Panoptic Review: Permissionless Options Trading For Any Asset On Uniswap V3
Options trading is an important part of the financial markets, allowing traders to take advantage of price movements and hedge their investments. The innovation of Uniswap v3 has opened the door to new options trading opportunities. Today, with dozens of centralized liquidity market makers (CLMMs) under construction, DeFi is on the verge of an options trading revolution – and Panoptic is at the heart of that revolution. In this Panoptic review, let’s find out through the article below.
What is Panoptic?
The Panoptic Protocol is a perpetual, oracle-free, timely payment options trading protocol built on the Ethereum blockchain. The Panoptic protocol is the world’s first protocol that allows any group of assets in the Uniswap v3 ecosystem to execute permissionless options transactions.
Panoptic’s mission was to develop a trustless, permissionless, composable options product and overcame the challenging task of building an options trading protocol on top of the Ethereum blockchain.
Panoptic Review: Uniswap Option Empowering Panoptic
Options trading is an important part of the financial markets, allowing traders to take advantage of price movements and hedge their investments. In traditional finance (TradFi), the options market requires more capital than stocks. The same is not true of decentralized finance (DeFi).
Uniswap v3 first launched in May 2021, introducing a host of innovative features, including centralized liquidity, paving the way for CLMM.
Unlike traditional liquidity provisioning (LPing), which spreads liquidity across the entire price spectrum of a token pair, centralized liquidity empowers liquidity providers (LPs) to contribute assets at their prices in a particular price range.
In short, CLMM on Uniswap v3 has allowed LPs to sell put and, in return, continuously receive fees from spot traders in the form of their “streaming premia” – a Panoptic discovery.
The protocol creates a marketplace for borrowing and lending Uniswap v3 LP tokens, allowing both call and put options to be traded. Traders can now buy and sell both put and call options on any token on Uniswap, the world’s largest decentralized exchange (DEX).
Panoptic removes partners, such as market makers, from pricing options and replaces pricing with a converged spot market-based stream with Black-Scholes pricing. Streamia Panoptic is an unpaid, pay-as-you-go streaming premium that uses Uniswap’s collection to calculate the amount of streamia an option buyer must pay to the seller.
Streamia equals the amount of swap fees that the borrowed Uniswap LP token would earn in the Uniswap pool if the buyer does not clear it plus the additional Panoptic liquidity difference. As a result, Panoptic options sellers make better profits than LPing in Uniswap for the same position.
Furthermore, Panoptic liquidity provision (PLP) plays a similar role to traditional LP by providing liquidity to facilitate trading. However, on Panoptic, the PLP does not need to choose a price range and can offer one or two tokens at any rate. This opens up one way and gives the LPs interchangeable, allowing passive investors to re-enter the market.
PLPs earn rewards proportional to options trading volume in Panoptic without worrying about price exposure or temporary losses!
Additionally, PLP allows users to trade under-collateralized options. While under-collateralized positions are more risky and require close supervision, users can expand their exposure while freeing up capital.
Finally, our collateral tracker allows traders to create capital-efficient, multi-legged positions such as straps, struts, iron conductors, and more. Through Panoptic, both advanced options traders and novices can effectively leverage their positions and manage DeFi investment risks.
Panoptic Review: Mechanism of action
The protocol allows for the creation of option-like returns by moving liquidity between ecosystem participants while collecting commissions to facilitate transactions. If a token pair has a Uniswap v3 pool, Panoptic can create an options market on that pair. This is in stark contrast to CEX and earlier options protocols, which currently only offer options on some whitelisted token pairs.
The mechanisms implemented by Panoptic naturally solve many of the problems that other DeFi option proponents have struggled with. Accurate and efficient pricing of options has been a challenge for many on-chain central limit order books (CLOBs) and automated market makers (AMMs), while DOVs subject to inappropriate incentives between off-chain market makers and vault depositors.
Because DOVs have no secondary market to offload inventory, they are restricted from auctioning options to the market makers with the highest bids. Price discovery is ineffective because there are a limited number of these buyers, resulting in undervalued options.
