Source: NFT GO

Summary

• Although still in its early stages, the NFT options market has grown significantly, with peak trading volumes closely correlated with floor price fluctuations in some NFT collections.
• Wrapped Cryptopunks, Bored Ape Yacht Club, and Pudgy Penguins are the three NFT collections with a large share of options trading, collectively accounting for 55.68% of the total market share.
• There are an average of more than 20 NFT options trades per week, but only about 6 NFT options are exercised.
• NFT option protocols provide lower-cost exposure for high-value NFTs, allowing traders to better grasp price movements.
• NFT options are able to bet on price fluctuations at a fraction of the actual cost of the NFT (as low as 0.01 ETH).
• NFT options trading is subject to market volatility, which is influenced by floor price data, trading volume, liquidity, NFT market cap, blue-chip NFTs, and market sentiment.
• The reduction in trading volume exposes the market to potential manipulation risks. Traditional pricing models, such as the Black-Scholes model, may not be suitable for the distribution of returns unique to NFT markets.

Chapter 1: Introduction

2021 marked the explosion of NFTs, with more than 1 million ETH traded as the project proliferated. Non-fungible tokens (NFTs) take center stage in the blockchain trading space. As NFTs evolve from community-based avatars and keys to speculative assets that are massively traded and hyped, their tools and means become more sophisticated. As the industry matures, we are slowly transitioning from speculative bubbles to sustainable expansion. This process is accelerated by the increased diversity and use cases of NFTFi.

Derivatives are one such tool that is rapidly gaining popularity in the NFT trading space. In this report, we’ll take a deep dive into the current state of NFT options, explore their mechanisms, provide data interpretation, and explore the potential benefits for traders and NFT creators.

Bear Market: Currently, NFT options provide users with new opportunities to participate and gain liquidity. For newbies, it is a convenient gateway into the NFT ecosystem.

To understand this emerging market, NFTGo has partnered with Wasabi, Hook, and Global Coin Research to release the first comprehensive NFT Options Report. This report covers everything from market overview to outlook, options mechanics to industry insights.

Chapter 2: NFT Options Overview

Options are a type of financial derivative that has been the backbone of the traditional financial industry for decades. These advanced financial instruments give the holder the right, but not the obligation, the right to buy (a call) or sell (a put) the underlying asset at a predetermined price within a specified period of time, enabling the trader to take advantage of potential price movements without fully owning the asset. In exchange, the option buyer pays the seller a premium. Depending on market conditions, holders can choose to exercise or expire options at any time, making options extremely versatile in hedging, speculative, and risk management strategies.

Why choose to buy NFT options instead of the NFT itself?

For a variety of reasons, people may prefer to buy NFT options over the NFTs themselves. First, options allow investors to participate in the potential price appreciation of NFTs without having to own them in large sums of money. Second, options provide a degree of downside protection, as the maximum loss is limited to the premium paid. Third, options provide greater flexibility, giving the holder the freedom to decide whether to exercise the option or let it expire based on the prevailing market conditions. In addition, options allow investors to hedge against the risk of falling prices and provide speculators with a way to profit from falling prices. Finally, traders don’t need to hold NFTs for a long time and can profit from short-term price fluctuations through options. As a result, NFT options are particularly attractive to investors with speculative purposes and risk management strategies.

Explanation of terms

• Strike Price: A pre-agreed price at which an NFT can be bought or sold.
• Expiration Date: The last day on which the option contract holder can exercise their right to buy or sell the NFT at the strike price. If no action is taken, then the contract will be worthless when it expires.
• Premium: The price at which an investor buys an option contract from the issuer. Royalty pricing is influenced by a variety of factors.
• American-Style Options: American-style options can be exercised at any time prior to the expiration date.
• European-style options: European-style options can only be exercised on the expiration date.

Mechanics

Call option

A call option speculates that the price of the underlying NFT will appreciate in value within a specified timeframe and allows the buyer to purchase the underlying at a specified price and date.

