Options remain an untapped frontier for mainstream adoption of DeFi. Current options markets primarily focus on BTC and ETH, neglecting a wide array of long-tail assets. This narrow focus significantly hampers the potential expansion of on-chain derivatives markets.
Divergence released an innovative automated market maker (AMM) that evolved from Uniswap V3, presenting unprecedented capital efficiency for DeFi options. It offers a permissionless, peer-to-peer smart contract infrastructure for digital options to be tokenized, swapped, and settled on Ethereum. Unlike standard options, the risk and reward of digital options is known before trades, and they offer:
No Liquidation Risk: Traders are safeguarded from liquidations during periods of extreme market fluctuations. No stress about wick candles!
Non-linear Return: A digital option costs a fraction of 1 collateral. It pays out a fixed 1 collateral when it expires in the money. For minimal investments, it can provide a rate of return far exceeding the price return of the underlying asset.
Up to 99x Leverage: The max leverage is attained via an entry at 0.01 collateral per option for a 1 collateral payout.
Hence, digital options are an ideal leverage trading and hedging instrument for assets prone to high volatility, providing a versatile solution by accommodating assets typically bypassed by perpetual swaps, empowering them to serve as collateral and/or underlying assets for options. As a permissionless system with open access, the protocol ensures equal opportunities for anyone to:
Create a market for digital options of a chosen underlying, strike, expiry, and collateral
Swap for digital calls or puts
Provide liquidity to sell digital calls or puts passively and earn premiums plus fees
The protocol design differs from a central limit order book, where buy and sell orders are organized by price levels and are matched with specific orders left by others. In the Divergence v1 Automated Market Maker (AMM), options trading occurs directly with a liquidity pool, which serves as an options market with selected specifications. At each price level, users buys options from aggregated liquidity positions. This order is then redistributed to sellers on a pro-rata basis.
A Divergence option pool handles three assets: calls, puts, and an ERC-20 token that collateralizes and quotes the options. The calls and puts are minted asSpear and Shield tokens, respectively. And the collateral token can differ from the underlying, allowing for synthetic exposures.
In the Divergence v1 AMM, options are fully collateralized before they are tokenized, swapped, and settled. Call and put options are valued relative to each other. Their relative prices change when collaterals are swapped for either calls or puts, and a new market rate for both options is found.
Using a web3 wallet, anyone can manage individual options exposures. They can long or short options anytime before expiry. Unlike standard options, digital options have limited risk. Protocol participants can decide their maximum gain or loss before a trade.
The protocol's interface is one of the ways one can interact with the protocol. Before using the interface, please confirm the acceptance of the Terms of Service and Risk Disclosure.