Designing On-Chain Options: Amortizing Perpetual Options

TL;DR

This paper introduces a novel on-chain perpetual options design that operates efficiently within blockchain constraints, enabling decentralized risk management and new DeFi applications without centralized intermediaries.

Contribution

It proposes a new amortizing perpetual options primitive and a decentralized market framework suitable for blockchain environments, addressing limitations of existing designs.

Findings

The contract functions as a foundational risk primitive for DeFi.

Enables applications like endogenous collateralization and de-peg insurance.

Provides a layer for mutualizing tail risk across protocols.

Abstract

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.