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80% APY!? Is it Sustainable?

We’ve covered why we think derivatives are going to the moon in 2022 (and beyond). We’ve told you why the options boom is coming (remember that 500-1000x growth covered in here). You know that we are early.

In the last report, we explained that DeFi options protocols are innovating rapidly, and briefly mentioned DeFi Options Vaults (DOVs). This report is going to dive deep into DOVs, and get into the nitty-gritty of why they are incredibly powerful tools that could offer a 15-80% sustainable yield, and are fast becoming a key part of the yield generation ecosystem in crypto!


  • DOVs are a vital part of the DeFi options markets.

  • You, me or anyone else can access hedge fund calibre investing strategies with DOVs.

  • The sector is already BOOMING, and shows no signs of slowing down.

  • Advertising very high and fully sustainable yield, but is that just marketing? 🤔

Read to the end for our answer, and DOV top picks!

What is a DOV?

By now, you’ve all read our report on options. You’ve got a good understanding of what options are, why they are important, and you know the top players in the market at the moment.

You enjoyed last week’s report (of course), but it left you wondering, what are these DOVs, and why do we think they’re sooo important.

DOVs have been a phenomenon in the second half of 2021, with not just retail, but some of the largest institutions taking interest in them. Check out the chart below to see the rapid growth of DOVs. Their beauty lies in their simplicity. Where previously users had to self-execute options selling strategies, with DOVs, you simply ‘stake’ your assets in vaults, which will deploy them into options strategies automatically. This can see users earn high (generally advertised as 15-50%) sustainable yields! This is without discussing the fact they provide liquidity for options buyers. They are fast becoming the backbone of the DeFi options infrastructure!

Implications of DOVs

  • Speed up adoption of DeFi options by an order of magnitude.

  • Address supply and demand issues in DeFi options market.

  • Allow (potential) sustainable high yields with no token inflation.

  • Form part of complex structured products, democratising access to previously unattainable % yields.

  • Strategies that were only accessible to hedge funds and the ultra-wealthy in TradFi, open to anyone, and for anyone to build. The democratisation, along with potential in crypto, means the yields generated far exceed the elite previously had, with more innovative strategies and more choices.

The Mechanics

How do these DOVs work? Well, they use basic strategies like covered calls and cash-covered puts, buying at the money options with funds users deposit into the pool.

Covered calls – Sells a ‘call’ option, giving the buyer the right to buy the underlying asset at a set point in the future, for a set price (the strike price) while simultaneously hedging by buying spot.

Cash covered puts – Sells a ‘put’ option, the same as a call option, but you are giving the buyer the right to sell you the underlying asset, rather than buy it from you while keeping cash ready to buy the underlying at a set price to hedge.

Both of these strategies try to capture the premiums options buyers pay while removing part of the downside risk.

There is scope for much more complex strategies to be used, but we are very early in their existence, and that kind of strategy needs to be carefully considered and battle-tested before it can be considered a safe investment.

DOVs in the Wild

Last week we discussed the pros and cons of 3 live protocols. Dopex, Hegic and Premia. We told you we would cover the vital liquidity providing side of those protocols, and that’s exactly what is happening today!

You may have noticed that the total value locked (TVL) and liquidity came up repeatedly when discussing the pros and cons. This is because the protocols run a peer-to-pool market-making model. This means when you purchase an option from one of these platforms, it is sold to you by the pool. This pool is a DOV. There are huge benefits to this model, but (currently) some pretty noteworthy negatives as well. These will be covered later.

What this means though, is that if the options boom is coming, and many of these protocols use DOVs to sell options, the DOV boom must be coming too.

Remember the chart of BTC options open interest? Check it out:

The dark blue is Deribit volume, a centralised exchange. Imagine if the market grows exponentially from here, and DeFi captures a large portion of that. Now imagine if the majority of those DeFi protocols are using DOVs to fund the selling of options. That’s a big old wad of capital that will be flowing into DOVs in the coming years.


  • Removes the requirement to match options sellers and buyers (profitably selling options is a very complex task, and something not suitable to the vast majority of market participants).

  • Pooled liquidity – rather than being fractured across different options prices, strike prices and expiration dates.

  • Long term sustainable yields (as there are no token emissions like traditional liquidity providing (LP)).

  • Vaults can earn several different forms of yield, staking or yield farming the underlying tokens that are deposited into the pool (as these only need to be used when the option expires, so there is a period of time where they are just sat in the pool).

What’s The Catch?

Yes, you’re right, there is a catch.

You probably remember in the last report we mentioned that their yields might not be as good as they first seem. So, is it payday or payout?

