Derivatives is the next frontier for DeFi. Options particularly are lagging, especially when compared to the traditional market. The main venue today, Deribit, while growing fast the past years, is still far behind Futures volume. We can expect more ways to buy or sell volatility on the crypto market in centralized fashion. Decentralized Finance(DeFi) is also brewing with ideas and implementations like Opyn, Lyra, UMA (KPI options), Hegic. We want to emphasis on three trends that rejoin on our investment thesis:

• expansion of crypto trading in general, of crypto options market especially
• DeFi complexity abstraction for easy onboarding of users
• the advent of the Internet of Blockchains’ world with more cross-chain applications and communications

Thus a protocol, surfing those three waves, presents an interesting investment upside. Harnessing the power of cross-chain (and/or cross layers) communications, this service will enable users to market-make, trade, exercise and also arbitrage using liquidity spread across different L1/L2.

Bitcoin was the first cryptocurrency, but more importantly for our discussion it was the biggest ecosystem. By that I mean that altcoins were forked out of Bitcoin source code. As such, a wallet supporting Bitcoin would support altcoins. The main use case at that time was around payment and trading but it was somehow not motivating enough to develop inter-blockchains communications. There were early interest in cross chain swap, which I always found fascinated. The main example used HTLC(Hash Time Locked Contract) based on the smart contract capabilities of Bitcoin. Despite that early interest, cross chain communications did not catch up. The fault: the trading use case that relied on Bitcoin since it was the currency of the cryptospace. It was the base pair for most altcoins and was thus needed to be able to trade. Centralized exchanges developed to answer that need and through that pairs with stablecoins, USDT, and fiat replaced those with Bitcoin, akin to a crypto Triffin Dilemma.

Ethereum and its smart contracts brought new uses cases or concrete and simpler implementations of old ones: ICOs, DAOs, NFTs, DeFi. Arguably, Ethereum has the biggest ecosystem which explains that even new chains with different consensus adopted the EVM(Ethereum Virtual Machine), like Binance Smart Chain or Avalanche. This renewed the interest for cross-chain communication with bridges between protocols, especially after DeFi summer. One example, the hunt for yield, did prop up the supply of BTC on Ethereum:

Another example is RenVM, an open protocol providing access to inter-blockchain liquidity for BTC, BCH, ZEC to your Ethereum app. There is also the cosmos protocol that was made for the Internet of Blockchain. Terra, one blockchain from that ecosystem, is active on Ethereum through their stablecoin UST and the Mirror protocol and its synthetic stocks (see charts on this dashboard).

Source of Insight

It is really hard to imagine a world where one chain rules them all, which attracted me to these ideas of cross-chain communication. I had the chance to develop a protocol Extending Atomic Cross-Chain Swaps during my PhD. I also took an interest in transparency for blockchains, which translated into Teal Finance, a project developed during hackathons to collect on-chain and off-chain (market) data. I realized DeFi Options were still very niche, compared to DeFi Perpetuals. This motivated me to become fairly active in a lot of DeFi Options, playing the beta user but also being active in those (discord) communities, in the search of the protocols that will be part of those three waves.