option Markets Beyond BTC and ETH in Crypto: Centralized exchanges, particularly Deribit, dominate option trading, which only supports BTC and ETH options. Many market makers show little interest in options for other tokens, given the lack of liquidity and available venues for hedging or arbitraging.

  5. Bad Debt Risks with Under-Collateralized Exchanges: Users of under-collateralized option exchanges face bad debt risks due to the protocol's inability to liquidate leveraged accounts effectivly. Losses are often socialized, with option buyers exposed to counterparty risks.

  6. Limited option types: Many option exchanges offer only basic options, such as calls and puts. Advanced strategies, such as spreads, straddles, and collars, are either unsupported or must be constructed manually.

  7. High Fees for Multi-Legged Options Trading: Trading multi-legged options on current exchanges requires crossing the option spread and incurring multiple transaction fees, reducing the viability and profitability of employing complex trading strategies.

  8. Poor Risk-Adjusted Yield for Option Selling Vaults: While DOVs are the most popular on-chain option products, they are often perceived as providing poor risk-adjusted yields due to option mispricing. This issue arises from the DOVs' wholesale auction model, which sells options in bulk to market makers.

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