Designing On-Chain Options: Amortizing Perpetual Options

Battle Count: 50

The paper is primarily about DeFi protocol/contract design rather than quantitative trading strategies. However, it is relevant to: (1) options market making in DeFi, (2) risk management and hedging strategies using on-chain derivatives, (3) understanding the structural constraints of on-chain derivatives vs. centralized exchanges, (4) potential new trading instruments (AmPOs) that could be incorporated into quantitative strategies, and (5) the economics of liquidity provision in options markets. The paper does not provide pricing models, trading signals, or backtestable strategies directly.

High complexity due to: (1) requires deep understanding of mathematical finance (perpetual American options, convex analysis, stochastic processes), (2) smart contract implementation of AmPO tokens with negative rebasing mechanics, (3) peer-to-pool market with premium function calibration, (4) physical settlement logic for calls and puts, (5) integration with existing DeFi protocols (lending, stablecoins), (6) path-independent yield computation with lazy amortization, (7) no reference implementation provided. The mathematical framework is elegant but translating to production smart contracts with gas optimization and security auditing is substantial.

The paper is primarily theoretical with complete mathematical proofs (Propositions 3.4, 3.7, 3.10, Corollaries 3.11, 3.12). The market mechanism is fully specified with explicit formulas. However, there is no empirical validation, no code repository, and no simulation results. The AmPO pricing is referenced to a companion paper [15]. Implementation would require significant smart contract engineering beyond what is described.