Options

Options are financial derivatives that provide the holder with the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined price on a specific date in the future. They are primarily used for risk management and speculative purposes.

DeFiLlama Options TVL

While options are well-established in traditional finance, they remain a relatively niche area in the cryptocurrency market, primarily on centralized exchanges (CEX). According to DeFiLlama, the total value locked (TVL) in decentralized options is only $127.5 million, comparable to the TVL of a mid-sized decentralized exchange (DEX).

Funding Background

Funding Overview

Ithaca Protocol has successfully raised $2.8 million in funding, with Cumberland and Wintermute Ventures leading the seed round in the fourth quarter of 2023. Other notable investors include Andrew Keys, Ghaf Capital, Merit Circle, Room40, Enjinstarter, Tradedog, and Georgios Vlachos, co-founder of Axelar, among others.

Founder’s Background

Dimitrios Kavvathas earned his Bachelor’s degree in Economics from the Athens University of Economics and Business and holds a Master’s and a PhD in Economics from the University of Chicago.

He began his career at Goldman Sachs in 2001, rising to Managing Director in 2005 and becoming a Partner in 2008. Throughout his tenure, he has held several senior roles, including Co-Head of the Securities Division for the Asia-Pacific region and a member of the Operating Committee. Additionally, he serves on the Asia-Pacific Risk Committee, the Global New Activities Committee, the Global Asset Liability Committee, and the Board of Directors of Goldman Sachs (Asia) LLC.

Dimitrios is also the Chief Investment Officer at Harmony Advisors, a position he has held since June 2016. Prior to joining Harmony, he worked at Noble Group as Co-Head of Financial Services, overseeing structured finance, commodity financing, and business development. He had a brief stint as the Head of Global Markets for the Asia-Pacific region at VTB Capital and is the founder and Chairman of Nomisma Holdings Pte. Ltd.

In the cryptocurrency sector, Dimitrios Kavvathas is the founder of Ithaca Protocol and previously served as the CEO of the prominent cryptocurrency market maker Amber Group from July 2021 to September 2022.

Core Features

Options Trading and Strategies

Funding Deposit Interface

Ithaca operates on Arbitrum One, Ethereum, OP Mainnet, Polygon, and Base. Users must deposit funds into the protocol before engaging in options trading.

All options available on Ithaca are European-style, with WETH/USDC as the underlying assets. The expiration times for these options are set to match those of the mainstream cryptocurrency options market, occurring every Friday at 8:00 UTC.

Market

Market Trading Interface

The Market offers three types of fundamental options: standard options, digital options, and forward contracts.

• Standard Options

Standard options are the most basic type of options product and are categorized into call options and put options. A call option grants the buyer the right to purchase the asset at the strike price upon the contract’s expiration, while a put option grants the buyer the right to sell the asset at the strike price upon expiration.

When trading these options, users must specify the option type (call or put), the direction (buy or sell), the number of option contracts, the strike price, and the order trading price.

• Digital Options

Digital options are made up of basic options combinations. For this type of option, both the maximum loss and maximum profit are fixed. Traders can profit if they correctly predict that the underlying asset will reach a specific price level. When trading digital options, users need to input the option type (call or put), direction (buy or sell), number of option contracts, strike price, and order trading price.

• Forward Contracts

This is a type of contract. Unlike options, the buyer does not have the right to choose whether to settle, and the seller does not receive a premium. Both parties agree to execute a trade at a predetermined price at a future date. The profit or loss is determined by the difference between the agreed price and the market price at the time of expiration. When trading forward contracts, users need to specify the option direction (buy or sell), the number of option contracts, and the order trading price.

Stories

Stories Trading Interface

The Stories feature products consisting of combinations of options. The available combinations include Bet, Risky Earn/Riskless Earn, No Gain No Payin’, Bonus/Twin Win, Barriers, and Principal Protected Strategies.

• Bet

This is a type of combination option that establishes a price range and predicts whether the underlying asset’s price will be within or outside this range at expiration. If the prediction is correct, the trader profits. Essentially, this involves speculating on volatility. The scenario where the price remains within the range is similar to the profit scenario for liquidity providers in an Automated Market Maker (AMM).

When trading this option, users need to specify the price range, decide whether the expiration price is expected to be inside or outside the range, and provide the order trading price.

• Risky Earn/Riskless Earn

These are combination options. Risky Earn sets a target price for the asset, allowing traders to earn returns based on risk capital. In contrast, Riskless Earn achieves a risk-free return through collateralized lending.

For trading Risky Earn, users must set the forecast price for the underlying asset and the order price. For Riskless Earn, users only need to enter the amount for collateralized lending.

• No Gain No Payin’

This is an option combination that transforms the seller’s premium into potential losses at expiration. Users don’t have to pay a premium upfront, but if the underlying price just touches the strike price at expiration, they incur a maximum loss (effectively equivalent to paying the premium).

When trading this option, users need to specify the option type (call or put), the strike price, and the size of the option contract.

• Bonus/Twin Win

This option combination allows buyers to protect their funds or potentially profit even during losses by paying a premium. The difference between Bonus and Twin Win is that Bonus offers a certain level of protection when the underlying asset falls below the strike price, whereas Twin Win presents another profit opportunity.