Example

Let’s say the current floor price of Azuki NFT is 5ETH. If you’re bullish on Azuki’s price and want to take advantage of the potential price increase without buying the NFT outright, you can choose to buy a call option. In this case, your option strike price is 5.5 ETH, the expiration date is two months from now, and the premium is 0.2 ETH.

In order to receive an option, you will need to pay a premium of 0.2ETH to the seller of the option, thereby earning the exclusive right to purchase the Azuki NFT within the next two months (American-style options) or expiration date (European-style options), regardless of the floor price at that time. This way, you can profit from the potential increase in price without directly owning the NFT.

Scenario 1: Floor prices climb

Six weeks later, Azuki’s floor price has skyrocketed to 6.5 ETH, and the value of your options has increased accordingly. At this point, you have three options:

You can choose to exercise the option and pay 5.5ETH to get an Azuki NFT. Once you own the NFT, you can sell it at the current floor price of 6.5 ETH, making a profit of 0.8 ETH (earning 1 ETH - investing 0.2 ETH). The return is up to 400% compared to the initial investment. Some platforms offer arbitrage tools and, with the help of flash loans, enable users to perform this procedure without the need for upfront capital.

Alternatively, you can decide to sell the option for a new premium of 0.7ETH. This way you will make a profit of 0.5ETH and the ROI will still be as high as 250%. The advantage of this method is that you don’t need to have 5.5ETH ready to buy an NFT at all times, but you can still benefit from its price appreciation.

Alternatively, you can choose to hold the call option in anticipation of further increases in the floor price for the remaining two weeks. At this point, you’re taking on a weighed risk, because if the price of the NFT continues to soar, it has the potential to bring higher profits.

Scenario 2: The floor price is lower than the strike price

Two months later, Azuki’s floor price failed to reach 5.5ETH. In this case, you are not obligated to buy the NFT for 5.5ETH, but you will lose all the premium. Therefore, the maximum loss will be 0.2ETH.

Put option

A put option speculates that the price of the underlying NFT will depreciate within a specified timeframe and allows the buyer to sell the underlying at a specified price and date.

Example

Let’s say the current floor price of Azuki NFT is 5 ETH, let’s explore a scenario: you are bearish on Azuki and want to take advantage of the decline in floor price. In order to execute this strategy, you need to buy a put option with a strike price of 4.6 ETH and an expiration date of the next two months. The cost (premium) to purchase this put option is 0.2 ETH.

Scenario 1: The floor price drops below 4.6ETH

Six weeks later, the floor price of the Azuki NFT dropped to 4 ETH, causing your put option value to increase to 0.45 ETH. Now, you have three options:

You can choose to buy the Azuki NFT at the current floor price of 4ETH and then exercise the put option to sell the NFT back to the issuer at 4.6ETH. The move would generate a profit of 0.4 ETH – the spread of 0.6 ETH minus the option purchase price of 0.2 ETH.

Alternatively, you can decide to sell the option at 0.45 ETH for a net profit of 0.25 ETH.

The third option is to continue to hold the put option and wait for the floor price to fall further to gain greater potential gains.

Scenario 2: The floor price is maintained above 4.6ETH

Two months later, the option expires with the floor price still above 4.6ETH. The good news is that you are not obligated to sell Azuki NFTs, so the spread will not cause you a loss. However, there is also a problem – you will lose the entire premium you spent on buying the option, totaling 0.2 ETH.

