Protocol Overview
Aori is a decentralized, member-owned, fully collateralized order book-based options trading protocol.
In contrast to AMM-based protocols, which struggle to accurately price options and experience impermanent loss, Aori operates as a central limit order book (CLOB) based protocol. The protocol maintains strategic partnerships with numerous market makers to ensure ample liquidity for users, while providing accurate pricing without impermanent loss.
Aori provides on-chain trustless settlement, eliminating counterparty risk by requiring full transaction collateralization, ensuring the maximum potential loss or gain of each option is covered. The capital efficiency of this model is maintained through a permissionless margin lending offering. Furthermore, there are no intermediary clearing addresses in Aori - when orders are matched, users settle the trade.
Initially, Aori will only offer wBTC and ETH markets; however, their use of OpenSea’s Seaport contract allows trading of various token standards such as ERC20 assets, ERC721 (NFT standard), and ERC1155 (multi-token standard), which gives Aori the ability to launch new markets for many different types of assets with ease. Aori’s unique use of Seaport also enables gasless order placement and cancellation.
The protocol’s off-chain infrastructure enhances scalability, matching the speed of centralized exchanges for makers and takers.
Aori is partially governed by a group of NFT “seat” holders, who not only participate in select governance voting, but also benefit from reduced fees and revenue share.
Protocol Mechanics
Overview
Aori options operate as ERC20 token contracts, embedding the functionality necessary for both securing collateralized assets and managing the settlement process typical of a conventional European option.
Order Book
Aori uses an off-chain order book for order matching, which can be accessed via the Aori frontend or via the inbuilt rest API. This order book is built on top of Opensea’s Seaport smart contract suite, which enables Aori to have a CEX-like user experience by allowing for gasless transactions via off-chain signatures. When makers submit orders via off-chain signatures, these orders enter a database which is shown to takers for on-chain fulfillment and execution. Upon fulfilling the order, the taker will pay a gas fee.
If options expire in-the-money:
Puts
● AoriPut option holder receives the underlying profit per option (strike - settlement price).
● The AoriPut option seller receives premium + reclaims the remaining USDC collateral.
Calls
● The AoriCall option holder receives the underlying profit per option (settlement price - strike price).
● The AoriCall option seller receives premium + reclaims the remaining USDC collateral.
If options expire out-of-the-money:
Puts
● The AoriPut option holder receives nothing.
● The AoriPut option seller receives premium + reclaims the full amount of USDC collateral.
Calls
● The AoriCall option holder receives nothing.
● The AoriCall option seller receives premium + reclaims the full amount of USDC collateral.
Aori uses the Seaport contract to enable trading of their ERC20 options tokens; however, upon completion of their options markets, Aori will expand their trading services to encompass spot markets and possibly futures markets as well. The Seaport contract enables trading of multiple token standards: ERC20 assets, ERC721 (NFT standard) and ERC1155 (multi-token standard) meaning Aori has flexibility in designing new markets built upon this fundamental order book smart contract.
Fees
Aori has zero fees for makers, and 3-5 bps for takers. There’s also a minting fee of 10-15 bps when minting options. These fees only apply to non-seat holders. Seat holders collect 40-60% of the fees charged to non-seat holders who use the platform. See below “Governance and Aori Seats” for additional details.
Aori Prime (Margin Pools)
Aori options are always fully collateralized, which is ideal from a counterparty risk mitigation point of view. Unfortunately, without a built-in credit mechanism, this model is not very capital efficient. Aori Prime offers option sellers the ability to use margin to fully collateralize and mint their ERC20 option tokens to combat this issue of capital inefficiency.
Aori Margin Pools are variable rate pools. The rates charged for borrowing are determined by utilization (i.e., percentage of pool utilized / borrowed) and are paid to liquidity providers (LPs). Base rate for borrowing is 5%, which increases to 18-20% at a 50% utilization rate. At 80% utilization rate, the APR is approximately 25%. Past 80% utilization, the borrowing rate increases at an increased rate.
This margin is extended to sellers via a permissionless liquidity pool model, with the LPs being both retail participants and institutions from both traditional finance and crypto. Since users post substantially more collateral compared to the fair value of the option, it is not undercollateralized.