Meanwhile, option AMMs and CLOBs use heavily modified Black–Scholes models to determine prices. This is problematic because blockchain technology is not developed enough to efficiently run these computationally intensive equations.
Incorrect pricing creates a toxic flow in which recipients, who can more accurately price offline options, exploit undervalued options, generating profits for themselves. they equal the cost of LP. To combat this, protocols have begun to introduce increasingly complex compensation models and mechanisms, which can solve one problem but often lead to another.
In contrast, since Panoptic options are built on top of the LP token, pricing is path dependent and Black–Scholes models are not needed. Another inefficiency with protocols that use Black–Scholes pricing is their reliance on oracles. Oracles are susceptible to price manipulation and are not suitable for long-term, low-liquid tokens. Panoptic’s design allows it to accurately price options on any Uniswap v3 liquid token, completely eliminating the need for oracles.
How do Panoptic Options differ from traditional options?
Options in Panoptic differ slightly from conventional options. Instead of using a clearinghouse to settle options contracts, the Panoptic protocol uses Liquidity Provider (LP) positions in Uniswap v3 as a fundamental building block for trading long and short options.
Panoptic allows users to access new and improved features when options trading:
- Panoptic Options never expire and are perpetual
- Anyone can deploy an options market on any asset in a permissionless manner
- Panoptic enables anyone to lend their capital to options traders as a liquidity provider
- Options have unique properties: width, new concept of moneyness, user-defined numeraire, etc.
- Pricing is path-dependent and does not involve counterparties (such as market makers)
- There is no concept of [vega], which means that the premium for open positions will not be affected by volatility expansion
- Collateralization requirements and buying power reduction respond to market activity
- Buying power requirements do not change over time
- Commissions are paid only once, when the position is created
- Distressed accounts will be liquidated by external users
- External users may forcefully exercise far out-of-the-money long positions
Panoptic Review: Participating parties
Panoptic’s ecosystem consists of three main players:
- Liquidity providers whose capital is used by option sellers and who receive profits from lending their capital;
- The option seller deposits collateral and uses it to borrow funds from the LP to create a short put option by providing centralized liquidity to the Uniswap v3 pool;
- Option buyers deposit collateral to pay the seller’s potential premium, and those who eliminate capital deployed by option writers to the Uniswap v3 pool, create long positions.
Panoptic Review: Fees and commissions
- Sell an option: Selling an option costs a commission and a gas fee. The commission is 0.2% to 0.6% of the nominal value of the options position, depending on pool usage at the time of sale. There is no commission to close the position.
- Buy an option: Buying an option costs a commission, a streamia (streaming fee), and a gas fee. The commission is 0.2% to 0.6% of the nominal value of the options position, depending on pool usage at the time of purchase. Streamia starts at 0 and accumulates while the underlying price remains in the range. There is no commission to close the position.
- Streamia (streaming fee) is equal to the swap fee that a borrowed LP position will earn in the Uniswap pool, multiplied by the spread factor.
- Commission Fee: This is the fee for minting an option. When the option seller or buyer opens their position, they pay a commission on the notional value of the position. Commissions are paid to PLPs. The commission fee percentage ranges between 0.2% – 0.6% based on team usage.
Panoptic Review: Roadmap
Currently, the Panoptic protocol is still in its early stages. According to the official website’s Roadmap, the protocol will launch to the mainnet in September of this year. Currently, the project team is using OpenZeppelin for security testing.
Panoptic solves the illiquidity of on-chain options by building on the Uniswap V3 ecosystem while optimizing transaction speed and transaction costs. Panoptic allows users to create long and short put or buy options for any Uniswap v3 trading pair that exists. In addition to buyers and sellers, Panoptic has introduced a new role as a “liquidity provider”. Options buyers and sellers must redistribute liquidity within the Uniswap pool to create new options. Panoptic uses commissions to motivate users to provide liquidity to increase the efficiency of its capital significantly.
All in all, the Panoptic Protocol is an efficient, low cost and highly liquid options trading protocol with huge potential and advantages. Panoptic provides reference and inspiration for other decentralized finance protocols, promotes the development and growth of the entire decentralized financial market, and creates a competitive, fair economic environment.
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DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.