Existing Platforms

The NFTFi space is still in its early stages, and as such, there are only a handful of well-functioning platforms that offer NFT options trading. For those keen to explore NFT options trading, there is still room for some options. The features and functions of each platform are slightly different, and users can choose the most suitable one according to their needs and preferences.

| | Nifty Options | Wasabi | Hook | Cally | | Blockchain | Ethereum | Ethereum | Ethereum | Ethereum & Optimism | | Call Option | None | Yes | Yes | Yes | | How does a call option work? | The issuer deposits the NFT into an escrow contract and determines the volatility surface based on their own risk appetite. They will also create a virtual order book with different strike prices and expiration dates accordingly The issuer deposits the NFT into the escrow contract and sets an expiration date, premium, and strike price. At expiry, the NFT is auctioned, the issuer gets the strike price, and the option holder gets the difference between the ask price and the strike price The option issuer deposits the NFT and determines the expiration date and premium. Next, the Dutch auction begins and the strike price decreases. If the option is not exercised before the expiration date, a new Dutch auction begins | Put | Yes | Yes | None | None | | How puts operate | The issuer deposits the NFT into an escrow contract, determining the premium, exercise price, and expiration date. The issuer pays the premium to the buyer, who deposits the exercise price into the escrow contract and collects the premium. When the issuer exercises the option, the NFT will be sold to the option buyer at the strike price The issuer deposits ETH into an escrow contract and agrees to purchase the NFT at a specified price. Option buyers do not initially need to deposit an NFT, but in order to exercise an option, they must first acquire an NFT during the exercise process. Wasabi offers the means to achieve this with flash loans in a single transaction, with no additional upfront capital required for traders None | None | | Sale & Exercise | Options cannot be sold, only exercised | Users can sell and exercise options at any time Options can be sold at any time. When the option expires, it will be automatically exercised through auction Options cannot be traded. The option buyer can exercise the option at any time

Chapter 3: Key Data Interpretation of NFT Options

The NFT options market, while young, has witnessed significant growth and resilience. Some platforms have entered this space, and the market development remains largely optimistic.

Trends and patterns in NFT options trading

With an average of more than 20 NFT options trades per week, but only about 6 NFT options were exercised, there was a big spike in the week of July 2, with the number of options issued by Wasabi soaring to 55.

A closer look at the peaks in NFT options that are traded and exercised reveals that these spikes appear to be closely related to floor price fluctuations in some of the top NFT collections.

For example, the July 2 surge in date rights trading coincided with a drop in floor prices for collectibles such as Azuki and DeGods. Azuki’s floor price started to fall at the end of June, with DeGods following in early July, and investors appear to be turning to options as a strategy to reduce potential risk. The uptick in options trading from mid-August to early September also followed this pattern. Therefore, using options to hedge the unpredictability of NFT prices is an investment strategy.

Lil Pudgys is another NFT collection that has a significant impact on options trading volume. When the floor price of Lil Pudgy started to rise in September, there was a corresponding surge in options volume, and there was a clear correlation between the two. Specifically, on September 24 and October 4, the floor price of Lil Pudgys increased by a significant 10% and 20%, respectively. The price jump coincided with a peak in options trading volume at 27 and 25 times, respectively. This suggests that options are not just a hedging mechanism that investors seek in times of market downturns. Conversely, options are also an attractive investment channel during the bullish phase of the market.

By extension, there is a clear correlation between options trading activity and spot trading when comparing the number of options trades with the overall market trend. In layman’s terms, when the regular NFT market is volatile, so is the options market. This correlation is not uncommon. In traditional finance, options tend to be a barometer of relevant market sentiment, reflecting broader trends and traders’ outlooks.

In conclusion, while the options market is actively issued, there are still few options that are converted into exercises. This gap proves that traders are hedging bets or speculating on future price movements, rather than taking advantage of options right away.

Market share dynamics

When delving deeper into the NFT options market, it’s undeniable that certain collections are leading the way in terms of total available liquidity (TAL). Among them, “Wrapped Cryptopunks”, “Bored Ape Yacht Club”, and “Pudgy Penguins” are the three leading NFT collections, with a combined market share of 55.68%. This dominance highlights the influence and popularity of these collections among NFT options.

With a TAL value of 847.32 ETH, “Wrapped Cryptopunks” seems to be the market leader. It was followed by “Bored Ape Yacht Club” and “Pudgy Penguins” with TALs of 802.05 ETH and 360.76 ETH, respectively. The huge market share that these three collections occupy indicates their pivotal role in the options market and, perhaps, their broader appeal in the NFT space.