For retail traders, margin is based on size, and will depend on the specific option and margin desired. For naked options, retail traders are required to post 20% of the underlying assets value and the entire fair value of the option as collateral. This collateral is stored in the margin vaults.
For institutional traders, a SPAN-based margining system is used, where the trader’s portfolio is monitored versus their collateral, and liquidated if needed. SPAN margin is a calculation methodology that assesses the risk of a portfolio by considering potential changes in the prices and volatility of underlying assets. It considers both futures and options positions, which can potentially lead to lower margin requirements for the portfolio. The margin is determined by calculating the maximum potential loss based on various parameters such as price range, volatility range, futures contingency, options sum contingency, and ATM (at-the-money) range, among other things. This approach allows for a more comprehensive and accurate assessment of the margin needed to cover potential losses in a portfolio.
At a later stage, Aori will be rolling out SPAN-based margin for retail traders, where spot and options holdings will also be taken into account.
Liquidations
Liquidations are handled through an aggregated option pricing network, which calculates the option price by comparing the value of the option across liquid markets. Since Chainlink does not have an oracle for options pricing or implied volatility, Aori aggregates data from Deribit, Bybit, and Paradigm. This will ensure liquidations are fair and accurate, even when the market is volatile. For alt-coins, this aggregated option pricing network is not required, since Aori won’t be offering leverage on alt-coins, therefore liquidations won’t be necessary.
75% of liquidation profits is given to LPs of the margin pool. The remaining 25% is given to the liquidator, which will not include the fair value of the portfolio. This fair value of the portfolio is returned to the margin pool when the position is closed. The liquidation profit is calculated using Aori’s options oracle to fetch the fair values of options, and liquidating options above that value.
The liquidation process is used to hedge the vault (where users mint and settle options into). If a position begins to move in the money and a user’s collateral dips below 115% of the fair value of the option, the liquidator must purchase or mint an option, sell it to the vault, and then collect the user’s collateral. This way, unless a liquidation is completely missed, the vault never takes directional exposure outside of simply holding tokens.
Initially, revenue from seat auctions will be deposited into the Aori Ethereum Margin Pool to bootstrap liquidity for margin provision on the Aori Protocol.
Governance and Aori Seats
Aori is a member-owned protocol where participants gain governance rights through a “seat.” This concept is inspired by the Chicago Mercantile Exchange’s (CME), where seat ownership grants certain rights and privileges to the holder. Historically, owning a seat on the CME allowed individuals or firms to become members of the exchange and engage in trading activities. These seats were limited in number, creating a form of exclusivity and establishing a value for ownership.
Aori is similar in that each user of the platform must trade through a seat, whether it is their own or someone else's. If a user does not specify a seat, they will default to the “Zero Seat”, which simply deposits the referral fees to the SeatsDAO treasury. To select a seat, users can use a referral link from a seat holder or simply enter the seat number into a drop down in Aori’s user interface.
Aori uses combinable ERC721 NFTs to identify the owner and offer them full access to the protocol with numerous benefits:
1. Seat holders control governance (SeatsDAO).
2. Seat holders do not pay option minting fees or trading fees on the protocol.
3. Seat holders collect 40-60% of the fees charged to non-seat holders who use the platform.
4. Seat holders set the option minting fees that non-seat holders are charged.
These seats were auctioned off over 105 days, therefore enabling anyone to purchase membership in the protocol. There will be an additional 15 seats for the team, investors and honoraries. All revenues from seat auctions and royalties from secondary sales go to the SeatsDAO, to be managed by seat holders. We can see the history of seat sales since the auction started, as well as the cumulative ETH earned from these sales below. Initially these earnings will be deposited into Aori Prime to bootstrap liquidity for margin provision.
Each seat is not made equal however; there are five tiers of seats available. The tier of a seat determines the number of governance votes that the seat holder can cast, as well as the take-rate of the fees earned from non-seat members trading through their seat.
Aori Order
Aori will also be launching their own OTC service, known as Aori Order. Aori Order will enable trustless on-chain trading for simple swaps or block trades, at the speed of centralized exchanges, without exchange risk.
