Variant Fund: on-chain Options have met the conditions for success and explosion.

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Source: variant.fund

Compiled by: Zhou, ChainCatcher

If the core value of cryptocurrency lies in providing new financial tracks, then it is puzzling that on-chain options have not yet become popular.

In the US stock market alone, the daily trading volume of individual stock options is about $450 billion, accounting for approximately 0.7% of the total market capitalization of the US stock market, which is $68 trillion. In contrast, the daily trading volume of cryptocurrency options is about $2 billion, which only accounts for 0.06% of the roughly $3 trillion market capitalization of cryptocurrencies (which is about 10 times lower than stocks). Although decentralized exchanges (DEX) currently account for over 20% of cryptocurrency spot trading volume, almost all options trading still takes place through centralized exchanges (CEX) like Deribit.

The differences between traditional options markets and on-chain options markets stem from early designs, constrained by original infrastructure, failing to meet two essential elements of a healthy market: protecting liquidity providers from adverse order flow and attracting quality order flow.

Today, the infrastructure needed to solve the former problem is already in place—liquidity providers can finally avoid being eaten away by arbitrageurs. The remaining challenge, which is also the focus of this article, is the latter: how to develop an effective go-to-market (GTM) strategy to attract high-quality order flow. This article argues that on-chain options protocols can thrive by targeting two distinct sources of high-quality order flow: hedgers and retail investors.

The Trials and Tribulations of On-Chain Options

Similar to the situation in the spot market, the first on-chain options protocol draws on the dominant market design in traditional finance - the order book.

In the early days of Ethereum, trading activity was scarce and gas fees were relatively low. Therefore, an order book seemed to be a reasonable mechanism for options trading. The options order book can be traced back to EtherOpt in March 2016 (the first popular spot order book on Ethereum, EtherDelta, was launched a few months later). However, in reality, on-chain market making is very difficult, as gas fees and network latency make it challenging for market makers to provide accurate quotes and avoid losing trades.

To address these issues, the next-generation options protocol utilizes Automated Market Makers (AMM). AMMs no longer rely on individuals for market trading but instead obtain prices from the internal token balances of liquidity pools or external price oracles. In the former case, the price updates when traders buy or sell tokens in the liquidity pool (changing the internal balance of the pool); the liquidity providers themselves do not set the price. In the latter case, the price is periodically updated when new oracle prices are published on-chain. From 2019 to 2021, protocols such as Opyn, Hegic, Dopex, and Ribbon adopted this approach.

Unfortunately, the AMM-based protocols have not significantly increased the adoption rate of on-chain options. The reason AMM can save gas fees (i.e., prices are set by traders or lagging oracles rather than liquidity providers) is precisely because its characteristics make it easy for liquidity providers to suffer losses due to arbitrageurs (i.e., adverse selection).

However, what truly hinders the popularization of options trading may be that all early versions of options protocols (including those based on order books and automated market maker designs) require that short positions must have sufficient collateral. In other words, sold call options must be hedged, and sold put options must have cash backing, which leads to low capital efficiency for these protocols and deprives retail investors of the crucial source of leverage they need. Without this leverage, and when the incentive mechanism disappears, the demand from retail investors also diminishes.

Sustainable Options Exchange: Attract high-quality order flow, avoid poor order flow

Let's start from the basics. A healthy market needs two things:

The ability of liquidity providers to avoid “bad order flow” (i.e., to avoid unnecessary losses). The so-called “bad order flow” refers to arbitrageurs earning nearly risk-free profits at the expense of liquidity providers' interests.

Strong demand sources are aimed at providing “quality order flow” (which means making profits). The so-called “quality order flow” refers to those traders who are insensitive to price and earn profits for liquidity providers after paying the spread.

A review of the history of on-chain options agreements reveals that their past failures were due to the fact that both of the above conditions were not met:

The technical infrastructure limitations of early options agreements have led to liquidity providers being unable to avoid adverse order flow. The traditional method for liquidity providers to avoid adverse order flow is to update quotes on the order book for free and at high frequency, but the delays and costs of the order book agreements in 2016 made on-chain quote updates impossible. Migration to automated market makers (AMMs) also failed to resolve this issue, as their pricing mechanisms are relatively slow, putting liquidity providers at a disadvantage in competition with arbitrageurs.

