A Comprehensive Understanding of the Operating Mechanisms and Characteristics of Five Major Decentralized Options Products: Opyn, Hegic, FinNexus, and Others

This article is from CoinGecko, authored by Khor Win Win, and compiled by Gong Quanyu and Echo.
For a long time, options have been an important part of the traditional financial system, providing buyers with the opportunity to bet on price movements or to amplify returns with minimal capital. As decentralized finance (DeFi) continues to make waves throughout the crypto industry, options protocols have naturally become the latest addition.
In short, options allow users the right to buy or sell the underlying asset at a specific price before the expiration date. Call options are buy options, while put options are sell options. Options refer to the right to buy or sell the underlying asset before the expiration date, and the option buyer only enjoys the right without bearing the corresponding obligation.
We will carefully examine some of these decentralized options protocols and compare how they make these powerful financial tools more accessible to the public.
1. Opyn
The first decentralized options platform to launch was Opyn. The first version of the protocol provides users with the ability to buy and sell American options, which can be exercised at any time before the expiration date. Users sell options by locking the underlying asset as collateral and creating tokenized options in the form of oTokens.
By locking collateral in Opyn's smart contracts, option holders can exercise their options at any time without worrying about counterparty risk. As long as there are enough liquidity providers willing to lock their collateral, Opyn can offer options on assets other than ETH, such as UNI and SNX, although the range of strike prices and expiration dates is limited.
For call options, they can be exercised by sending the correct amount of the underlying asset and destroying the oToken. On the other hand, it can also be resold to others via Uniswap. By purchasing oTokens, users can hedge against any significant price fluctuations.
Interestingly, Opyn does not charge any fees. Although they hope to implement fees in the future, their current focus remains on creating the best options experience for the community. However, due to supply shortages and Uniswap acting as the market maker for Opyn options, the pricing of oTokens often experiences errors. Therefore, Opyn heavily relies on speculators to ensure that premiums reflect the price of the underlying asset.

On December 29, 2020, Opyn launched version 2, which introduced features such as automatic execution and fast minting, innovating on the concept of flash loans promoted by lending platform Aave. This version offers European options through an order system and provides users with a decentralized alternative to Deribit (currently the most popular centralized options platform). Limit orders are another new feature in Opyn's second iteration, allowing users to execute trades at specific prices, and limit orders can be placed on the Opyn V2 platform for free, although the buyer of the order is obligated to pay the fee.
Currently, version 2 only offers WETH options, and the range of strike prices and expiration dates is limited. It remains to be seen whether users will widely adopt Opyn's latest products over centralized options products.

2. Hegic
After overcoming some early vulnerabilities, Hegic quickly rose to become one of the top options protocols, with a total value locked exceeding $50 million by mid-January 2021. The platform offers a simplified and highly customizable user interface to select the execution price and expiration date of options, making it more appealing to newcomers compared to seasoned players.
Unlike order book-based approaches, Hegic is based on liquidity pools, similar to decentralized exchanges that use automated market makers. Hegic's liquidity pools serve as collateral for options, with each asset having a corresponding liquidity pool.

Currently, Hegic only offers American options for ETH and WBTC, with the ETH and WBTC pools providing collateral for both call and put options. Hegic uses unconventional methods rather than traditional options valuation models to calculate option premiums. The formulas for calculating premiums are as follows:
Put Option = (Time) * IV * Strike Price / Price
Call Option = (Time) * IV * Price / Strike Price
Additionally, a 1% settlement fee is charged based on the size of the option. For example, an option with a nominal amount of 10 ETH will require an additional payment of 0.1 ETH. Moreover, depending on the chosen strike price and expiration date, the fees may exceed the total premium paid, especially for low-premium options.
The 1% settlement fee has been controversial, as relatively small new users are unwilling to pay this amount, and experienced users will find cheaper alternatives.
However, data shows that since the release of the iterative version "Hegic v888," Hegic has accumulated over $100 million in revenue in less than ten weeks. Note that Hegic is currently running a liquidity mining program where users can earn rHEGIC tokens to purchase options or provide liquidity in the liquidity pools. The rHEGIC tokens are IOU tokens that can be converted to HEGIC tokens once Hegic reaches a certain trading volume or the expiration date arrives. For example, if the platform's cumulative trading volume exceeds $100 million or by November 11, 2021, the first phase of rHEGIC tokens will be available for conversion.

Options purchased on Hegic are initially non-transferable—they are bound to each account. This is different from other options platforms like Opyn, which allow users to sell or buy options through secondary markets. Recently, with the introduction of tokenization in Hegic, this situation has changed, enabling users to tokenize their Hegic options.
3. Auctus
Similar to Opyn, Auctus offers fully collateralized ERC-20 tokenized options. Auctus currently supports American options for ETH and WBTC, using an order book model similar to Opyn V2, but that is where the similarities end.

Auctus introduces the concept of fast trading, allowing users to exercise options without holding any stablecoins, and they can exercise options using only the option tokens, with users covering the difference between the current price of the underlying asset and the strike price, minus the fee paid to the option issuer. This is similar to cash settlement, thus providing users with greater flexibility in their options trading strategies.
However, this versatility comes at a cost. Auctus charges a 2.5% trading fee based on the premium paid and an additional 0.3% settlement fee on the underlying asset at the time of exercise. The range of strike prices and expiration dates is small, but even so, Auctus has extremely low liquidity due to the unavailability of certain types of options offered.