Aori Order will use the Seaport contracts to handle order placement and execution, using an off-chain database to log and store Seaport signatures and order information. The use of Seaport contracts allows gasless and feeless placement and cancellation of orders for makers. Furthermore, only guaranteed swaps are executed (i.e., where both parties transfer assets in the same block), otherwise the transaction fails.
Order will launch on Ethereum Mainnet, Arbitrum, Avalanche, Polygon, BSC and Optimism.
AORI Token
Token Overview
AORI is Aori’s utility and governance token. While the Aori Seats will be used as a governance tool for setting fees for trading and clearing, the token will have full governance power over upgrading the protocol, margin rules, listing new markets and more.
AORI token holders will also retain fees that are not paid to seat-holders, and 25% of the interest paid from margin lending. These fees can be captured by users staking AORI for esAORI.
Distribution
The maximum supply of AORI is 100,000,000. There will be liquidity mining rewards for staking to the margin pools, allocating 30% of total supply over two years.
There will be a 1:1 swap of DAMM tokens over to AORI, pro-rata to supply. Holders of bdAMM will receive a bonus. (see below “Team Background” section for additional information on DAMM).
Investors
Aori raised $2 million in their seed round (as dAMM Finance), receiving investment from crypto-native protocols and funds. The round saw participation from 7 firms: Prismatic Capital, System 9, WOO Network, LedgerPrime, Fisher8, Concave and Berachain.
Team
Background
The Aori team initially built dAMM Finance, an undercollateralized lending and borrowing protocol. The platform provided lending to whitelisted market makers and institutional borrowers, utilizing algorithmically determined interest rates, and liquidity pools with non-stable crypto assets.
The dAMM Finance platform was launched just several weeks before the FTX blowup, which severely impacted the institutional lending market. As a result, the dAMM team decided to sunset the lending platform and refocus on building a decentralized options protocol. They rebranded to Aori to reflect this new direction.
Team Overview
The team consists primarily of former employees of System 9, a leading crypto market-making firm. Their quant background, software development experience, and close ties to System 9 positions the team to create new protocols and solutions for institutional players.
The core team currently consists of:
Joshua Baker
Chief Executive Officer
- Previously COO of System 9
- Self-taught software developer, built dAMM Finance
Adam Macomb
Chief Operating Officer
- Previously managed over 80 client accounts for System 9 and implemented full-scale management systems
- Has a decade’s worth of experience handling logistics and international sales management from his time at Global Contacts Inc.
Marc Orenstein
Chief Financial Officer
- Began at Bear Stearns and JPMorgan in convertible bonds and as a block equities execution trader
- 2 decades of experience in the hedge fund world, across Davis Capital and his own systematic long/short equity fund, Observa Capital
- Entered crypto as CIO of Blockweather Holdings, a crypto fund utilizing a long/short and derivatives approach to portfolio management
Wyatt Cravatas
Chief Technical Officer
- Previously developed market making software at System 9
- Led app development and product/brand work on dAMM
Gerald Gaffney
Chief Compliance Officer
- Decades of experience in trading, coding, risk management, and portfolio management from his time at Bear Stearns, ING, the Royal Bank of Canada, and Avatar Securities
- Experienced in managing development control systems, as well as execution and trading systems
Partnerships
Aori is working closely with Fuel Network and WOO Network, as well as market makers Kronos Research, System 9, LedgerPrime and GSR. These partnerships with prominent market makers enables Aori to bootstrap supply side liquidity and increase pricing accuracy.
Fuel Network
Fuel Network is a modular execution layer, with parallel transaction execution, top Virtual Machine (FuelVM) and developer tooling with Sway Language and Forc. Fuel Network recently released their Beta 3 testnet, quickly reaching over 900k+ transactions in just over 2 months. Aori will be launching on Fuel upon their Mainnet launch later this year. Additionally, Aori is a close partner for that launch and will be a featured app on their protocol.
