Charm uses a single liquidity pool to power multiple options with different strike prices to solve the liquidity problem of decentralized options.
Written by: Ether Boy
Because options can use lower capital to leverage greater leverage and make use of market volatility for profit, they have the characteristics of high capital utilization and controllable risks. In addition to their speculative properties, they are often used for hedging in the traditional financial sector. , In order to achieve risk management. Since its inception, it has been regarded as a high-volatility and high-risk cryptocurrency market. This long-term high implied volatility attribute is precisely matched with the “appeal” of options. With the rapid maturity of the cryptocurrency derivatives market, option products are quickly being recognized by more and more market participants.
However, the difference between options is that for a currency such as BTC, there are dozens or even hundreds of trading pairs at different exercise prices in different periods, and the trading volume of cryptocurrency options is still very low. This creates a problem for the liquidity injection of centralized options.
How to solve the liquidity problem has become a hurdle that options products must overcome at present, and Charm has proposed a brand-new solution to this pain point.
What is Charm?
Charm (charm.fi) is a decentralized options protocol based on Ethereum. It was officially launched on the main network on January 18 this year. It aims to provide users with European options for calls and puts, and is created using the prediction market AMM fluidity.
Charm’s approach is to certify options with different exercise prices on the same date, using a bond curve provided by LMSR’s liquidity model. Through this curve mechanism, different options can be generated. And determine its price through a multivariate function.
Charm has the following characteristics:
Opening a position requires payment of 1% of the basic transaction fee. There is no charge for liquidation or settlement.
Chainlink oracle is used to retrieve the base price at expiration.
Prices are completely determined by supply and demand, and AMM does not rely on external predictions for pricing.
Options can be sold at any time before expiration. Unlike American options, users can obtain the intrinsic value and time value of the option at the same time.
Charm allows a single liquidity pool to power multiple options with different execution prices, thereby partially solving the problem of liquidity dispersion. Moreover, compared to a centralized option trading platform, AMM’s market making method can also provide greater liquidity and depth than automatic market makers, and reduce the bid-ask spread.
Compared with Opyn, Hegic and other relatively more mature decentralized options solutions, Charm has obvious advantages in the design of solving liquidity problems. Opyn uses the form of an order book, which has a higher spread than a centralized exchange. However, when buying options on Hegic, you can only choose the date, not the price, and you cannot make more flexible price choices.
The main functions have been launched, but the early product capital pool is still shallow
In Charm, users can click Deposit to choose to provide liquidity in a pool of call or put options that expire on a certain date.
It can be seen that the current liquidity provided in the ETH and BTC option pools is still very small, and there are only less than 20 ETH in the ETH call option pool, which is likely to cause great “slippage”:
For example, if you buy 10 ETH call options that expire on June 25 and have an exercise price of 1600USDT in the Call column, the Price Impact has reached 46.7%, and you need to pay a very high premium.
Insufficient liquidity incentives and high risks, resulting in low user enthusiasm for participation
The current low liquidity provided on Charm is mainly due to two reasons. One is that the project party has not developed liquidity mining incentives, and the liquidity provider can only get some transaction fees at present (of course, future airdrops are not excluded. may.). Second, the official also reminded that providing liquidity is risky and may lose as much as 100%. Of course, this loss can also be avoided if hedging is done.
Therefore, to provide liquidity in Charm, it should be regarded more as a speculative bet, rather than a method of obtaining profit. Before the expiry date of the option, up to 100% of the deposit may be lost. These restrictions also make current users less enthusiastic about providing liquidity to Charm.
Charm has not yet decided to issue a token, but it is in the process of token design. Charm reminded that Charm has not been audited and tested.
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