SDX Protocol Architecture

SDX employs PsyOptions' Tokenized European Options Protocol to power its fully collateralized and cash-settled options, effectively mitigating protocol liquidation and counterparty risks for option buyers.

Each liquidity pool, also known as a vault, market-makes for a single underlying asset (e.g., SOL) and supports various option types (including calls, puts, call spreads, and put spreads at launch) in both buy and sell directions.

Liquidity pools have configurable parameters to create the ideal trading strategy. These parameters include target normalized delta, gamma, vega, and theta, as well as capital utilization interest rates, fees, and bid-ask spread curves. We are currently conducting backtesting to determine the optimal parameter set, which we will refine with test trading volumes during the devnet phase.

A potential liquidity pool configuration involves setting the target delta to 0.5 and a negative vega (e.g., -0.002 for SOL at $22). Such a vault would primarily focus on selling both call and put options until the target vega is reached, similar to existing DeFi Option Vaults (DOVs). This configuration generates yield from option premiums (theta) and market-making fees.

The long delta, short vega vault architecture is inherently suitable for alt-coin markets like BONK and RAY. Liquidity providers supply equal amounts of USDC and COIN to the pool, targeting a 0.5 delta, analogous to liquidity provision in a standard Uniswap V2 AMM.

Overall, as a liquidity provider in SDX, yield is generated from:

  1. the premium received from selling options (short vega),

  2. maker fees from buying low and selling high (the bid-ask spread) and

  3. market movement of the underlying asset, with the positive delta exposure.

In the following section, we will discuss the pricing model and fee design in greater detail.

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