Principle and need

Eonian Option

The Eonian Option offers a versatile solution to the crypto market's prevailing needs, such as taking on significant leverage without risking liquidation and low-cost hedging. It is based on the incredible work of Dave White on Everlasting Options, from which we took a lot of inspiration.

Let's explore the first application, hedging. There are currently two ways to hedge: perpetual contracts and European options. Perpetual contracts are the most convenient as they efficiently mitigate collateral risks, but their funding rates make them relatively expensive. The funding rate is highly dependent on market conditions, and when the market is bearish, investors have to pay more, offsetting their hedging benefits.

In contrast, the Eonian Option offers a cost-effective hedging solution as it only incurs rolling costs, which are much lower than the funding rate and less affected by market contexts. Additionally, the automated purchasing process is more convenient and less expensive than buying European Options every week. When buying a European option, market makers charge a spread to compensate for potential losses caused by informed traders who have information about the future price of the asset. Uninformed traders, who buy contracts without concern about price, do not need to be charged a spread. However, in practice, everyone pays the spread, and it's impossible to differentiate between informed and uninformed buyers.

The Eonian Option resolves this issue by regularly purchasing options, indicating to the Liquidity Provider that the buyer is not informed, eliminating the spread charge. As a result, Eonian Option buyers only pay the spread once.

AMM

Due to the potential fragmentation of liquidity, a CLOB-based exchange is not feasible for products such as the Eonian Option. As a result, we chose to utilize an automated market maker (AMM) model. However, many existing AMMs that offer options either impose high fees or do not provide adequate protection for Liquidity Providers. To address these issues, we drew inspiration from the well-designed system used by Lyra Protocol.

Our AMM incorporates automatic hedging actions based on the Greeks exposure of Liquidity Providers to ensure the long-term sustainability of the protocol. It also features a pricing market driven by a dynamically determined Implied Volatility.

Our risk management approach is centered around two primary risks: Vega and Delta Risk. To manage Vega Risk, we implement an asymmetric spread around the theoretical option price, which varies depending on whether the executed trade increases or decreases the Vega Risk. To mitigate Delta Risk, the pool trades the underlying asset on the spot market to offset its exposure to changes in the asset's price.