Lien Protocol: A DeFi Options Protocols Unlike Any Other
DeFi is evolving at a rapid pace. There are now several decentralized options protocols in the current DeFi space that users can choose from to fulfill their specific needs. Upon evaluating each protocol’s features, Lien seems to come out on top with offerings that are useful for users that are looking to benefit from a combination of options strategies.
The more variety there is of the options’ underlying assets, the better it is for users because they can choose from a wider selection of assets to deploy their strategies. This is the reason most options protocols are adding other assets besides ETH to their platform.
The options protocols differentiate themselves by offering different expiration types, settlement methods, underlying assets, collateral requirements, fungibility characteristics, etc. When comparing these parameters, the Lien protocol stands out as being most favourable to users. Let’s explore the features one by one.
Exercising the Options - European Type
Lien offers European-style options which can be exercised by the user only on the expiration date. If the option is in-the-money at expiry, the option is cash-settled and users can claim the payoff at any time after the maturity date.
On the other hand, most of the other options protocols use the American-style type option, which allows users to exercise the option before the expiration date. Users have to be careful as there is a risk that the option expires worthless.
Cash versus Physical Settlement
There are two ways to settle an option, cash settlement or physical delivery. For cash-settled options, users receive the payoff of the option in lieu of taking physical delivery of the underlying asset. Cash settlement allows a more efficient use of the user’s capital because the user does not have to deliver the underlying to the counterparty.
Options on the Lien protocol are cash-settled which is the preferred method of most traders due to its convenience and capital efficiency.
ETH & USDC as Collateral
Options protocols typically use non-stable assets such as ETH as collateral as well as stable assets such as USDC and DAI.
Lien is no exception but uses USDC as collateral for put options as USDC is considered to be more trustworthy than other stablecoins.
ERC20 Token & Secondary Market
Most of the options protocols tokenize options as an ERC20 token to make it transferable in secondary markets. The ERC20 token standard is supported by most DeFi platforms making it the obvious choice when considering liquidity.
Options on the Lien protocol are tokenized as an ERC20 token and can be traded in secondary markets using the Lien app as well as DEXs (Decentralized Exchanges) such as Uniswap or 1inch.
Liquidity through Pools
Centralised exchanges such as Binance use order books to facilitate options trading. Order books are popular among traders who are accustomed to providing liquidity on order books.
While some exchanges provide liquidity through pools where traders put capital in pools and use buy options to trade against the pool, which is quite popular among small traders, it provides liquidity in the pool type that can be shared and includes liquidity of options.
Currently, Lien offers options through a decentralized OTC (over the counter) with an oracle pricing the options. Lien recently released an improved volatility oracle that allows more accurate pricing of the options which equates to fairer prices for users.
With the launch of Lien v2, users will be able to provide liquidity through a pool allowing them to capture returns generated from selling options.
Most options protocols require users to put up 100% of the notional value as collateral to issue an option. This is because option sellers have to be able to cover the payoff amount at all times.
DeFi options protocols are less efficient in terms of capital requirements compared to their TradFi equivalent due to their trustless nature, to ensure that capital requirements are met without having to trust the counterparty. With the Lien protocol, users can also create exotic options such as butterfly options, which is more collateral efficient than just issuing plain vanilla options.
Another strength of the Lien protocol is that it enables users to trade options at a price close to its fair value, thanks to the volatility oracle. This will lead to a more liquid secondary market. The release of Lien v2 will attract a new cohort of users as they will also be able to collect premiums by writing and selling options.
Inherited Feature from Lien v1
In Lien v1, to achieve a stablecoin backed by ETH derivatives, ETH was split into two types of call options; SBT (Solid Bond Token) and LBT (Liquid Bond Token). SBT is a deep in the money call option that pays out a fixed amount in USD unless the ETH price on the maturity date falls below the strike price. LBT is a leveraged call option which has a payout that corresponds to the increase in the underlying ETH price. This is one of the most unique features of Lien that sets it apart from other projects. This feature has been integrated into Lien v2.
Lien v2 will split the underlying asset into various options that can be sold using the Lien app. Options that can be created from the underlying asset include ATM (At The Money) call options, butterfly options and SBT. SBT will continue to serve as a deep in the money call option and can be used to purchase options on the Lien platform. SBT, upon maturity, will be converted into ETH.
Vision for the future
Last but not least, Lien has a clear vision for the future. According to their latest medium article, they remain dedicated to creating stablecoins out of derivatives once sufficient liquidity for the options market is established. They mentioned that they are planning to release derivative backed stablecoins once they have sufficient liquidity in their pool.
Their challenge seems to open a new door for the DeFi space. Among the unique and interesting protocols in this space, Lien’s vision clearly stands out. It may not be an easy journey, but it will surely be an exciting one.
DeFi has pushed the crypto world into the next stage as it starts to open up the possibility of fully automated and trustless finance transactions. Because regulators still control the on-ramps and off-ramps into and out of the crypto world, the transfer of assets sometimes does not occur according to the users’ intention. However, in DeFi, once a user makes a valid request to execute a transaction to a contract, that request will automatically be enforced.
Lien has recently added BNB as an underlying asset for options on the Binance Smart Chain where traders can trade BNB call options and exotic options such as butterfly options.Lien will continue to support various cryptocurrencies as underlying assets. It’s time to keep an eye on option platforms like the Lien protocol which is clearly the most favorable option for users.