Secondary Options Pool (SOP)
Overview
The Secondary Options Pool is a unique component in Grix, enabling takers and makers to trade on-chain while significantly lowering bid-ask spread and AMM fees.
The SOP takes makers’ selling requests as a limit order for a previously purchased option and offers it as a liquidity source for solvers routing it to the takers.
Why do we need a secondary options pool?
As of today, most DeFi options protocols offer an AMM structure for buying and selling options. When a user chooses to sell a live option back to the protocol before expiry (if possible), the AMM buys it back with the relevant slippage, skew, and fees deducted from the option's value. This significantly hurts the value of all DeFi options since the actual value of the option on the market is less than it would be if trading on a centralized exchange.
That is to say, there is no market equilibrium between makers and takers through the AMM since there are fees that change the supply curve.
In the following example, simplifications of the graphs and equations have been made. Each DeFi options AMM works differently with different mechanisms to protect from price manipulation and with different skew models.
The general demand equation is
Pd=a−bQd
Where:
Pd is the price the consumers are willing to pay.
a is the maximum price consumers are willing to pay for zero quantity.
b is the slope of the demand curve, representing the change in quantity demanded for a change in price.
Qd is the quantity demanded?
The general supply equation without fee:
Ps=c+dQs
Where:
Ps is the price at which producers are willing to supply.
c is the minimum price producers need to start supplying (intercept with the price axis)
d is the slope of the supply curve, representing the change in quantity supplied for a change in price
Qs is the quantity supplied.
But, when a fee is added as a percentage of the price (in most AMM cases), the supply equation becomes:
Ps=c+dQs1-f
Here, the fee is taken into account by dividing the right-hand side of the supply equation (1-f).
The amount of inefficiency in this type of market is positively correlated to the fee needed to be paid to the broker (either by the taker or the maker).
Grix protocol's solution is a simple DeFi exchange allowing traders to swap the option contract. The representation of option contracts on most DeFi protocols is either an ERC20, ERC1155, or ERC721, which are all transferable between users, so swapping between users is not only possible but expected. This component acts as an additional liquidity source for Grix's options traders.
In fact, even in traditional finance, when buying an option contract, you are only able to trade this contract through the same broker. So, you are basically “married” to the broker that sold you the contract, even if the price is much higher on other venues. In summary, a secondary marketplace for options is a new concept in the DeFi space. Operating this venue on the protocol will ensure better prices for both makers and takers by “bypassing” the broker’s fees and inefficiencies.
Example
User's Goal: Buy 90 contracts.
Total Budget: $1000.
Protocols and Prices:
Protocol A: $11 per contract.
Protocol B: $10 per contract.
Grix SOP Orders:
Order 1: 20 contracts at $8 on Protocol A.
Order 2: 30 contracts at $9 on Protocol B.
Naive Approach - The user attempts to buy all 90 contracts from a single protocol, not considering different prices or the secondary market.
Cost: $11 per contract x 90 contracts = $990.
Outcome: The user stays within the $1000 budget but doesn't optimize the cost per contract.
Basic Protocol Split - The Solver optimizes by splitting purchases between Protocol A and Protocol B based on their prices.
Strategy: Buy more contracts from the cheaper Protocol B.
Split Example:
40 contracts from Protocol A: 40 x $11 = $440.
50 contracts from Protocol B: 50 x $10 = $500.
Total Cost: $440 (A) + $500 (B) = $940.
Outcome: The user saves $60 compared to the naive approach.
Utilizing Grix SOP
The Solver further optimizes the purchase by including Grix SOP orders.
Strategy: Buy maximum contracts from Grix orders at lower prices, then fill the remainder from protocols.
Grix SOP Purchase:
20 contracts from Order 1 (Protocol A) at $8 = $160.
30 contracts from Order 2 (Protocol B) at $9 = $270.
Remaining Contracts to Purchase:
Total contracts bought from Grix: 50 (20 from A + 30 from B).
Remaining contracts to buy: 90 - 50 = 40 contracts.
Additional Purchase from Protocols:
Since Protocol B is cheaper, the Solver decides to buy the remaining 40 contracts from Protocol B.
40 contracts from Protocol B: 40 x $10 = $400.
Total Cost with Grix Orders:
$160 (from Grix, Protocol A) + $270 (from Grix, Protocol B) + $400 (from Protocol B directly) = $830.
Outcome: The user achieves the goal of 90 contracts within the budget, significantly optimizing the cost to $830, saving $170 from the naive approach and $110 from the basic protocol split.
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