The requirement for full collateral has eliminated the options feature (leverage) that retail investors value, and leverage is a key source of high-quality order flow. Without other on-chain options usage solutions, high-quality order flow is out of the question.

Therefore, if we want to build an on-chain options protocol in 2025, we must ensure that both of these challenges are addressed.

In recent years, various changes indicate that we can now build infrastructure that allows liquidity providers to avoid adverse order flow. The rise of specific application (or industry) infrastructure has significantly improved the market design for liquidity providers across various financial applications. Among the most important are: speed bumps for delayed execution orders; priority sorting for order publication only; cancellation of orders and price oracle updates; very low Gas fees; and censorship-resistant mechanisms in high-frequency trading.

With the help of scaled innovation, we can now build applications that meet the demands of a good order flow. For example, improvements in consensus mechanisms and zero-knowledge proofs have made the cost of block space low enough to implement complex margin engines on-chain without the need for full collateral.

Solving the issue of poor order flow is primarily a technical problem, and in many respects, it is actually a “relatively easy” problem. Indeed, building this infrastructure is technically complex, but that is not the real challenge. Even if the new infrastructure can support the protocol to attract good overflow traffic, it does not mean that good order flow will appear out of thin air. On the contrary, the core question of this article, and its focus, is: assuming we now have the infrastructure to support good order flow, what kind of go-to-market strategy (GTM) should the project adopt to attract this demand? If we can answer this question, we have hope of building a sustainable on-chain options protocol.

Price insensitive demand characteristics (good order flow)

As mentioned above, good order flow refers to demand that is insensitive to price. Generally speaking, the demand for options that is insensitive to price is mainly composed of two core types of clients: ( hedgers and ) retail clients. These two types of clients have different objectives, and therefore their usage of options also differs.

Hedge Fund

The so-called hedger refers to those institutions or businesses that believe reducing risk has sufficient value and are willing to pay an amount above the market value.

Options are very attractive to hedgers because they allow them to precisely control downside risk by selecting the exact price level at which to stop losses (strike price). This is different from futures, where the hedging method is either/or; futures protect your position in all cases but do not allow you to specify the price at which the protection takes effect.

Currently, hedgers account for the vast majority of the demand for cryptocurrency options, which we expect mainly comes from miners, who are the first “on-chain institutions”. This can be seen from the dominance of Bitcoin and Ethereum options trading volumes, as well as the fact that mining/validation activities on these chains are more institutionalized than on others. Hedging is crucial for miners because their income is denominated in volatile crypto assets, while many of their expenses—such as wages, hardware, custody, etc.—are denominated in fiat currency.

Retail

The term retail investor refers to those individual speculators who aim for profit but are relatively inexperienced—they typically trade based on feelings, beliefs, or experiences rather than models and algorithms. They generally wish for a simple and user-friendly trading experience, and their driving demand is for quick riches rather than rational consideration of risk and return.

As mentioned above, the reason retail investors have historically favored options lies in their leverage. The explosive growth of zero-day options (0DTE) in retail trading confirms this—0DTE is widely regarded as a speculative leveraged trading tool. In May 2025, 0DTE accounted for over 61% of the trading volume of S&P 500 index options, with the majority of the trading volume coming from retail users (especially on the Robinhood platform).

Although options are popular in the trading finance sector, retail investors' acceptance of cryptocurrency options is actually zero. This is because there is a better cryptocurrency tool available for retail investors to trade long and short with leverage, which is currently not available in the trading finance sector: that is perpetual contracts (perps).

As we can see in hedging transactions, the greatest advantage of options lies in their level of sophistication. Options traders can consider going long/short, time, and strike price, which makes options more flexible than spot, perpetual contracts, or futures trading.

Although more combinations can bring higher granularity, which is exactly what hedgers expect, it also requires making more decisions, which often leaves retail investors feeling overwhelmed. In fact, the success of 0DTE options in the retail trading space can largely be attributed to: 0DTE options improve the user experience of options by eliminating (or significantly simplifying) the time dimension (“zero days”), thus providing a straightforward leverage tool for going long or short.

