The Options are Limitless

Options are an important tool to any trader. Whether the trader is hedging an existing position or building a complex multi legged strategy, there is no denying the utility of options when it comes to trading. However, this paper is not intended to discuss options in the context of trading. Rather it will touch upon options as a tool to align incentives.

This is commonly seen in startups where employees are given options to encourage them to stay with the company and perform well. When the company’s equity increases in value, so do the options. Why not provide the employee directly with equity? The equity of private companies is illiquid, meaning the holder has no way to sell it. Equity given to employees is treated as taxable income, which can lead to large tax burdens for those that receive it. With no way to sell the equity, the employee may become bankrupt.

How does this relate to crypto? When projects want to incentivize users, they typically airdrop tokens to user wallets. This can work well if there’s a lot of promise for upside in token or it’s the hottest dog token around, but more often than not the airdrop receivers dump their tokens quickly. Early community members dumping tokens can be detrimental, especially if there is not much liquidity for the token. The alternative? Drop at the money (ATM) call options!

The ATM Call gives the holder the upside exposure to the project without the economic incentive to dump quickly. When the holder does have enough upside to dump, they’ll have to pay to exercise the option before they can sell the project’s token, resulting in more funding for the team to continue their work.

The following chart is a plot of airdropped token prices. It can be seen with UNI, BADGER, TORN (green) and INV (purple) that the price rose rapidly within the first week of trading before starting a multi-week downward trend. Many factors affect price including broader market conditions, product changes, etc. We’ll let the reader interpret the chart as they please.

No or low liquidity is a large concern for early projects. Airdropping tokens to community members, without a liquid market to sell the token, can be problematic. It can create a large amount of downward pressure on token price as there will likely be more sellers than buyers. To bootstrap liquidity and prevent this, projects are generally forced to sell tokens at a discount to market makers. Wouldn’t it be better if those tokens were in the hands of contributors, users, and community members? We think so.

Airdropped tokens tend to have large amounts of volume around the time of airdrop before tapering off. As can be seen from the Uniswap and 1Inch charts below, there’s a drastic drop off from volume after the initial excitement from the airdrop wears off.

MKR and COMP, which did not have airdrops, maintained a more normalized volume throughout the trading timeframe.

Even when the token has liquidity, an option can be the proper tool to incentivize contributors. Traditional companies can issue new shares to sell when they need to raise more capital. Tokens with fixed supply do not have such a luxury. More often than not, the amount set aside in a project’s foundation is somewhat fixed. This is important to note because an ATM option can be handed out to incentivize behavior over a specified period of time. After the expiration date, the foundation would receive their tokens back if the holder has not exercised. This gives the foundation flexibility to try out partnerships and initiatives by sending an asset up front without having to worry about the tokens being sold immediately.

Another interesting concept could be to encourage moonshot initiatives. Imagine a scenario where the foundation is approached with some wacky idea that is hard to grasp, but worth incentivizing. This is where out of the money (OTM) calls could come into place. Rather than sending tokens directly to this potential contributor, we can send an option that’s strike price is higher than the current token price. It will only be economically beneficial to the receiver to sell when the token’s price is higher than the set strike.

For example, say PsyOptions was approached by Anon to build a complex structured product on top of the PsyOptions protocol. Anon promises it will increase protocol usage 2x and will build it in 6 months, but is requesting a grant or incentive up front. PSY is currently trading $1, so rather than sending anon 100,000 PSY, we’ll send Anon an OTM call for 100,000 PSY with a strike price of $1.50 and an expiration of 1 year. This means that if Anon does not complete his project on time or it does not have the intended effect, it won’t be economical for Anon to redeem the PSY. It will likely expire out of the money, and the foundation can reclaim the PSY. Or the market rips, Anon is just lucky but still required to pay the foundation $150,000 to exchange the option for the PSY.

PsyOptions is the settlement and clearing protocol for asset settled options on Solana. Anyone can create options for any SPL token using the V1 program. Let me repeat that, anyone can create any option for any SPL token. The end user can set the strike price, the amount of the asset (typically 100 in TradFi), the expiration, and even what asset they would like to denote the option in. Want to write an option for an NFT? You can do that, as long as it’s represented as an SPL. Want to receive BTC instead of a stablecoin when your options get exercised? It will handle that. Due to the flexible nature of the program, one could easily integrate and build an options vesting program (please reach out if you do this).

— PsyOptions Research Team

Related posts:

I just finished reading All the Light We Cannot See by Anthony Doerr. It’s a book that has been praised by many of my friends and I finally got around to reading it. Honestly, it was kinda hard to…

Mungkin saat itu kita berdua memang di takdirkan untuk berpisah, berpisah dengan waktu yang cukup lama bagi kita berdua. Perpisahan kita kemarin jujur adalah perpisahan paling lama yang pernah kita…

A very painful event occurred in Chicago which took life of the famous rapper FBG Duck .This rapper gave a series of hit raps the noted ones are Fool Me in 2015, Using Me in 2018, 2 Sides in 2017 …