Compared to its peers, Auctus will struggle to gain a higher market share due to low liquidity, high fees, and a limited variety of products unless more innovative products are introduced. However, their latest products (such as Auctus Vault and OTC options) seem to be moving in the right direction.
The Auctus Vault combines yield farming with options to provide risk exposure to specific assets while protecting the principal. The yields from the vault are automatically used to purchase options for specific assets. It aims to allow users to earn not only through established strategies but also from price fluctuations of the underlying assets of the options. Before the deadline, users can deposit their USDC into the "3Pool-ETH Call" vault. Participating in the vault incurs a 10% performance fee and a 0.2% withdrawal fee.
On the other hand, OTC options allow anyone to create options for any ERC-20 token with a strike price and expiration date. The OTC trading interface guides users to lock assets as collateral to create a specific series of options. Users can then post contract links in the Auctus Discord channel to advertise these trades to counterparties. Trades are matched off-chain, but the contractual obligations remain on-chain, and the freedom for users to create any options product may generate some interest and trading volume for the platform.
4. FinNexus
Unlike the aforementioned projects, FinNexus offers options products for Ethereum and Wanchain users. The platform has gone through two iterations, currently terminating version 0.1. Version 1.0 introduced many changes and is now operational on the Ethereum mainnet in real-time.

Version 0.1 used a tokenized options model, allowing any individual option seller to issue European options as long as there is sufficient capital. Since options are issued individually, sellers must bear all profits and losses. Unlike most options protocols, users can use FNX (the platform token) to collateralize options, not just the underlying assets.
FinNexus v0.1 employs a dynamic margin model, where the published collateral should be sufficient to cover the potential profits of the option holders. Theoretically, as the price of the underlying asset moves further out of the money, the required margin will decrease, and users may choose more options.
In short, the options on FinNexus v0.1 function more like futures contracts with minimum margin requirements. Even if options have been exercised or expired, users may still face liquidation risks. When holders exercise their options, FinNexus charges a 0.3% trading fee and an additional 0.3% settlement fee upon liquidation.

In FinNexus version 1.0, as long as there is reliable price information, FinNexus allows users to create options for any asset, regardless of the blockchain. This means that any asset can potentially serve as the underlying collateral for options. Currently, FinNexus version 1.0 supports options on ETH, WBTC, and DeFi tokens such as Chainlink, Maker, and Synthetix.
Like Hegic, FinNexus version 1.0 also uses liquidity pools for users to buy and sell their non-tokenized American options. Their multi-asset single pool (MASP) system allows users to hold positions on different underlying assets while using only a single asset type as collateral.
To illustrate, there are currently two available liquidity pools on the Ethereum mainnet: the USDC pool and the FNX pool. To generate options, liquidity providers can provide USDC or FNX as collateral. Users can then purchase options on any of the five assets mentioned above and use either of the two assets to pay the appropriate option fees.
In short, the underlying assets constitute the basis for all transactions in that specific liquidity pool, including selling options back to the pool and exercising them. Since the initial launch, transaction fees have significantly increased, with trading fees surging to 5% of the total fees paid, and an additional 5% settlement fee charged upon exercise.
In face-to-face competition with Hegic, FinNexus may offer a wider variety of options, but more work is needed to bring the liquidity and user base required for sustainable growth.
As of February 2021, FinNexus's total locked value is approximately $10 million, far from Hegic's current standing.
5. Charm
Charm is a relatively novel decentralized options protocol that just launched its mainnet on January 18, 2021. As seen in previous options protocols, liquidity is crucial to ensure there are enough assets available to support the minting of options when exercising them.
Charm claims that it does not require option sellers, allowing them to offer an unlimited number of options for sale while requiring minimal guiding liquidity.

Charm aims to achieve this by using a prediction market automated market maker (AMM). In short, the protocol summarizes potential profits for the counterparties of the options, while the AMM creates liquidity for them.
Charm behaves more like a prediction market, where if any party holds options that enter in cash form, the profits will transfer from one counterparty to another. For example, if a specific option is an in-the-money option, the collateral locked by the option seller will be used to repay the option holder, and vice versa. Although the protocol is designed this way, users will still receive these options in the form of tokens that can be used on other platforms.
Charm's options are European and can be settled in cash at any time. They are fully priced based on user supply and demand, although a 1% fee is charged on the nominal size of the purchased options. Charm implements an AMM called liquidity-sensitive market scoring rule (LS-LMSR), which functions similarly to token joint curves, meaning that as investments purchase more options, subsequent purchases will require a higher premium.
Currently, Charm only supports ETH, and the range of expiration dates and strike prices is limited. Compared to competitors, Charm's existence is less dependent on liquidity. This allows Charm to focus on delivering more innovative products to attract a larger DeFi crowd.
6. Conclusion
With record trading volumes on the Deribit exchange in recent months, options are clearly poised to become increasingly popular within the larger crypto community. While centralized options exchanges like Deribit have garnered widespread attention among experienced traders, permissionless and anonymized options trading platforms have yet to make their mark in the DeFi space.
There is no doubt they will stay here and will certainly attract and engage more participants, but simplicity is key. For these platforms, making it cheaper and easier for users to buy and sell options will be greatly beneficial. Gathering the necessary liquidity and user base to match businesses like Aave or Uniswap has also proven to be a challenge. However, with the right incentives and designs (such as Hegic's reward mechanism or Charm's prediction market AMM), the demand for decentralized options is likely to grow in the near future.
The competition among many platforms that have already launched or are about to launch in decentralized options trading is far from over, with each platform having its advantages and disadvantages. Emerging platforms catering to more DeFi assets, such as Premia and Primitive, may provide some healthy competition for these existing protocols. Ultimately, users can choose which protocols to execute or not execute at all.
Here is a comparison of all the decentralized options platforms discussed.