From the dual perspectives of infrastructure and market demand, the development of on-chain options is at a critical turning point. In recent years, on-chain options protocols have actively explored models such as order books and automated market makers (AMM); however, constrained by technological bottlenecks and product design flaws, they have failed to achieve scalability. A deep analysis reveals that the fundamental reasons are primarily twofold:
Firstly, liquidity providers have long faced the risk of arbitrage order flows, making it difficult to effectively resist adverse selection. In the on-chain trading environment, high-frequency arbitrageurs often leverage their technological and speed advantages to trade ahead of liquidity providers' price adjustments, putting liquidity providers in a disadvantageous position, which severely impacts their willingness to participate in the market.
Secondly, protocols generally require full collateral, resulting in extremely low capital efficiency, greatly diminishing their attractiveness to retail users. In traditional financial markets, retail investors are the main group demanding leverage in options, as they aspire to achieve significant investment goals with minimal capital. However, the full collateral requirement of on-chain options means that retail investors need to invest a large amount of funds, which undoubtedly raises the participation threshold and discourages many retail investors.
Now, with the continuous evolution of blockchain infrastructure, the first challenge has the conditions for a technical solution. The emergence of cutting-edge technologies such as application-specific chains, modular execution layers, and zero-knowledge proofs has significantly reduced the latency and cost of on-chain operations. This allows liquidity providers to manage quotes and risks in a more refined manner. For example, with the anti-censorship order submission mechanism, the fairness and security of order submissions are ensured; by delaying trade execution, irrational trading caused by instantaneous market fluctuations is avoided; and through efficient oracle updates, accurate market information is obtained in a timely manner. These designs effectively isolate high-frequency arbitrage behavior, building a solid protective barrier for liquidity providers.
However, the key to whether on-chain options can move to the mainstream market lies in the second question—how to build a sustainable flow of high-quality orders. This is essentially a product-market fit problem rather than a simple technical challenge. From the structure of traditional finance and the existing crypto market, high-quality order flows mainly come from two types of user groups: hedgers and retail speculators.
For hedgers, especially Bitcoin miners and large holding institutions, options are a powerful tool for finely managing risks. They need to effectively hedge against cash flow risks arising from price fluctuations. Taking Bitcoin miners as an example, they need to accurately match the cryptocurrency income obtained from mining with fiat currency expenses to maintain stable operations. Currently, this type of demand is almost entirely met by centralized platforms such as Deribit.
However, on-chain protocols are not without opportunities. Through token incentives and compatibility with existing custody solutions, on-chain protocols can gradually penetrate this market. Babylon's successful practice in the Bitcoin staking field fully validates the feasibility of this path. It attracts a large number of users to participate through innovative incentive mechanisms and integration with existing custody systems, providing valuable experience for the development of on-chain protocols in the hedging field.
For retail users, the real appeal of options does not come from complex strategy combinations but from their unique leverage properties and novel trading experiences. Currently, perpetual contracts almost monopolize the leverage demand of retail investors in the crypto market. This is because perpetual contracts greatly simplify the operation process, allowing users to trade without needing a deep understanding of complex concepts like time decay and strike prices, as they only need to judge the direction of the market.
However, this does not mean that options have no opportunities in the retail market. The core advantage of options lies in their ability to express views on volatility and construct asymmetrical return structures. For example, by launching volatility tokens or structured vault products, complex options positions can be packaged into simple and understandable asset forms. These products can attract retail users who are dissatisfied with the monotonous long-short trading of perpetual contracts and are eager to try new strategies, providing them with more diversified investment options.
Looking ahead, for on-chain option protocols to succeed, they must simultaneously overcome two major challenges: technical architecture and market demand. On one hand, it is necessary to continuously optimize the underlying infrastructure to create a safe and efficient market-making environment for liquidity providers, ensuring they can operate stably in the market; on the other hand, products should be designed closely around real user scenarios, such as customizing seamless hedging tools for miners to meet their precise risk management needs; and creating volatility trading entry points for retail investors to lower the threshold for options trading and stimulate their participation enthusiasm. Only when these two conditions are met can on-chain options truly break free from their marginal status and step boldly onto the main stage of crypto finance, opening their own glorious chapter.