Options are not viewed as leverage tools in the cryptocurrency space because perpetual contracts (perps) have become very popular and are simpler and more convenient for leveraged long/short operations than 0DTE options. Perps eliminate the two factors of time and strike price, allowing users to continuously engage in leveraged long/short positions. In other words, perps achieve the same goal as options (providing leverage for retail investors) with a simpler user experience. As a result, the additional value of options has significantly decreased.

However, retail options and cryptocurrency traders are not completely without hope. Aside from using leverage for simple long/short operations, retail traders also crave interesting and novel trading experiences. The refined characteristics of options mean that they can offer a whole new trading experience. One particularly powerful feature is that it allows participants to trade directly on volatility itself. Take the Bitcoin Volatility Index (BVOL) provided by FTX (now closed) as an example. BVOL tokenizes implied volatility, enabling traders to directly bet on the magnitude of Bitcoin price fluctuations (regardless of direction) without having to manage complex options positions. It packages trades that would typically require straddle or strangle options into a tradeable token, allowing retail users to easily and conveniently speculate on volatility.

Marketing strategy for price-insensitive demand (good order flow)

Since we have identified the characteristics of price-insensitive demand, let's describe the GTM strategies that the protocol can use to attract good order flow to the on-chain options protocol based on each characteristic.

Hedgers GTM: Meet miners where they are located.

We believe that the best marketing strategy to capture the flow of hedge funds is to target hedgers, such as miners currently trading on centralized exchanges, and provide a product that allows them to own a stake in the protocol through tokens while minimizing changes to their existing custody arrangements.

This strategy is similar to the user acquisition methods of Babylon. When Babylon launched, there were already a large number of off-chain Bitcoin hedge funds, and miners (some of the largest Bitcoin holders) were likely able to utilize these funds to provide liquidity. Babylon primarily builds trust through custodians and staking providers (especially in Asia) and caters to their existing needs; it does not require them to try new wallets or key management systems, which often necessitate additional trust assumptions. The choice of miners to adopt Babylon indicates that they value the autonomy to choose custodial solutions (whether self-custody or selecting other custodians), the ownership gained through token incentives, or both. Otherwise, the growth of Babylon would be difficult to explain.

Now is an excellent opportunity to utilize this global trading platform (GTM). Coinbase recently acquired Deribit, a leading centralized exchange in the options trading space, which poses risks for foreign miners who may be reluctant to keep large amounts of funds in U.S. controlled entities. Additionally, the increased feasibility of BitVM and the overall improvement in the quality of Bitcoin bridges are providing the necessary custodial assurances to build an attractive on-chain alternative.

Retail Market Promotion: Providing a brand new trading experience

Rather than trying to compete with them using the tricks commonly employed by criminals, we believe that the best way to attract retailers is to offer them innovative products that provide a simplified user experience.

As mentioned above, one of the most powerful features of options is the ability to directly observe volatility itself without having to consider price trends. On-chain options protocols can build a vault that allows retail users to engage in long and short trading of volatility through a simple user experience.

Previous options vaults (such as those on Dopex and Ribbon) suffered losses due to imperfect pricing mechanisms, making them easy targets for arbitrageurs. However, as we mentioned earlier, with recent innovations in specific infrastructure, we now have clear reasons to believe that you can build an options vault that is not affected by these issues. Options chains or options aggregators can leverage these advantages, improving the execution quality of volatility options vaults while also enhancing liquidity and order flow in the order book.

Conclusion

The conditions for the success of on-chain options are finally gradually being met. The infrastructure is becoming increasingly mature, capable of supporting more efficient capital utilization solutions, and on-chain institutions now truly have a reason to hedge directly on-chain.

By building infrastructure that helps liquidity providers avoid adverse order flow and creating on-chain options protocols centered around two types of price-insensitive user groups—hedgers seeking precise trades and retail investors looking for a novel trading experience—it is ultimately possible to establish a sustainable market. With this foundation, options can become an integral part of the on-chain financial system in unprecedented ways.

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