Kronos Research/WOO Network
Kronos Research is a quantitative research and crypto trading firm. Kronos trades on average more than $5 billion / day, in crypto volume alone. Kronos Ventures, Kronos’ venture capital arm, incubated WOO Network. WOO Network is a system of centralized and decentralized exchange platforms, including: WOO X, WOOFi and WOOFi DEX.
System 9
System 9 is a global market maker and software firm for the crypto alt-coin market.
Ledger Prime
LedgerPrime is a quantitative and systematic digital asset investment firm. LedgerPrime is a leading derivatives market-maker, and also participates in early stage VC investments.
GSR
GSR is a crypto trading and market-making firm, which specializes in providing liquidity, trading and risk management solutions.
Chain
Aori options will initially be launching on Ethereum Mainnet, with Arbitrum and Optimism following shortly thereafter.
Ethereum Mainnet is the most dominant chain, and currently has the highest total value locked (TVL) and decentralized exchange (DEX) volume amongst all chains, with TVL of $21.9 billion and DEX volume of $1.5B daily. As of month-end July 2023, Ethereum processes approximately 31.5 million monthly transactions, with 11.8 million monthly active addresses.
Arbitrum was launched in May 2021 and has become Ethereum’s leading layer 2 (L2) network, holding about $1.74 billion in total value locked as of August 2023. It publicly launched its token ARB in March 2023, and has continued to increase TVL and activity since then. As of August 2023, Arbitrum had 2.7 million active monthly addresses, and processed over 600,000 transactions daily.
Optimism was first introduced in June 2019, and its mainnet launched in December 2021. Since then, the L2 has garnered over $727.6 million in TVL, making it the second largest L2 solution. Over the past few months it’s seen steady growth in both users and monthly transactions, despite the general downtrend in DeFi. As of August 2023, Optimism had 1.4 million active monthly addresses, and processed over 400,000 transactions daily.
Optimism and Arbitrum together hold the majority of share of TVL across Layer 2’s, Arbitrum having majority with 66.5% and Optimism with 25.9%. For comparison, zkSync, the third highest, holds 5.27%.
Source: DefiLlama
As of August 2023, Arbitrum and Optimism had combined daily transactions of 1 million, and average daily users of 239,000.
Source: Dune
Source: Dune
The widespread adoption of both Ethereum and Arbitrum provides Aori with a significant advantage in terms of visibility and popularity. Both Ethereum and Arbitrum chains boast high activity and experience substantial transaction volumes compared to alternatives. Additionally, although Optimism does not have as high transaction volumes and activity comparatively, activity on Optimism has been increasing steadily, after the success of Optimism’s Bedrock Upgrade and OP Stack. It is likely that with the EIP-4844 upgrade, where Ethereum Layer 2 transaction costs are decreased, Optimism and Arbitrum transactions, daily active addresses and activity will further increase.
Aori also has future plans to launch on Fuel Network, an execution layer with modular architecture and parallel transaction execution which recently unveiled its Beta 3 testnet. Fuel Network would allow Aori to move the order book signatures entirely on-chain, through Fuel’s predicate system, and remove all off-chain aspects outside of settlement prices.
Roadmap
Aori expects to release their beta product on Ethereum in August 2023. Shortly after launching on Ethereum, Aori plans to launch on Arbitrum and Optimism.
Eventually, Aori will also launch on Fuel Network, hopefully by late 2023. The launch on Fuel Network will represent a compelling improvement, since it will involve moving order book signatures entirely on-chain through Fuel’s predicate system, therefore removing all off-chain aspects outside of settlement prices.
Additionally, Aori will be releasing combinations strategies, so that users do not have to structure them themselves. Combinations are options trades that are made of more than one type of option, strike price or expiration date on the same underlying asset. An example would be vertical spreads, where users simultaneously buy and sell options of the same type and expiry, but with different strike prices.
Throughout the rest of 2023, Aori’s main goal will be to optimize their order books further and build liquidity.
Competitor Analysis
Crypto Options
As the cryptocurrency market has regained life in 2023, so has the centralized cryptocurrency options space. Volume and open interest (OI) for centralized crypto options exchanges have already crept up to levels that had been seen in the November 2021 froth. Centralized crypto options exchanges processed BTC options volume above $163.1B and ETH options volume above $62.3B since the start of 2023.
