How Onchain Options Could Replace the Basis Trade as Crypto's Yield Strategy
- •
Onchain options follow the perpetuals adoption curve
“Similar to what I described there with the seven year timeline between the introduction of perps to crypto in 2016 to really hyperliquid beginning to get serious traction in 2023 and 2024, I think we're about seven years behind when Deribit started to do volume for the first time too. And I think that market is about to get a lot bigger. I think we're in the early innings of, like, that sort of uptick in on chain options adoption following off chain, like the 2023 moment for pubs.”
- •
Options exchanges benefit from strong network effects
“It shows how difficult it is to actually replicate a network effect in options. It's much more sticky because you have, you know, very long onboarding cycles, a very high bar for institutions to use, and, you know, once they're onboarded, like, to take incremental risk to go to another exchange. This is very difficult to wrestle someone away from an existing exchange for another exchange once all of that is set up, which is why a lot of the other centralized exchanges tried very hard to get into options and didn't make huge inroads into the market share.”
- •
Deribit established the first crypto volatility surface
“The major things that Deribit brought was, like, a real time order book. They actually used the central limit order book for market makers, and that, you know, made prices not so opaque. And it brought it more transparently, which I think is nice. And it was the first time we could make an IV surface for Bitcoin and actually, like, price it, and people could see that. I think that really led the game in a lot of pricing and a lot of risk in portfolio management.”
- •
Counterparty risk drives shift toward onchain derivatives
“I think more and more, we see some of these big OTC takers and traders, at least looking to take less counterparty risk than they have in the past. I mean, you have, like, even, you know, block fills, like big US based, Chicago based, reputable market maker, OTC desk, declaring bankruptcy out of nowhere, like, a month ago. Those risks are present no matter who you're dealing with. And anytime you as a business can reduce that risk, you're going to try to do it.”
- •
Capital stickiness makes options markets hard to disrupt
“Once you have a trade expiring in a year, the market maker needs capital on that exchange for a year. And the trader has some capital and some positions on the exchange for a year. This is very difficult to wrestle someone away, from an existing exchange for another exchange once all of that is set up, which is why, you know, like, a lot of the other sort of Asia based centralized exchanges tried very hard to get into options and didn't make huge inroads.”