As we studied before, we can long and short NFT with protocols like nftperp. However, with the Wasabi protocol, you can take it a step further and trade options based on NFTs. With options, traders can use additional strategies such as selling an NFT at a specific strike price through selling a call option.
Wasabi, developed by DKODA Labs, is a decentralized NFT options protocol that enables market participants to issue and trade option positions as NFTs. The protocol generates an ERC-721 token that represents an option for any EVM compatible asset. The architecture of Wasabi is designed to interface with third-party NFT marketplaces and AMMs, enabling in-the-money option holders to take profits by interacting with both sides of the market automatically.
The current NFT market faces three major challenges that Wasabi aims to address:
- Hedging options: Currently, NFT traders can only buy NFTs at a low price and hope to sell them at a higher price. NFT holders lack effective ways to hedge their positions or profit from market downturns.
- Sustainable income-generating options: Holders of ERC-721 assets are unable to earn sustainable passive income from their assets in a safe and secure manner.
- Affordability: Most traders are unable to participate in high-value NFT markets because they cannot afford the minimum price required to purchase a discrete increment, such as a full CryptoPunk.
To address these challenges, Wasabi’s peer-to-peer, decentralized covered options protocol offers several solutions:
- Options can be traded, exercised, or aggregated into more complex financial instruments.
- Liquidity providers (LPs) create and support option pools and earn stable, low-risk income by receiving premiums.
- Market participants can capitalize on the market’s volatility by purchasing, executing, or trading options.
How It Works
There are mainly two parties involved:
Liquidity Provider (Option Seller)
The liquidity provider (LP) is the party that creates an option pool by depositing NFTs (from a collection) and/or ETH and specifying a set of pool parameters such as strike price and expiration date. In return, the LP earns stable, low-risk income by receiving premiums from buyers who purchase options from their pool. The LP takes on the obligation to either sell or buy an underlying asset at a specified strike price within a specified time period if the buyer exercises their option.
Trader (Option Buyer)
The trader is the party that purchases an option from an LP. The trader pays a premium to the LP in exchange for the right, but not the obligation, to either buy or sell an underlying asset at a specified strike price within a specified time period. If the price of the underlying asset moves in their favor before expiration, they can exercise their option and profit from it.
Compared to put options, call options are relatively easier to understand. They give option holders the right to buy an asset at a strike price. As of v1, pools can only issue covered calls. To create a pool that can write call options, LPs must deposit NFTs as collateral. The maximum number of call options a pool can write at any time is equal to the number of non-collateralized assets in the pool.
Put options give option holders the right to sell an asset to the pool at the strike price. Unlike call options, LPs for put options have to create the pools by depositing ETH into the pool. The maximum number of put options is equal to the total ETH available in the pool. Additionally, a pool cannot write a put option with a strike price higher than the ETH in the pool.
Similar to call options, traders pay a premium for a put option. An ERC-721 token representing the option will then be transferred to their wallet. The pool also locks an ETH amount corresponding to the strike price, simultaneously. When the price of NFT is lower than the strike price, put option holders can exercise the option and sell the NFT to the pool.
If you’re worried that the previous examples only covered exercising options, you might be wondering how to take a profit. Call/put option holders need to sell/buy the NFT from/to marketplaces or NFT AMMs to take a profit. Fortunately, Wasabi’s architecture can interface with third-party NFT Marketplaces (Opensea, LooksRare) and NFT AMMs (Sudoswap). This means that in-the-money options holders can profit by using Wasabi. The platform interacts with both the buy and sell sides of the market automatically.
In Wasabi, a flash loan is an uncollateralized loan that enables users to borrow funds without collateral. This loan is used in the Wasabi protocol to help in-the-money option holders exercise their options and take profits without any upfront capital.
Here’s how it works:
- An in-the-money call option holder who wants to exercise their option but lacks the funds to do so triggers Wasabi to make a flash loan within a single block.
- The flash loan allows the user to borrow ETH from the liquidity pool. With the borrowed funds, the user can exercise their option and buy the NFT for a lower-than-floor price.
- The user sells the NFT on a partner marketplace at the floor price, making a profit.
- The user repays the loan with 0.09% interest and takes their profit.
Flash loans provide users with quick access to significant amounts of capital without the need for collateral or lending. This can help traders to speculate the price of NFT like BAYC without large amount of capital.
- There are several differences between NFT perpetuals and NFT options. First, options offer more flexibility in terms of exercising upon holders’ will, which can function as insurance. Second, options provide greater flexibility than perpetuals in terms of strategies.
- Wasabi’s architecture is designed to help NFT marketplaces and AMMs increase liquidity. There are opportunities for Wasabi to partner with marketplaces and AMMs to create interesting tokenomics.
- According to Wasabi’s whitepaper, their goal is to be the derivatives primitive for ERC-721. This includes not only PFPs, but also gaming items, music NFTs, and Real World Assets, which adds a great story as NFT financialization has yet to fully bloom.
About TKX Capital
Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.