Unfortunately, it’s a different story for decentralized crypto options protocols. Popular options protocols and options vaults have had static TVLs since the start of 2023, even with major upgrades to top protocols. The unfortunate reality of decentralized crypto options is that growth of the sector has been slow, and existing protocols have failed to attract volume, value, or interest due to a variety of reasons, such as low liquidity, inferior pricing or inability to scale. One of the major drivers of these issues is that most options protocols on EVM chains tend to be AMM-based protocols.
AMMs vs CLOBs
Option automated market makers (AMMs) operate differently compared to order book systems as they enable traders to both buy and sell options directly from the AMM, with liquidity provided by liquidity providers (LPs). While options AMMs may be considered a necessary evil to enhance liquidity where there is a lack of market makers, they come with several drawbacks when compared to order book based systems.
One of the key issues with option AMMs is the potential for options mispricing. Pricing options accurately is a complex task that requires a lot of inputs aside from the standard AMM calculation xy=k. Moreover, AMMs lack market makers who can update implied volatility (IV) and model pricing, forcing them to rely on alternative methods to derive IV, which can lead to pricing inaccuracies.
Options AMMs rely on liquidity providers to underwrite options, and therefore struggle to scale effectively. They are prone to experiencing high levels of impermanent loss, wherein LPs bear additional losses during periods of increased market volatility. Slippage can be significant if liquidity is not deep enough.
Furthermore, AMMs carry price risk as they collateralize options with the underlying assets. This exposes them to potential fluctuations in the asset's price.
AMMs often suffer from non-competitive pricing due to their inferior pricing capabilities and the need to protect their liquidity providers. Additionally, AMMs may also have an imbalanced utilization ratio (i.e., one that is too high or too low), which could lead to underpriced or overpriced options if only a portion of the pool is used to generate premiums. In contrast, order book systems allow market makers to adjust prices dynamically, unrestricted by fixed pricing functions.
Overall, while option AMMs serve a purpose in enhancing liquidity when market makers are lacking, they exhibit limitations such as mispricing, scalability issues, impermanent loss, price risk, and non-competitive pricing. Order book systems offer advantages through the involvement of market makers who can trade prices freely.
Deribit
Deribit is a centralized options exchange that launched in 2016. Deribit offers European-style options, as well as futures and spot trading.
Deribit is the most dominant crypto options exchange, both amongst centralized competitors, and against DeFi alternatives. The vast majority of crypto options volume and OI is from Deribit.
Deribit on average commands almost 75% of BTC and ETH options volume amongst centralized exchanges. The dominance is even more obvious when compared against decentralized options protocols. The most popular crypto options protocol, Lyra, has processed a total cumulative volume of $1.4B across all instruments. In comparison, Deribit processed $576.5M just on BTC options for the 30 days ending 8/23/23.
Source: coinglass
Premia
Premia Finance is an AMM based decentralized options protocol that launched in 2020. Premia allows users to trade American-style options on Arbitrum, Fantom, Optimism and Ethereum. In addition to trading options, Premia offers aggregated pool strategy vaults through their integration with Knox.
As of August 2023 Premia has a TVL of $5.5M, and has traded a cumulative volume of $197.7M over the past year. All-time high TVL of Premia was in January 2022, at $25.1M. PREMIA token is currently worth $0.43 and has an FDV of $42.7M. At its highest, in October 2021, PREMIA token was worth $5.79 and had an FDV of $579M.
Premia offers users a lot of flexibility: users can sell their options back to the pool, they can purchase options with different assets, and they can exercise options at any time before or after the options expiration, without penalty (i.e., “American” options). This degree of flexibility is unique among competitors.
There are two pools for each asset pair on Premia, a call pool and a put pool. If a user wants to purchase an option, they can specify the size, strike price and maturity date of the option that they'd like to purchase to the pool. The pool will give a quoted price in return.
Premia uses an augmented Black-Scholes based pricing implementation, which incorporates on-chain implied volatility using supply and demand utilization modifiers.