Well, the issue is that if the options the pool is selling (the options you are selling, as the pool’s assets are used to fund them) expire ‘in-the-money’, meaning the buyer has profited, then you (the pool depositor) lose out.

Because of how volatile crypto is, and how difficult it is to price options, this (historically) has happened quite a lot. Most platforms have conducted back-tests to check if the strategies would be profitable, but in practice, this often isn’t the case (it is suspected some platforms choose the data that suits them, not giving a realistic picture of returns and losses).

Note, this does not write DOVs off, as with refinements in options pricing and improvements in how the protocols operate, this can be, and is being, fixed. One such improvement is Delta hedging, see below. **

Delta Hedging

Welcome to Delta hedging 101. Sit back and strap in, you’re in for a hell of a ride.

Okay, okay, I admit it’s not that exciting. Its potential though, really gets me going.

This can get pretty complex, but all you need to know is that delta hedging, simply put, is hedging against the kind of losses discussed above. It literally means hedging against movements in the underlying assets price.

Why is that so exciting?

If done correctly, delta hedging would remove all potential downside, making the returns displayed truly sustainable.

Whilst hedging does cost, the impact on returns if done efficiently doesn’t have to be huge, and is well worth it!

There are loads of platforms currently working on delta hedging their DOVs (Friktion is one example, the next ‘Volt’ (their name for the DOVs) is planned to be fully delta hedged), some that are building with the specific goal of effective and efficient delta hedging (remember Arrow Markets, the platform currently in testnet), and some that already do it (Hegic, although you take an 80% hit, only earning 20% of premiums collected when using hedging).

Interesting Protocols

Note, these aren’t necessarily the best platforms out there, as in the options article, the scope of this report does not cover them in full. If we consider them an opportunity (not financial advice) we will write a separate report on them at that time.

As mentioned last week in our options report, Dopex, Hegic and Premia all operate their own DOVs.

Dopex has a major focus on their DOV offering, innovating in many ways, including by offering DOVs with 100-1000x leverage designed to capitalise on the Curve wars. It has also partnered with JonesDAO to offer optimised DOV strategies built on top of Dopex. This is intended to, in time, cater for all risk appetites, with a wide range of choices.

We will be doing a deep dive report on them after this derivatives series, along with competitors such as Thetanuts and Stake DAO (if we consider them viable competition).

Solana MVP – Friktion

One protocol that caught our eye is Friktion. Currently the largest options seller on Solana across CeFi and DeFi, with the end goal of becoming a full-stack portfolio management protocol. They have over $750m trading volume, and $90m total value locked, despite only launching in December. They also offer DAO treasury management services, called Circuits, and have at least 5 DAO or institutional clients. The most popular strategies for their institutional clients will be turned into new Volts, allowing retail to access them.

2 new Volts are currently in the works, both of which feature the all-powerful delta hedging mentioned above. The first will aim to be delta neutral (risk-free), and the second more customised.

Whilst being on Solana limits its potential market massively, there is still a huge market there, with much less competition, and Friktion capitalising on their early-mover advantage, and doing all the right things to make it top dog.

The protocol aims to be fully decentralised, but has no token yet.

As you can imagine, we will be keeping a close eye on this!


Whilst there are several ways to earn yield in DeFi, there is a significant lack of sustainable yield. Money markets (lending and borrowing) are significantly overcrowded, offering low single-digit yields, LPing on a DEX see you lose to impermeant loss (potentially losing a lot), staking requires token inflation (unless there is an incredibly well-formed burn system in place) and rebase tokens such as OHM have incredibly high inflation.

DOVs could be a way to create sustainable, long-term high yield. This is something that doesn’t exist, at least to the same level that DOVs could achieve. There is a high risk, in such a volatile market, that the options expire in the money (meaning the seller (pool depositor) takes a loss). However, if delta hedging is properly implemented, there would be protection against the downside.

This would be a game-changer, and we believe delta hedging is the key to success for DOVs. Judging by the exponential innovation we’ve seen so far, as these platforms iterate, these issues will certainly be resolved.

Future Potential

The future potential of these protocols is massive. The options strategies employed can be utilised in complex structured products, along with other strategies. This could be game-changing in crypto, allowing retail to earn very high yields and/or hedge their holdings in ways that have previously only been accessible to the ultra-wealthy.

There will be a massive range of strategies, and users will be able to select one to suit any end goal (be that hedging a certain % of downside potential, increasing returns by a certain %, profiting off market volatility, or just earning solid sustainable yield, to name a few!).

Not only this, but the speed of innovation we are seeing will mean these strategies will soon far outstrip what is available to those elite!

Take that, Wall Street.

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