In the DeFi space, options trading isn’t as popular as perpetual contracts. This lower popularity is in part due to liquidity fragmentation, where trading is spread out across various expiration dates and strike prices. Additionally, pricing options are complex, particularly due to the challenges in determining implied volatility and other market factors. This complexity, alongside the inherent intricacies of options strategies, makes them less approachable compared to the more straightforward FP3KK. Today, we will look into Panoptic, a protocol in the DeFi space focusing on perpetual options. Having recently secured $7 million in funding, following an earlier raise of $4.5 million in December.
Panoptic emerges in the DeFi options space with a unique protocol offering perpetual options. Operating without oracles and built on Uniswap v3, it introduces features like non-expiring options, enhancing flexibility for a wide array of trading strategies. This integration with Uniswap v3 taps into existing liquidity pools, boosting the efficiency and accessibility of options trading in the decentralized finance ecosystem. Panoptic’s approach represents a significant innovation, offering a novel angle to DeFi options trading.
Panoptic’s options differ from traditional ones by not using a clearinghouse, instead relying on Uniswap V3 LP positions for trading. Key features include:
- Perpetual nature with no expiry dates.
- Path-dependent pricing without market maker involvement.
- No impact from volatility expansion (no vega).
- Dynamic collateralization and buying power that adjust to market activities.
- Stable buying power requirements over time.
In Panoptic, the liquidity providing process begins with providers depositing assets into Panoptic pools. These assets are then borrowed by traders to establish long and short options positions. As trading occurs on Uniswap V3, fees are paid, a share of which is distributed to the liquidity providers. These providers benefit by earning commission fees based on the traded options’ notional value and a spread on the premiums paid by the option buyers. The system is designed to incentivize liquidity provision while maintaining market efficiency.
In Panoptic, option buyers move funds from Uniswap V3 to the Panoptic pool, incurring a standard fee. They also deposit a collateral, typically 10% of the option’s value, to cover any potential premiums that arise from their option positions.
Sellers in Panoptic borrow liquidity from the platform’s pool and then allocate it to Uniswap V3, paying a commission for this borrowing. They are required to deposit collateral, allowing them to sell options up to five times the value of their collateral.
Streamia, or Streaming Premia, offers a dynamic and market-aligned way to pay for options in Panoptic. Rather than paying a large premium upfront, buyers pay smaller, continuous fees based on actual trading activity in Uniswap V3. This method aligns costs more closely with market conditions and trading volume, making it a more flexible and potentially fairer system for option pricing. It eliminates the need for external price oracles, reducing dependency on external data sources and simplifying the pricing process.
Panoptic’s option pricing is influenced by three factors: duration of position hold, trading volume in the pool, and liquidity distribution within Uniswap. Notably, trading volume and liquidity distribution can affect implied volatility assessment. High liquidity with low trading volume typically results in undervalued implied volatility, while the opposite scenario leads to overvaluation. This dynamic encourages option sellers to increase liquidity in Uniswap when implied volatility is high, and buyers to engage more when it’s low.
Panoptic’s entry into the DeFi options arena stands out, especially with its focus on user-friendly UI/UX designed to welcome those new to options trading. For example, with its interactive UI, it becomes quite intuitive to understand what your option strategy’s P&L will look like.
This approach, coupled with its innovative features like perpetual options and an oracle-free framework, sets it apart from competitors like GammaSwap. Panoptic aims to simplify trading experiences while tackling prevalent market challenges, positioning itself as a key player in the dynamic DeFi market. The platform’s impact will hinge on its ability to attract and retain users, especially those new to options trading.