One of the main limitations of Premia is the lack of capital efficiency due to the existence of two pools per asset, which leads to fragmented liquidity. Compared to other AMM-based protocols like Lyra, Premia has twice as many vaults. Additionally, Premia does not allow underwriting options. Liquidity providers automatically underwrite options purchased by users of the Premia pools. Although this system has certain benefits, it also leads to LPs suffering from impermanent loss.
Premia v3 (also known as Premia Blue) has recently been announced, which will bring a full revamp of the v2 system. As opposed to just having two pools per asset, users can initialize their own pools to provide concentrated liquidity via range orders. In addition, they’ll also provide vaults with smart liquidity management and an order book on Arbitrum Nova for market makers - with all the liquidity from these sources aggregating to the same interface for traders. Lastly, v3 comes with a redesign to their token model - most notably with a shift from regular liquidity mining to options liquidity mining.
Aevo
Launched in April 2023, Aevo is an order book based decentralized options protocol built by the Ribbon team. The protocol runs on a custom EVM rollup, which rolls up to Ethereum.
Aevo operates with an off-chain matching engine and order book for trade matching, while settlement occurs on-chain. Before executing orders, an off-chain risk engine verifies margin requirements. Users can deposit collateral and check order books and margin availability before buying. Market buys instantly match with sellers. Trades are posted on the rollup, where option contracts reside. A chunk of all data is sent to the mainnet for processing.
Aevo has recently expanded its offering to include perpetual futures trading. Eventually, Aevo will be integrated with Ribbon as the venue where Ribbon’s options contracts settle. Ribbon offers structured products often consisting of selling options (currently done using Opyn’s infrastructure). This would bring somewhere around $20M in weekly volume to Aevo, whose 24h volume ranges in the low millions generally.
Previously, Aevo had no token, and the only associated token was Ribbon Finance’s RBN. However, recently, Ribbon launched a proposal to wind down RBN and launch a new token AEVO. AEVO will have the same total supply as RBN (1,000,000,000) and will initially only grant governance rights.
As of August 2023, Aevo had a TVL of $6.1M with $4.3M in cumulative inflows, and 1,505 users. Since launch, Aevo has seen increased traction, achieving their highest USD inflows of $290K and daily active users of 72 on June 22, 2023.
Lyra
Lyra Protocol is an AMM-based decentralized options protocol which launched in 2021. It allows users to buy and sell European options against a liquidity pool, on Arbitrum and Optimism.
Lyra can also be accessed through other front-ends, such as Kwenta. Additionally, Lyra has integrated with GMX, Synthetix, Brahma and others to offer collateralization or delta hedging for vaults.
Within Lyra, LPs participate by depositing sUSD or USDC into specific Lyra Market Maker Vaults (MMVs) dedicated to a particular asset. This deposited liquidity is utilized to establish two-sided option markets, allowing LPs to quote options on the specified asset (e.g., ETH Market Maker Vault LPs provide options on ETH). By depositing liquidity into the vault, LPs earn fees generated from options trades.
Synthetix v3 recently just launched on mainnet as well. While the capabilities are still limited, greater functionality being rolled out would at the very least improve Lyra vault hedging and sUSD liquidity. Greater integration with Synthetix v3 could also mean cross chain functionality, better liquidity, and additional collateral options.
As of August 2023, Lyra had a TVL of $18.7M, with cumulative volume of $1.4B, and 5,208 total active unique users. All time high TVL was $125.5M in December of 2021. LYRA token is currently worth $0.065 and has an FDV of $64.2M. At its peak in December 2021, LYRA token was worth $0.677 and had an FDV of $677.0M.
Pricing on Lyra is quite good relative to other AMM-based options protocols, but they still suffer from mispricing with larger trades and a lack of diverse strikes/expiries. Reliance on sUSD on Optimism also lends itself to capital inefficiency problems, though some of this could be remedied with Synthetix v3.
Lyra will be moving to an order book style options exchange with the launch of Lyra v2. Lyra v2 will be a decentralized settlement protocol, offering central limit order book trading for spot, perpetuals and options built on top of Lyra Chain, an L2 built on the Optimism Stack. With v2, Lyra will have improved options pricing accuracy, as they shift to a traditional Black-Scholes model, and abandon deriving IV through alternative methods.
