Siren: An Introduction

Options are a financial instrument that can be used to create various complex financial products. The essence of options is that they provide traders with the choice to buy or sell an asset at a predetermined price in the future. This feature is useful for hedging against potential price changes and speculating on these changes.

The Core Mechanics of Siren

Siren employs a fully-collateralized approach to writing options, eliminating the need for oracles. A single MarketsRegistry contract is responsible for creating and managing individual markets. Once a Market contract is created, anyone can interact with it in a permissionless manner. The solvency of a position is always guaranteed by the collateral locked in the smart contract.

Siren tokenizes both sides of the contract, namely the buyer's side (bToken) and the seller's/writer's side (wToken). The bToken provides the holder with the right to buy or sell the underlying asset at a predetermined strike price. The wToken allows the holder to withdraw the collateral (if the option was not exercised) or the exercise payment (if the option was exercised) from the contract after expiration.

When a trader buys a put option, the on-chain token amount is multiplied by the strike. For example, a 1 WBTC $20K PUT will result in 20,000 bTokens. Similarly, a put option is essentially a reversed-assets call option (e.g. a WBTC/USDC put is equivalent to a USDC/WBTC call option).

Tokenizing both sides of the contract enables Siren to create secondary markets for both long and short exposure. In order to become a writer, one can purchase a wToken from the SirenSwap AMM (see below). Conversely, a writer can unwind their short exposure by selling the wToken back to the AMM. This simplifies the write-side mechanics by reducing it to purchasing the underlying collateral at a discount, compared to the typical design where the writer minted long tokens and needed to sell them to realize the premium.

SirenSwap Automated Market Maker

Liquidity is crucial for creating a thriving market, and options can be particularly challenging in that regard. Liquidity is not only impacted by various strike prices and expirations, but also requires sophisticated liquidity providers to ensure fair and sustainable pricing.

To address liquidity concerns from the outset, the Siren protocol utilizes a custom SirenSwap AMM. This AMM combines a constant-product bonding curve with options minting to facilitate trading of both bTokens and wTokens. Importantly, no additional assets are required in the pool other than bTokens/wTokens to trade against the collateral asset (e.g. WBTC). This approach enhances LP capital efficiency and offers other advantages that will be discussed in future posts.

The Siren core team has intentionally designed SirenSwap to be a model-less market maker, believing that simplicity is key in the early days of Ethereum and DeFi. This means that the AMM does not rely on complex on-chain pricing formulas or oracle feeds to operate. As a result, anyone can become an LP and potentially earn trading fees.