While these collections dominate, it’s worth noting that the rest of the NFT collections together hold around 44% of the market share. This distribution shows that while top collections play an important role, there is plenty of room and potential for other collections to grow as well. As a result, despite being influenced by major players, the NFT options market remains a dynamic market, with both established collectibles and emerging competitors.

In mature financial markets, derivatives are traded more than 30 times more than the stock market. Derivatives, especially options, will continue this growth trajectory.

The number of active options users has grown steadily, with the NFT options market increasing from zero to more than 140 active users and over 3,000 ETH in total available liquidity. Notably, Wasabi’s number of users skyrocketed by 150% per month from June to July.

Chapter 4: How to Trade and Use Options Strategically

Protect holders from sharp price fluctuations

Buy NFTs on a low budget

Exposure to high-value NFTs at a low price is one of the biggest breakthroughs in NFT options protocols. Traders can gain access to the price movements of the most sought-after items at a fraction of the cost.

June 2023 is a pivotal and tumultuous month for the 0N1 Force series. Traders can take advantage of these huge price fluctuations without the need for upfront collateral.

Here’s a real-life example of making money with options:

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On June 5, 2023, 0N1 Force traded at a floor price of 1.3ETH after some key announcements. A smart trader expects the price to continue to rise, so he buys the option at a fraction of the price of the entire NFT. He bought a call option with only a premium of 0.047 ETH and an exercise price of 1.3 ETH.

In just a few hours, the floor price of 0N1 Force rose to 1.54 ETH, at which point the bold trader decided to exercise the option at that price.

In the end, the trader paid 0.047ETH, riding the upward trend of the 0N1 Force series price during the volatile period and making a profit of 0.193ETH in just a few hours, i.e., a 410% return in less than a day.

Without options contracts, it would not have been possible to realize this upside risk at such a low cost. This case also demonstrates the great potential of such an agreement.

Risk hedging when prices fall

Hedging is a key concept in all market risk management, and options provide an excellent way to do so. Broadly speaking, this risk management tool doesn’t exist in the cryptocurrency market, which is why put options are a groundbreaking innovation.

Let’s look at one such example: Trader 2 sells Nakamigo at 0.4ETH when the floor price drops to 0.279 ETH.

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In the days following the launch of the Nakamigos series in May 2023, there was a phenomenal increase in the floor price of the initial free minting series. Traders who want to hold Nakamigos can use put options to hedge new gains without having to liquidate their original NFTs.

On May 27, the floor price of Nakamigos rose to 0.44 ETH, and smart traders took advantage of the opportunity to hedge their positions. They bought Wasabi’s put option at a strike price of 0.4 ETH with an upfront premium of only 0.0325 ETH.

Over the next 15 days, the price of Nakamigos continued to fall, dropping to a low of 0.279ETH on June 10. However, due to the trader’s ability to hedge their position on Wasabi, their put option gives them the right to sell one Nakamigo at 0.4ETH.

Traders can use Arbitrage Flow, an internal tool, to buy NFTs on the open market at a lower price with flash loans, and then exercise the option to sell it back into the pool and make a profit.

In this case, the trader took advantage of this and made a profit of 0.089ETH even though the initial investment was only 0.0325 ETH, i.e., a 296% return in just two weeks, without having to sell their NFTs.

This case study shows that put options can successfully hedge against market declines without having to sell NFTs.

Hedge newly issued NFTs

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From past experience, NFT artworks will cause large fluctuations in phases, often downward fluctuations.

Azuki’s launch of Elementals came during one of the most volatile periods in NFT history. The project was hyped up, but holders simply could not hedge against the risk of falling prices of the original collectibles without a put option. Fortunately, some market participants have managed to do just that using our protocol.

