Derivative protocols in DeFi

This post is a summary of all the options products available in the DeFi space. I embarked on doing a bit of research after I wanted to hedge my LP positions given the current volatile market and the impending merge.

Before going ahead, it helps the reader to have a basic understanding of what options/futures are. You can read a basic primer here from Zerodha which elaborates on the fundamentals of an options contract in TradFi.

One of the main differences between TradFi options and DeFi options is the additional component of a liquidity pool. Since we can’t have order books (due to limited TPS, available block space etc) in DeFi, liquidity providers come together to provide liquidity to the pool in return for earning some yield. You can think of these LP’s as the equivalent of market makers(banks/hedge funds/prop trading shops) in TradFi.

Most of these product are inspired from the equivalent TradFi products and follow along closely in terms of their equivalent implementation.

In TradFi, the price of the futures contract is usually different from the underlying’s prices and converges to the value of the underlying on the expiry date. The deviation is caused by the risk free interest rate and/or any dividend given out by the underlying before the expiry period. Since we don’t have expiry dates here, we need a mechanism to price these contracts. Enter funding rates which the longs pay the shorts to help keep the futures price close to it underlying.


Basically funding rates will always tend towards zero as other market participants (traders/arbitrageurs/etc) will take advantage of the rate by going long when its negative or going short when its positive, thereby aligning the price of the of the perp with the underlying. If the funding rate is positive, you can short perps and buy ETH on the spot market for a delta neutral strategy. A bunch of start-ups have automated this trade:




While the above platforms mostly work on fundamental primitives, there are also a lot of companies providing pre-made option strategies for retail participants to invest in. These are particularly attractive to the less-complicated user who wants a quicker investing/gambling experience.

Distributed Option Vaults (DOVs)

Let’s look at how these products are structured in the DeFi space:

Ribbon Finance



There are a lot more derivate platforms which further build on top of yield aggregators, DOVs etc. We shall have a look at them in the next post.

Disclosere: I use the above platforms and don’t endorse any of them.

If you like it, check out my other posts too:

· defi, derivatives, protocols, web3