Designing On-Chain Options: Amortizing Perpetual Options
It provides a foundational risk primitive for DeFi, addressing the lack of a standard on-chain options design that can withstand adversarial blockchain conditions.
This paper introduces a design for amortizing perpetual options tailored to blockchain constraints, enabling decentralized risk management without centralized clearing. The framework supports applications like endogenous collateralization and de-peg insurance.
Financial options are fundamental to traditional markets, enabling strategies ranging from hedging to speculating. Yet, while the Automated Market Maker paradigm has revolutionized decentralized spot markets, no equivalent standard has emerged for on-chain options. Typical designs attempt to replicate centralized exchange mechanics, requiring high-frequency oracles and robust liquidation engines which may fail during stress events. This paper presents a design for amortizing perpetual options tailored to the operational and adversarial constraints of blockchain environments. Leveraging this primitive, we introduce a decentralized market framework with minimal consistency requirements. We demonstrate that this contract functions as a foundational risk primitive for DeFi, enabling applications such as endogenous collateralization and explicitly priced de-peg insurance, thereby showing that this design provides a layer for mutualizing tail risk across protocols without reliance on centralized clearing institutions.