Introduction

In early 2020, the nascent form of on-chain options projects emerged, mostly operating as on-chain insurance. It wasn’t until the latter half of the year, when options protocols like Opyn v1 and Hegic officially launched, that this sector entered a developmental stage. Projects continuously innovated in trading forms, product types, and pricing mechanisms, giving rise to exotic options such as perpetual and binary options and derivative products like perpetual contracts. By the second half of 2021, with the groundwork laid in the underlying infrastructure, structured products began to emerge, including Ribbon Finance, Dopex, and Thetanuts Finance, attracting significant investor attention. Currently, roughly 50+ projects operate in the DeFi options sector, mainly deployed on Ethereum, Arbitrum, and Solana chains, with structured products accounting for over 80% of the total value locked (TVL). In contrast, liquidity for other options products remains relatively low. Structured products dominate the current development landscape of on-chain options markets.

Structured options products, also known as DeFi Option Vaults (DOVs), are initially operated by users depositing collateral into Vaults at specific collateralization ratios. Vaults then minted options based on the collateral and sold them, with professional market makers as the option buyers, often through off-chain auctions. Due to the asymmetry between option buyers and sellers, structured products essentially aggregate sellers. Their operational logic fundamentally provides OTC-like trading through smart contracts. Underwriters participating in vault options include QCP Capital, GSR, Paradigm, and market makers on Uniswap v3, among others, although liquidity remains relatively limited. In theory, as option buyers, market makers could hedge positions in advance to reduce implied volatility (IV) and decrease option prices, potentially reducing vault revenues. However, the scale of hedging must be significant for this to be effective. Thus, market-maker institutions may not execute such strategies due to cost considerations. Their primary goal in underwriting options is more about hedging and risk management.

Essentially, these products operate in a fund management format. The core of the DeFi options market lies in lowering user entry barriers and simplifying on-chain computations, made possible by the emergence of structured products. They significantly reduce the threshold for retail investors to act as option sellers while providing relatively stable, high-expected returns to users. The landscape of the options sector remains fluid, with vault-style products emerging as the mainstream. The Cega protocol offers alternative options services using the option pool model, which is theoretically a form of structured product. This article will delve into the Cega product, analyzing its operational logic and current development status in detail.

What is Cega?

Cega is an alternative options product built on the Ethereum, Solana, and Arbitrum chains. Users deposit assets into the liquidity pool to sell put options, earning corresponding premiums. Professional market makers pay premiums to users to hedge against asset depreciation risks, similar to yield-generating products. The product launched on Solana in June 2022, with TVL on Solana exceeding $40 million at one point but subsequently declining. In March 2023, the product launched on Ethereum and expanded to Arbitrum in July, beginning multi-chain deployment. Recently, it announced the launch of options pegged to gold, aiming to bridge the connection between real-world assets and DeFi.

The Cega team was founded in February 2022, with founders having extensive experience in derivative trading and early involvement in blockchain. In March 2022, the protocol completed a $4.3 million seed round led by Dragonfly. In March 2023, it secured a $5 million funding round from Dragonfly and Pantera Capital. The project has not yet issued tokens.

Product Logic

Cega’s alternative options product is currently deployed on Ethereum, Solana, and Arbitrum. Users deposit funds into various pools on the Cega platform, providing liquidity equivalent to selling a put option. The buyers of these options are accredited market makers, who hedge risks by paying premiums to users depositing funds. Additionally, users can benefit from risk protection within a specific range of asset depreciation.

Cega currently offers three official products: Pure Option Pool (PO), Bond Option Pool (BO), and Leverage Option Pool (LO). The protocol charges users two types of fees: performance and management. When users profit, a 15% performance fee is charged. The management fee amounts to 2% of the total deposits annually.

Source：Cega App

Pure Option Pool (PO)

Users deposit a certain amount of USDC into the Pure Option Pool and receive pool tokens as withdrawal vouchers. The deposited USDC is locked until the expiration of the option, and users receive premium income accordingly. Essentially, depositing funds represents selling put options, exposing users to the risk of asset loss if the underlying asset’s price falls within a specific range. After the option expires, users can redeem their principal and corresponding premiums using the withdrawal vouchers. This product resembles a strategy yield product, as users cannot construct diversified options themselves, making it less attractive to professional investors.

To illustrate further, suppose a user deposits 1000 USDC into the Pure Option Pool, which uses BTC and ETH as underlying assets. The premium APR is 10%, the period is 27 days, and the asset protection range is 50%. Regardless of how the price of the underlying assets changes after the deposit, the user will earn 94 USDC (1000 10% 27/365) in premiums. Before the option expires, if the price of any asset in the pool (BTC or ETH) does not drop beyond the protection range, the user’s principal will not suffer any losses. Users can redeem their principal and premium income upon expiration using the withdrawal vouchers. However, if the underlying asset price drops more than 50%, the user’s principal will incur losses. It’s important to note that if the price of the underlying asset drops by 50% or more before the expiration date but rises above 50% by the expiration date, the price range protection will still be invalidated, and the user will incur losses equivalent to the maximum drop by the expiration date. Thus, depositing funds is akin to selling put options with a 27-day term and an exercise price equal to the current asset price, with the put options exercisable only if the price breaches the protection range after being sold.

Bond Option Pool (BO)

The logic of premium pricing and principal protection in the Bond Option Pool (BO) is similar to that of the Pure Option Pool. However, in the Bond Option Pool, when users deposit assets into the pool, the funds are fully lent to market makers while simultaneously selling put options, effectively lending out the funds. This increases the utilization of funds and enhances the returns for depositors. However, it also introduces the risk of market maker default.

Currently, the largest TVL Bond Option Pool in the protocol is based on BTC and ETH as underlying assets, with a downside protection range of 90%. This means that the probability of users’ principals suffering losses due to market fluctuations in the event of asset depreciation is minimal. The premium income for depositing users is akin to interest income from lending to market makers. Therefore, fundamentally, the Bond Option Pool resembles more of a lending product.

Source：Cega App

Leverage Option Pool (LO)

The Leverage Option Pool (LO) essentially adds leverage functionality to the Pure Option Pool. Depositing users can earn higher premium income, but they also face higher risks. However, there is still principal protection. If the underlying asset depreciates significantly or even incurs excessive losses, the loss amount is limited to the principal and does not affect the premium income.

Source：Cega App

Current Development Status

Cega initially deployed on the Solana chain, leveraging the resurgence of the Solana ecosystem. After the product went live, the TVL peaked at over $40 million but declined. Later on, the team expanded to Ethereum and Arbitrum. Currently, the total TVL has surpassed $17 million.

Source：Cega App

The Bond Option Pool on the Cega platform, with BTC and ETH as underlying assets, has the highest TVL, reaching $7.9 million, accounting for approximately 46% of the total TVL. This pool offers significant downside protection for assets, making it highly attractive to users. Recently, the team also introduced options products pegged to gold, aiming to bridge the gap between real-world assets and the DeFi world.

Source：Cega App

Conclusion

Cega’s product lineup includes Pure Option Pool, Bond Option Pool, and Leverage Option Pool. When users deposit funds into these pools, they are essentially selling put options and earning premium income, resembling more of a strategy yield product. However, users cannot construct diversified options themselves, leading to a lack of flexibility and making it challenging to attract professional investors. The Bond Option Pool, in particular, resembles an unsecured lending product where users lend funds to market makers, with some risk of market maker default. From the current lineup of products, the appeal to users is limited, and breaking through in terms of TVL poses a challenge.