The Decentralized Finance (DeFi) options market has had limited growth because of a long-standing chicken and egg problem: volume both requires and begets liquidity.
Options are particularly challenging from a liquidity standpoint because they are the most complex financial primitive. By comparison, perpetual futures and other delta one derivatives are orders of magnitude simpler.
Bringing liquidity to the DeFi options market will grow the entire DeFi derivatives ecosystem as retail traders and institutions alike begin to trade options as a way to speculate and hedge their risk. There is an infinite combination of financial products that can be built with a robust options base layer.
This is precisely why Initialized funded Synquote, a decentralized options trading platform. We’re proud to announce we were the lead investor of their most recent capital raise with participation from Coinbase Ventures, Polygon, Alliance DAO, CMT Digital, and Ryan Selkis of Messari.
Why There’s a Liquidity Problem in DeFi Options
Each year billions of options contracts exchange hands making options trading a critical component of the traditional finance ecosystem. In decentralized finance, options are a small, but growing piece of the ecosystem.
To date, no protocol has been able to achieve deep liquidity and fair prices for on-chain options traders. This is because options have a high cardinality of instruments. For BTC there is the BTC-USD perpetual. For options, there are multiple expiry dates. Each expiry date has a number of strike prices, and options can be calls or puts.
This multiplicative effect makes it much harder to have liquidity for instruments that may be required by one of the many combinations of options strategies that can be run to generate a particular payoff profile.
But the diversity in options is exactly what makes them an irreplaceable financial instrument. No derivative is as expressive as options, almost any payoff profile you desire can be made a reality.
The zero-to-one moment for Synquote
When we met Ahmed Attia in June 2021, we were immediately struck by his depth of thinking about the decentralized options market paired with his deep technical skills in the smart contract stack. In working with him over the last year, he’s proven he can take that understanding, identify user needs and ship a lot of code.
Ahmed first entered the decentralized exchange space in 2017 as an undergrad at Stanford.
He started out as a trader on exchanges including IDEX, which grew to become one of the largest applications on Ethereum’s network. After using the platform, he reached out and joined as one of the first engineers during a period of rapid growth. After IDEX, he spent a couple of years at Google working on software-defined networking.
While at Google, he discovered a massive gap in the market while watching the DeFi derivatives space. None of the DeFi options platforms had enough liquidity, and they often had unfair prices for traders and unsustainable models for liquidity providers.
Existing approaches using AMMs (emulating their use in spot markets like Uniswap) ran into issues managing risk in an often one-sided market, and could not compete with quant traders in pricing options on centralized exchanges.
After experimenting with different approaches, Ahmed found that RFQ, or request for quote, could bring significant improvements to the DeFi options space by hitting a sweet spot of usability for retail users and ease of providing liquidity for market makers. RFQ is traditionally used to trade illiquid markets such as fixed income, exchange-traded funds (ETFs), and now crypto options.
Six months after our initial meeting, Ahmed followed up to tell us he had built out the entire Synquote platform by himself. The end-to-end customer experience he showed us was impressive.
Users can go to the Synquote app, connect their wallets, and trade crypto options in just two clicks. The first click is to request a quote, and the second click is to submit the trade. If you’ve ever used the Robinhood interface for options trading, Synquote’s is just as easy to navigate.
An important note: as with most DeFi derivatives platforms, Synquote does not currently support users in the US.
In order for the DeFi options market to grow, users need an easily accessible platform, and they need liquidity. Synquote is solving both problems with its innovative use of RFQ and a two-click interface that makes onboarding seamless for first-time options traders.
I believe Synquote is on track to become the most liquid options protocol in DeFi. The team has already proven they can quickly build out and ship their options offering. I expect the platform to improve by the day and am excited to see how Synquote will continue to close the gap in the DeFi options market.