This is an introductory summary of the Panoptic Protocol.
Who should use Panoptic?
Options are one of the most traded instruments in traditional finance. They can be used to hedge a portfolio, speculate on the value of an asset, create synthetic positions in a capital-efficient manner, or as a way to create defined-risk positions.
Investors that first learn about options may be overwhelmed at first. While the math behind options may seem daunting for most users, anyone without a math background may still earn sustainable returns as long as users follow a core set of basic rules.
Here is how Panoptic can be valuable investment instrument for different user profiles:
1. Retail Users
Retail users can also choose to participate in decentralized option vaults --a novel type of managed investment instrument pioneered by Ribbon Finance. Option vaults can easily be implemented in Panoptic to target strategies that can be bearish, bullish, delta-neutral, or any combination thereof.
Link: Strategies for retail users.
2. "Pro-tail" Users
In Panoptic, these users could be DeFi-native users that are comfortable with liquidity providing in AMMs and liquidity mining in protocols such as Uniswap or SushiSwap. Or they could be seasoned TradFi options traders that may want to get exposure to 24/7 markets on the long-tail of digital assets that are tradable on Uniswap v3.
Link: Strategies for Pro-tail users.
3. Market Makers and Uniswap v3 Liquidity Providers
In Panoptic, market making involves responding to both the demand from buyers and the need to stabilize prices within a Uniswap v3 pool. That may mean having to sell OTM options or providing liquidity in response to the put skew of an underlying asset. Or buy close to the money options when the implied volatility is low compared to the realized volatility. Of course, seasoned market makers will need to do so in a way that maintains delta-neutrality at the portfolio level.
Link: Strategies for Uni v3 LPs.
In addition, institutions may deposit funds in the Panoptic pool as liquidity providers in order to collect a stable yield on their capital, which means they would effectively be lending their tokens to options sellers and market makers for a fixed commission fee.
Link: Strategies for institutions.
5. DAOs and protocol treasuries
By seeding a Panoptic pool from the "token" side, DAOs will effectively increase the liquidity available for the creation of call options, which in turn should allow both retail speculators and pro-tail users to profit from an increase in token price. These tokens could in turn be used as collateral to back a DAO's market making activities, which could help stabilize prices and decrease market volatility.
Link: Strategies for DAOs and protocols.
How do Panoptic Options differ from traditional options?
Options in Panoptic differ slightly from conventional options. Instead of using a clearinghouse to settle options contracts, the Panoptic protocol uses Liquidity Provider (LP) positions in Uniswap v3 as a fundamental building block for trading long and short options.
Panoptic allows users to access new and improved features when options trading:
- Panoptic Options never expire and are perpetual
- Anybody can deploy an options market on any asset in a permissionless manner
- Panoptic enables anyone to lend their capital to options traders as a liquidity provider
- Options have unique properties: width, new concept of moneyness, user-defined numeraire, etc.
- Pricing is path-dependent and does not involve counterparties (such as market makers)
- There is no concept of [vega], which means that the premium for open positions will not be affected by volatility expansion
- Collateralization requirements and buying power reduction respond to market activity
- Buying power requirements do not change over time
- Commissions are paid only once, when the position is created
- Distressed accounts will be liquidated by external users
- External users may forcefully exercise far out-of-the-money long positions
What are the risks?
Options trading is not for everyone. Like any form of leveraged trading, trading options is associated with significant risks. Any user that wishes to interact with the Panoptic protocol has to understand the risks involved.
The main risks are:
- Over-exposure: losing due to leveraged exposure.
- Unfavorable pricing: paying a large premium for options.
- Forced exercise: having far-the-money positions closed by external actors/liquidators.
- Liquidations: losing deposited collateral because of a margin call.