When trading this option, users need to input the strike price, protection price, and size of the option contract.

• Barriers

This option combination creates four strategies for buyers and sellers: Up-and-In Call Option, Up-and-Out Call Option, Down-and-In Call Option, and Down-and-Out Call Option. The Up-and-In and Down-and-In options are straightforward; when the price reaches the strike price, the seller profits, otherwise, they do not. The Up-and-Out and Down-and-Out options offer a more aggressive strategy, allowing for small price movements without significant gains or losses, which increases profit potential while lowering the likelihood of meeting the conditions.

When trading these options, users need to specify the option type (call or put), direction (buy or sell), number of option contracts, strike price, whether it’s a touch in or out, and the touch price.

• Principal Protected Strategies

This strategy combines lending to protect the principal amount. After depositing funds, users earn interest from lending and can withdraw some of this interest to purchase options. The options are categorized into three simpler types: call options with a cap, put options with a cap, and range-moving options.

When trading this option, users need to specify the option type (call, put, or range-moving), size of the option contract, strike price 1, and strike price 2 (cap price).

Dynamic Options Strategy

Dynamic Options Strategy Interface

Beyond the basic and advanced markets, the Ithaca Protocol offers a customizable options combination panel. This allows professional users to create options combinations tailored to their specific needs.

High-Frequency Paired Auctions (FBA)

The Ithaca matching engine employs a high-frequency batch auction (FBA) mechanism. Orders are matched during discrete-time auctions and immediately proceed to the next FBA cycle.

FBA operates across multiple order books with various products, underlying assets, and expiration dates, enabling seamless processing and synchronized execution of multiple linked or conditional orders.

High-Frequency Paired Auction Process

Order Submission Phase

During the order submission phase of FBA, users can submit new orders to the order book or cancel existing ones. However, no orders will be matched during this phase, and no matching prices will be generated. Each order submission phase is immediately followed by another, concluding when the matching period for that auction begins.

Matching Period

Once the order submission phase ends, the matching period begins. During this time, the Ithaca matching engine evaluates all active orders, including conditional ones. After the matching period, the engine determines a single price for forward contracts, as well as a single price for both call and put options. Any new orders placed during the matching period will not be accepted into the current auction cycle; instead, they will be placed in a temporary queue outside the order book until the next order submission phase starts.

Risk Sharing Module (RSBB)(RSBB)

Static replicable derivatives are either decomposed into RSBB using put option parity and funding option equivalence or restructured from RSBB and directly integrated into the matching engine. The matching occurs at an “atomic” level.

Option Atomization

In the Ithaca pairing engine, each options order is represented as a combination of different building blocks based on its profit and loss diagram, as illustrated above.

In a typical options trading process, each option involves both a buyer and a seller, requiring two orders to complete a match.

Post-Atomization Combination

The RSSB module enables the Ithaca pairing engine to match buyers and sellers of call options, put options, and forward options with the same characteristics.

The RSSB module reduces the number of market orders that need to be cleared, thereby enhancing liquidity compared to traditional order books. This facilitates the transformation of structured products into a decomposable order format. Synthetic orders with multiple independent branches can be executed simultaneously, ensuring consistent execution across the board.

Mixed Integer Linear Programming (MILP) Optimization

Mixed Integer Linear Programming (MILP) enables the identification of clearing prices and the associated set of consistent orders to maximize execution volume while ensuring compliance with best execution standards. This optimization process integrates conditional orders and automatic replication. MILP utilizes advanced heuristic techniques, employing a branch-and-bound algorithm with binary integer constraints to effectively explore the solution space.

Affiliated Ecosystem

The Ithaca Protocol operates within several ecosystems, the most significant being the Arbitrum One ecosystem. Arbitrum is known for being particularly supportive of Native Protocols, featuring lower initial audit hurdles and providing substantial backing for ecosystem projects. This has led to the growth of innovative DeFi protocols like Pendle, GMX, and Radiant. Arbitrum will also offer additional resources and support to the Ithaca Protocol. Furthermore, the high frequency of DeFi interactions within Arbitrum enhances the potential for synergistic effects among its various protocols.

Airdrop Initiatives

Airdrop Points Dashboard

The Ithaca Protocol has established an airdrop initiative aimed at incentivizing liquidity, rewarding early adopters, and fostering the growth of the Ithaca ecosystem. Users can unlock badges and earn points by fulfilling specific usage and invitation criteria. Additionally, linking wallets and social media accounts can also earn fixed points. These points will be connected to future airdrop distributions.

Conclusion

As traditional capital increasingly focuses on the cryptocurrency market and traders seek to capitalize on trading volatility, the options market holds significant growth potential within the DeFi space. The core challenge for the options market lies in providing a diverse range of products while ensuring sufficient liquidity for those options.

The Ithaca Protocol addresses this challenge by utilizing the RSBB module to atomize and combine options orders. This not only expands the variety of options products available but also allows for the effective combination of corresponding positions, thereby ensuring order liquidity. Such capabilities are essential to meet the demand for options in the DeFi environment.