On June 24, three days before the Elementals announcement, a trader first bought a 1-week put option with a premium of 3.93 ETH at a strike price of 17 ETH and retained the right to sell one Azuki at that price. After Elementals was officially announced, Azuki’s floor price dropped all the way to 9 ETH.

On June 30, the trader exercised the option, locking in a profit of 4.07 ETH, earning 103% in just 6 days. He successfully used put options to hedge against the downside of the floor price, which was not possible before.

Profit for traders without having to buy NFTs

Bet on the market with small payouts

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The magic of NFT options is that it only costs a fraction of the actual cost of NFTs (as low as 0.01 ETH) to gain huge exposure and bet on price fluctuations. There are many such examples, such as the following:

On May 12, 2023, a trader took advantage of the ability to bet on large price movements to buy a 1-week call option on 0N1 Force with a premium of only 0.02ETH prepaid. At the time of purchase, the floor price of the series was hovering below 0.6 ETH, and the trader bought a call option with a strike price of 0.6 ETH.

In less than a day, the floor price of 0N1 Force rose to 0.85 ETH, at which point the trader decided to exercise the option to make a profit. By using Wasabi, this trader made a profit of 0.02ETH with just an initial investment of 0.23ETH, creating a staggering 1150% return in a matter of hours.

Options are particularly well-suited to the NFT scenario, as they are useful for both long-term holders and active traders.

! [Hmd0GYizS2sxayjFfypDtpzXeBCxoH6C1MmxTf2T.jpeg] (https://img-cdn.gateio.im/webp-social/moments-40baef27dd-e20138d313-dd1a6f-cd5cc0.webp “7121813”)

An NFT trader recently bought Pudgy Penguins options on Hook for 0.0864ETH (about $160). A month later, the trader sold the option for 0.4 ETH (about $750), earning a return of 0.3136 ETH (363%).

The trader bought the option when the Pudgy Penguins floor price was around 3.4 ETH, and over the following month, the Pudgy Penguins floor price rose to 4.3 ETH, leaving the option in the red.

If a trader buys one Pudgy Penguins at the floor price at the same time and then sells it, they will earn 0.9ETH (26.5%). While the ETH amount will be higher, they will earn much less in percentage terms.

Earn prepaid premiums

NFT holders can earn income by creating and selling call options. If the NFT holder believes that the value of the NFT will increase, but not more than a certain amount, they can sell the call option, earn a premium, and they can keep the premium regardless of the price movement.

For long-term NFTs, selling call options is a great way to boost your returns.

On July 15, a Milady holder minted and sold an option at a price of 0.149939 ETH. The option has a strike price of 2.8ETH and expires on August 11, 2023.

Assuming that the option expires without making money, the Milady holder can replicate this strategy over and over again to earn a large amount of ETH over the course of a year.

Chapter 5: How to Spot Opportunities in Volatility

In the NFT market, volatility is often seen as a challenge, but it also presents unique opportunities. NFT options provide a way to navigate volatility, enabling market participants to speculate on future price movements or hedge their investments, much like options in traditional financial markets. The innovative application of options in the NFT space highlights its importance as a strategic tool that minimizes risk and increases potential profits.

To understand NFT options and utilize them effectively, it is essential to have the ability to perceive key market signals and make data-based predictions. This requires the analysis of a large amount of market data, such as price data, trading volume, liquidity, market sentiment, market capitalization, as well as advanced indicators such as the Relative Strength Index (RSI), Natural Logarithmic Yield (LnR), Hypothetical Volatility Index, and Sharpe Ratio. Through this lens, we delve into the volatility of the NFT market and explore how data-driven decision-making can empower NFT options traders.