Lyra v2 is structured around two foundational units: subaccounts and managers. Subaccounts serve as the containers for users' supported assets and are governed by managers. They are ERC-721 compliant NFTs that store details of assets, unique labels, and balances. Assets can include various financial instruments like options and futures, and they can be programmed for different purposes. The subaccounts contract has two main functions: ensuring that only authorized parties can change the subaccount's balance, and informing all relevant parties about trades involving the subaccount.
Managers are smart contracts which are responsible for setting margin rules (margin requirements for users), liquidations (both outlining and enforcing liquidations) and settlement of trades. Managers can alter a subaccount’s balances since they are responsible for both trade settlement and liquidations.
Dopex
Dopex is a decentralized options exchange protocol that launched in 2021. Dopex offers its users five different products: SSOV, Atlantic Options, Options Scalps, Zero Day to Expiry Options and Option Liquidity Pools. SSOV (Single Staking Options Vaults) are Dopex’s flagship product, which allows users to buy or write options. It’s important to note that an overwhelming majority of Dopex’s liquidity and demand resides within the SSOVs - the other four products regularly have days with zero volume.
Options can be bought from a SSOV by paying a premium to liquidity providers. Liquidity providers can sell options (covered calls or cash-settled puts) by depositing either the underlying asset (for calls) or stablecoins (for puts) and earn premiums and rewards.
Dopex uses a dual token structure. DPX is the protocol’s governance token. DPX can be locked in exchange for veDPX for governance power. rDPX is a rebate token that is used to compensate options writers (i.e. liquidity providers in SSOVs) with a portion of their losses.
Greater functionality is also planned for rDPX with v2 - plans currently include using it to mint synthetic assets (namely dpxETH). Day one priority will be to establish a strong peg and liquidity for the dpxETH:ETH pair using a peg stability module and governance power from treasury assets (veCRV and vlCVX). This is currently in auditing stages.
One notable aspect of Dopex is the ecosystem that it has. Dopex has integrated with some prominent Arbitrum ecosystem projects, such as GMX, Sushiswap, JonesDAO, PlutusDAO, Silo Finance and Vesta Finance.
As of August 2023, Dopex had a TVL of $37.1M. Dopex SSOV’s have traded cumulative volume of $262.6M, with total user count of 21.4K. At peak, Dopex had a TVL of $92.8M. The DPX token is currently worth $74.07 and has a FDV of $37.1M. At its all-time high, DPX was worth $4,215.41 and had a FDV of $2.1B.
Dopex v2 introduces a new LP system which uses CLAMM (Concentrated Liquidity AMMs) liquidity to provide underlying liquidity for options writing. LPs can deposit concentrated liquidity positions (e.g., Uniswap v3), to earn LP fees until a trader uses the liquidity provided. After the trader utilizes the liquidity provided, LPs earn the premium from the option that they have underwritten.
Dopex v2 aims to consolidate their liquidity, since v1 liquidity was fragmented with individual products (i.e. SSOV, straddles, scalps etc.) each having their own liquidity source. With Dopex v2, liquidity provided can be used for all Dopex option-based products.
A Simple Comparative Analysis: Purchasing At-The-Money Bitcoin Calls
When users attempt to purchase bitcoin (BTC) at-the-money (ATM) call options across different platforms, they encounter variations in the ease and feasibility of executing these trades. For example, let’s analyze this trade across varying premium size, such as $1k, $10k, and $100k:
On Deribit, the most popular platform with deepest liquidity, users can easily acquire BTC ATM call options with any of the mentioned premium amounts. The platform's strong liquidity and active trading environment facilitate smooth executions.
With Aevo, although purchasing options with $1k and $10k premiums is relatively straightforward, users face limitations with larger amounts like $100k. This is primarily due to bid sizes typically being in the range of 1.5 to 2.0 BTC, which makes it challenging to fill orders at significantly larger size.
