On-chain Options Emerge as New Path Forward for Crypto Risk Management

Crypto investors have long been able to buy and sell assets outright or take directional bets with borrowed exposure through spot and perpetual futures. However, managing risk has always been a challenge. Now, on-chain options are emerging as a new path forward.

A study by OAK Research estimated that on-chain options trading accounts for roughly 0.2% of on-chain perpetual futures volume. This is despite the fact that Deribit, an exchange offering on-chain options, has $27.3 billion in open interest and registered $2.5 billion in options volume over the past 24 hours.

On-chain options allow investors to pay a fixed premium, keep their assets, and transfer downside risk to someone else. This can be especially beneficial for long-term holders who want protection against crashes without having to sell their assets. Market makers can also use on-chain options to manage their directional exposure by trading the underlying asset or its futures as prices move.

A deeper options market can pull in new capital and provide a more efficient way of managing risk. However, it requires a solid infrastructure that includes high-frequency price oracles, dependable liquidation engines, and reliable hedging mechanisms. The sector has yet to see the emergence of an equivalent standard for on-chain options as seen with automated market makers in decentralized spot trading.

The growth of on-chain options is still in its early stages, but it holds significant promise for deeper liquidity and more efficient risk management in the crypto space.