Detect market swing signals

To identify the potential volatility of the NFT market, several metrics need to be measured:

• Price data: Large price fluctuations may indicate market volatility. For example, if the price of an NFT fluctuates significantly over the course of a day or week, it could indicate that the market is volatile. Traders can take advantage of NFT options to profit from them.
• Trading volume: A sudden increase or decrease in trading volume may indicate imminent volatility. High trading volumes usually mean greater price fluctuations. For example, if there is a sudden increase in the trading volume of an NFT, it could be a precursor to a large price swing. Options traders can use this information to buy options in anticipation of price movements.
• Liquidity: Lower liquidity leads to greater volatility because smaller trades have a greater impact on the price. This provides options traders with the opportunity to take advantage of potential price differences. For example, if an NFT has low liquidity, buying a small amount may significantly increase its price. A trader might anticipate this and buy a call option in the hope of profiting from the price increase.
• Market Cap: NFTs with smaller market caps may exhibit higher volatility, providing options traders with the opportunity to benefit from these price fluctuations. For example, a trader may find an NFT with a relatively small market cap but strong fundamentals. By purchasing options, they can profit from potential price fluctuations without having to invest a lot of money in the NFT itself.
• Blue-chip NFTs: Blue-chip NFTs refer to NFTs that have built a strong reputation for quality, reliability, and the ability to profit in good times and bad. They tend to fluctuate less due to their stability. As a result, the overall trend of change in the market can often be seen in the volatility of blue-chip NFTs. When blue-chip NFTs fluctuate, people can predict the direction of their collections.
• Market Sentiment: Market sentiment refers to an investor’s overall attitude towards a particular market or asset. Market sentiment is often driven by news events, product launches, or other market-moving events. For example, if there is positive news about a particular NFT or its issuer, it drives bullish sentiment, potentially raising the price of the NFT. Options traders can take advantage of this by buying call options in anticipation of an increase in price.

Understanding and accurately interpreting the signals of the NFT market is an essential first step towards efficient options trading, requiring careful analysis of various metrics such as price data, trading volume, liquidity, and market capitalization. In addition to these quantitative metrics, focusing on qualitative factors such as market sentiment and the reputation of blue-chip NFTs can also provide valuable analysis of potential market volatility. By effectively detecting these market signals, whether speculating on future price movements or hedging potential losses, traders can take advantage of market volatility to their advantage and adopt strategies accordingly.

Data-driven forecasting

In order to effectively navigate and profit from the NFT market, traders need to anticipate market trends and make decisions, which requires a comprehensive analysis of various market data and indicators in the process.

• Relative Strength Index (RSI): RSI is a momentum indicator used in technical analysis to measure the speed and change of price movements, where “RS” is the average increase in the rising session in a certain time frame divided by the average decline in the falling session. An RSI above 70 is usually an indication that the NFT is overbought, indicating that its value may be overvalued and that there may be a pullback in the price. Conversely, an RSI below 30 usually indicates that the NFT is oversold, indicating that its value may be undervalued and the price may rise. As a result, options traders can speculate on these potential price corrections by buying put options when the RSI is high and call options when the RSI is low.
• Natural Logarithmic Yield (LnR): Natural Logarithmic Yield allows traders to simulate price changes over time, with higher yields indicating higher volatility. For example, if a trader observes an upward trend in the natural logarithmic yield of an NFT price, they may predict a period of high volatility in the future and can buy options to profit from the predicted price fluctuations.
• Volatility Index: A hypothetical volatility index, similar to the VIX index in traditional markets, measures the expected volatility in the future. Higher volatility can raise the premium of an option, creating an opportunity for the option seller. For example, if the index shows high future volatility, a trader may create an option to receive a higher premium, especially if they believe that the actual future volatility will be lower than the volatility shown by the index.
• Sharpe Ratio: Sharpe Ratio = (Expected Return on Investment - Risk-Free Rate) / Standard Deviation of Investment Return. The Sharpe ratio is used to understand how the return on an investment compares to its risk. The higher the Sharpe ratio, the better the risk-adjusted return. For example, if a trader compares two NFTs and one of them has a higher Sharpe ratio, they may choose to buy an option on that NFT because it indicates better risk/reward coordination.

As an integral part of risk management, NFT options can protect traders from falling prices (via put options) and potential price increases (via call options) when the NFT is sold.

