Pantera Capital Partner: A Detailed Explanation of the Solana DeFi Options Protocol PsyOptions

Author: Paul Veradittakit, Partner at Pantera Capital

Original Title: 《Options on Solana》

Compiled by: Linqi, Chain Catcher

What is PsyOptions?

PsyOptions aims to be an on-chain financial services platform for decentralized finance. The core team contributes to blockchain-based software through the Psy Finance DAO, collaborating with individuals and entities distributed globally. The team has established a range of products, such as option vault yields and collateralized cash-settled European options, all built on open-source software. The project won first place at the Solana x Serum DeFi hackathon as a mechanism for automatically generating yield and options trading strategies, enhancing the functionality of TradFi financial products through the openness and trustlessness of DeFi.

What can PsyOptions offer users?

PsyOptions' flagship product is its American options protocol. Users can create new options markets by specifying the expiration date, the underlying asset they hold and its quantity, the quote asset (the nominal value for option pricing), and the strike price. PsyOptions does not impose restrictions on the underlying asset, meaning that options markets can be created for any asset that can represent an SPL token. This includes NFTs, tokenized property, tokenized stocks, and more.

Once the options market is initialized, users can mint options. All options in the protocol are fully collateralized, meaning that to mint an option, users must provide 100% of the underlying amount for that option. In financial terms, fully collateralized options are referred to as secured call options (call options) or secured put options (put options). The collateralized assets are stored in the Underlying Access Pool of the options market. Once users provide the collateral required to mint options, they receive two tokens from the protocol: an OptionToken, which represents the actual option contract, and a WriterToken, which grants its holder the right to claim the quote amount upon exercising the option (the amount paid by the option exerciser).

To exercise the option, the holder of the OptionToken can pay the quote amount (the strike price multiplied by the quantity of the underlying asset they purchased) to the protocol and then deposit it into the Quote Asset Pool. The holder of the WriterToken (usually the user who created the option) can then claim the quote amount from the Quote Asset Pool.

If the option expires before exercising, the holder of the WriterToken can burn that token to reclaim the underlying amount from the Underlying Asset Pool. Alternatively, if users wish to close their position before the option expires, they must hold and burn both the WriterToken and the OptionToken to reclaim the underlying amount from the Underlying Asset Pool.

PsyOptions also offers a European options protocol and is developing a collateral-deficient options protocol. Based on this framework, options can be automatically exercised upon expiration, and users do not need to provide full collateral when minting options, ensuring higher capital efficiency. The team is also building a new protocol called PsyMarkets, which will provide European options to end users; users will be able to purchase butterfly options, iron condor options, and more options trading strategies.

What can PsyOptions bring to DeFi protocols?

PsyOptions enables DeFi protocols to redefine their governance tokens, liquidity mining, and community-building methods. The practice of DeFi protocols conducting "airdrops" to incentivize early user adoption has become increasingly common. However, these airdrop recipients often sell the tokens immediately after receiving them to realize quick profits. This poses a challenge for protocols conducting airdrops, as users selling tokens essentially transfer valuable governance tokens to individuals with misaligned interests, which can negatively impact the token's price and affect the protocol's capital resources.

For PsyOptions, DeFi protocols can now airdrop call options on these tokens to early users instead of airdropping governance tokens. Then, if airdrop recipients wish to sell governance tokens, they must first exercise the options by paying the quote amount to the protocol before they can sell the actual tokens. In a sense, this hedges the risk of airdrops because even if users sell their tokens, the protocol can still realize some profit. Jungle DeFi recently conducted an airdrop using options on the JFI governance token; 102,000 of these call options were exercised, pushing the token price above $2 and netting the Jungle Foundation over $200,000.

What is PsyFinance?

PsyOptions recently acquired Tap Finance, a decentralized options vault (DOV) protocol on Solana, and rebranded it as PsyFinance. Notably, this is the first acquisition within the Solana ecosystem. PsyFinance supports the automated execution of various options strategies on PsyOptions to generate sustainable yields on a single token asset. This eliminates multiple complexities involved in profitable options trading, allowing users to achieve high returns on options strategies without needing to be options experts.

PsyFinance offers options vaults for various assets, including USDC, SOL, ETH, BTC, and more. Each vault executes specific trading strategies on its assets, such as selling or writing covered call options, and automatically compounds its earnings for maximized returns. Users simply need to deposit their assets into a vault they consider high-quality to earn stable, non-inflationary APY of up to 30% on Solana. Additionally, since PsyOptions supports European options, the capital efficiency of PsyFinance's options trading strategies results in higher yields. The European vaults also run on Serum, allowing any user in the Solana ecosystem to purchase options flow from their vaults. PsyFinance will soon add features related to options liquidity mining, enabling users to further maximize their returns from automated strategies.

Governance of the Protocol

Both PsyOptions and PsyFinance are governed by the Psy DAO, with membership determined by the PSY governance token. Psy DAO generally follows the COMP governance model to regulate how PSY holders propose and vote on protocol changes. DAO members holding at least 0.1% of PSY can propose governance actions, such as increasing support for new assets or changing the interest rate model for specific options markets. These proposals must be executable code. Once a governance action is proposed, DAO members have 3 days to review and vote on the proposal. If the majority of voting users and at least 2% of the total PSY token supply support the proposal, it will be implemented.

The maximum supply of PSY is 1 billion, with a current circulating supply of 62 million. In January of this year, the PSY IEO conducted by PsyOptions on FTX and Gate was oversubscribed by more than 20 times.

Final Thoughts

In summary, PsyOptions significantly expands the realm of financial derivatives on Solana through its high-quality options protocol. With PsyOptions, DeFi protocols can create American or European options markets for their governance tokens, fundamentally changing how they handle token airdrops, capital management, and more.

End users can passively earn over 20% in sustainable high yields by depositing assets into PsyFinance's decentralized options vault and profiting from automated trading strategies. Furthermore, with PsyOptions' emerging products around European options and options liquidity mining, PsyFinance users can achieve higher returns with less upfront capital investment.

PsyOptions and PsyFinance bring the diversity of TradFi financial products into the trustless and composable nature of DeFi. This is the first step in making the "Psy" protocol one of the most powerful and feature-rich financial services platforms for DeFi projects and end users.