DeFi Options Protocols Suffered as Ether Fell to $2.1K

On-chain options offerings are unlikely to see future growth unless the crypto market turns bullish, one analyst said.

AccessTimeIconFeb 11, 2022 at 7:26 a.m. UTC
Updated May 11, 2023 at 5:28 p.m. UTC
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Options protocols built on Ethereum and other networks have seen falling volumes and users since the start of 2022, according to data analytics tool Glassnode. The trend follows a fall in the broader crypto market, analysts said.

An option is a contract that allows its holder the right, but not the obligation, to buy or sell an underlying asset at a specified price on or before a specified date.

While options are predominantly used by banks and investment firms in traditional finance, several options protocols have sprouted in the past two years as decentralized finance (DeFi) – or products that use smart contracts for financial services – gained steam in the broader crypto market.

Options usage, however, seems to be correlated to market movements. The total value locked (TVL) in options protocols has experienced an exodus of hundreds of millions of dollars since the start of 2022, according to research from Delphi Digital this week.

TVL on platforms like Hegic dropped to under $800 million from $1 billion at the start of January, while some like Opyn saw nominal drops followed by a recovery.

Analysts said the drop came as crypto sentiment fell. “The drop is likely attributable to falling asset prices. Lower asset prices result in poor performance for put-selling vaults and a 'flight to safety' amid the market volatility, causing investors to withdraw capital from risky option vaults,” Delphi Digital said in a note this week.

Ether prices fell to under $2,200 at the start of January, losing 37% since November’s all-time highs of over $4,800. Tokens of other layer 1, or base, blockchains fell similarly, with Solana’s SOL losing 59% and Polkadot’s DOT losing 63% since November highs, CoinGecko data shows.

Risky for some and profitable for others

Developers behind some crypto platforms said options for crypto – which are themselves a risky asset class – form one of the riskiest strategies in the market, one that sees an immediate exodus if conditions turn bearish.

“The digital currency ecosystem is generally known as a very risky terrain based on the volatility of inherent assets,” Dmitry Mishunin, founder of crypto audit company HashEx, told CoinDesk in a Telegram message. “Many pulled funds from perceived risky assets, and marketplaces of which DeFi options represents one.”

“If you agree to buy Ethereum when it goes -40% in a week and you are willing to sell Ethereum when it goes +40% in a week, you can use 'covered call' and 'writing put' vaults to generate an additional 40-50% yields on your holdings,” explained Andrey Belyakov, founder of derivatives platform Opium Protocol, in a Telegram message to CoinDesk.

Belyakov, however, cautions, “It is like a sharp knife, can be extremely helpful for cooking or one can lose a finger if he is not good with it.”

At the time of writing, the DeFi options market had a TVL of $761.1 million across a pool of 31 protocols. But some expect the TVL to return should market conditions improve.

“Confidence is expected to return to the ecosystem over the next few weeks, but all is dependent on how the broader digital currency ecosystem performs,” Mishunin said.


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Shaurya Malwa

Shaurya is the Deputy Managing Editor for the Data & Tokens team, focusing on decentralized finance, markets, on-chain data, and governance across all major and minor blockchains.

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