In conclusion, despite the challenges that the volatility of the NFT market presents, it also presents a unique opportunity for strategic profitability. By having a thorough understanding of market signals and data-driven forecasting, traders can effectively leverage NFT options to reduce risk and potentially maximize gains in this thriving, dynamic market.

Chapter 6: Current Challenges and Risks

NFT options are undoubtedly an interesting innovation, but there are still some issues to consider in the process of widespread adoption. One is liquidity, the NFT market is quite fragmented, as most collections only have 10,000 pieces. Outside of the most popular collections, it can be difficult to create enough liquidity for NFT projects.

Another consideration surrounding NFT options has to do with the depth of the NFT trading volume in question. This has the potential to trigger manipulation (or what some call a highly profitable trading strategy). Traders can own an NFT, buy a downside put option on the item, and then list the NFT below the floor price. And vice versa – if the floor price is low, a trader can buy a call option and then buy that NFT. It is important to monitor open interest, liquidity, and collection volume relative to floor price thickness.

In addition, pricing accuracy is also a key part and is another important factor. Options have historically been priced using the Black-Scholes model. However, this model assumes that the returns of the underlying assets are normally distributed.

According to NFTGo’s data, we can see the distribution of daily floor price changes for two popular NFT collections, CryptoPunks and Bored Ape Yacht Club.

As you can see, the daily yields of CryptoPunks and BAYC in ETH are not normally distributed, but have varying degrees of skewness and kurtosis. The absence of a normal distribution affects the ability of the Black-Scholes model to price options contracts correctly.

Chapter 7: The Future of NFT Options

Derivatives are an extremely important innovation in the operation of capital markets. They are a way for traders to speculate, hedge, and manage risk across asset classes.

The cryptocurrency market is still in its infancy, but it is growing rapidly. At Wasabi, we believe that NFTs will be a potential flashpoint for cryptocurrencies and Web 3 as the industry continues to move forward, mirroring the nature of real-world assets and collectibles themselves. In order for NFTs to grow as an industry, infrastructure is necessary. It can promote the steady development of the market, introduce suitable liquidity, and make the overall benefit more and more. That’s why we built the Wasabi protocol.

We are all too familiar with the fact that NFTs are inherently illiquid, have large differences in value, and are not suitable for splitting. For now, options are still the best way to increase liquidity and build a solid market structure to attract large players. Wasabi’s options are physically settled, do not involve any synthetic instruments that can be manipulated, and do not result in cascading liquidations like other models for similar purposes.

As the NFT market continues to grow, the derivatives market will continue to grow, eventually surpassing the spot market in terms of trading volume, just like the traditional market. The role that options play in this is crucial, and this has been evident for a few months since the launch of Wasabi Protocol.

As we expand into new markets such as games, real-world assets, and the entire NFT space, we are excited to see how market participants can create new scenarios with this novel financial instrument."

Today’s options promote capital efficiency for holders, but they are inefficient for creators. Option holders take advantage of options’ natural leverage to gain greater exposure relative to the amount of money they have invested, completely independent of Oracle and not subject to liquidation. In today’s market, the underlying NFT must be deposited before an option can be created, thus greatly driving up the price of the option. The main reason is that the asset is locked up until it expires, making it more difficult to create options.

Next-generation NFT option protocols won’t face this problem. The options market shows that there are many ways to choose from: Panoptic is creating options based on existing AMM LP positions, Aevo is building synthetic options, and Aori is implementing a fully collateralized margin system to solve this problem.

Once a solution is found, liquidity in the options market will no longer be limited to the circulating supply of tokens. Options will drive growth in the derivatives market as a whole and even serve as a stabilizer for the collectibles market, as active traders will be able to gain exposure to the derivatives market more effectively without having to constantly engage in spot trading.

Finally, options will be combined with other NFT financial instruments to form complex positions. Lenders can hedge with options to further compress the annual interest rate of the loan. When people borrow money, they also buy options, and use the proceeds of the options to pay interest expenses.