Dopex, on the other hand, presents a different limitation as it lacks ETH or BTC call vaults altogether. While it may offer SSOVs (Structured Single Option Vaults) with little slippage, the absence of ETH or BTC call vaults restrict users from fully engaging in these specific contracts.
In contrast, Lyra and Premia users experience slippage at even $10k premium purchased. For example, on Lyra, a 30 day-to-expiration 4 BTC call with a $31k strike price at $1k of premium purchased comes out to $1,191 per contract, while at $10k premium purchased, the option price is $1,648. Additionally, due to limited liquidity there is no option available to purchase a $100k premium.
Similarly, on Premia, significant slippage also occurs with the option price at $1k of premium purchased being $1,142 and at $10k premium being $2,418. Again, there is no liquidity for options with a $100k premium.
Potential Catalysts & Narratives
Centralized Exchanges and Regulation
Major centralized crypto exchanges such as Deribit do not offer trading in countries such as the US and Canada, where many funds and institutions are located. Additionally, we have seen increased regulatory scrutiny by European and American regulatory agencies. These increasing headwinds for centralized exchanges can be a positive factor for decentralized options exchanges with low latency, high liquidity and a CEX-like trading experience, such as Aori, since they are decentralized.
Tokenomics
Aori has strong tokenomics. The AORI token accrues value by earning fees that are not paid to seat-holders, and 25% of the interest paid from margin lending. These fees are passed onto esAORI (escrowed AORI) holders. Moreover, the AORI token also has a relatively low circulating supply that is likely to be locked to a large extent, due to the benefits offered to esAORI holders.
Rest API
Aori's high-speed off-chain API allows for seamless integration with major options houses like Paradigm through their Rest API. Regardless of blocktimes or node latency, Aori's API empowers chains to process tens of thousands of orders per second, effectively eliminating chain latency as a limiting factor in trading performance.
Token Launch
Competitors such as Lyra, Dopex and Premia have already released tokens. In the digital asset space, retail participants are almost always more attracted to protocols with new tokens, especially if provided the opportunity to farm token incentives early in a protocol’s life.
New Chain Launches
Aori has announced that they will be launching on Arbitrum and Optimism shortly after their Ethereum launch. Additionally, they will be aiming to launch on Fuel Network in Q4 2023. These launches on lower latency, lower fee chains (especially post EIP-4844) are likely to increase Aori’s volumes, OI and fees earned. As previously mentioned, the Fuel Network launch would allow Aori to move its order book signatures entirely on-chain, through Fuel’s predicate system, and remove all off-chain aspects outside of settlement prices.
Team
The Aori team has proven to be nimble, quick to adapt to market conditions. They successfully pivoted away from their undercollateralized lending product, dAMM Finance, after recognizing the upcoming headwinds for the undercollateralized lending market post FTX collapse. The team has been highly active during the bear market, focused on building the entirely new Aori platform. Additionally, through their ties with System 9, the team has deep expertise in the derivatives and options space, which is essential to build a successful protocol.
Reflinks
Marketing and referral links can be an effective tool in bringing on traders and getting volume through a platform. Aori has announced that they will be implementing reflinks, through their Seats mechanism, which could lead to a growing community and therefore increased volume and trading on the platform.
Potential Risks
Low Usage
Decentralized options protocols have failed to produce meaningful volume and liquidity, as the sector has failed to find a successful product market fit. A major potential risk with Aori is that crypto options traders are uninterested in decentralized solutions, and would prefer to continue to use centralized protocols, despite their limitations.
Legal
Aori’s tokenomics are attractive since they are value accruing, however this is a double-edged sword. Protocols with value accruing tokens may be targeted by regulatory agencies. Since Aori team members are not anonymous, this could pose a legal threat.
Smart Contract Risks
Smart contracts are complex and carry risk, which may result in total loss of funds. This can be partially mitigated through audits.
Oracle Risk
If Chainlink oracles were dysfunctional, it could lead to bad pricing, missed liquidations and incorrect settlements, thus leading to losses for traders.
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This report is for illustrative purposes only. Portfolios managed by Prismatic Capital LLC may hold investments in the company described herein, and the reader should not assume any such investments were or will be profitable. Please review all disclaimers here.
