Author: Dan Rysk
Translation: Peggy, BlockBeats
Editor's Note: For a long time, DeFi options have not become a mainstream trading category. Compared to perpetual contracts, they are more complex, have more fragmented liquidity, and struggle to form stable natural demand.
However, the algorithmic stablecoin vision recently proposed by Vitalik opens up another possibility for options: they are no longer treated as an independent trading product but become the underlying financial building blocks for stablecoins, yield products, and structured assets.
The author of this article interprets this scheme from an options perspective. He believes that the stable-side asset in Vitalik's design is essentially similar to a synthetic covered call: users split 1 ETH into two parts, one part obtains 'stable value' below a certain strike price, and the other part obtains upside gains above the strike price. Since these two parts always sum to 1 ETH, the system does not need to introduce debt, margin, or liquidation mechanisms, thus avoiding the core liquidation risk of traditional CDP stablecoins.
But the challenges of this design are also evident. To make the stable-side asset approximate a stablecoin, it needs to continuously roll deep in-the-money call options, which brings issues like rollover slippage, front-running of fixed trading paths, and insufficient liquidity. More importantly, behind each unit of stable asset, someone must continuously hold the corresponding upside-side asset, which is a leveraged ETH long position with no funding rates and no liquidation risk. Whether this demand can exist long-term determines whether the system can truly scale.
Finally, drawing on Rysk's experience, the author points out that DeFi options have been difficult to scale in the past because they are too complex as direct trading products, and user demand is not natural enough. However, if their position is changed—placing options at the bottom layer of more complex assets like stablecoins, structured yields, and index products—they might be more suitable as infrastructure for DeFi. In other words, the opportunity for options in DeFi may not be to become the next perpetual contract, but to become the pricing and risk distribution engine behind the next generation of on-chain financial products.
Below is the original text:
For years, I've heard the same phrase: 'Options don't work in DeFi.'
After building Rysk, I admit there's some truth to that. Most DeFi options products struggle to grow. Liquidity is fragmented, attracting natural trading flow is difficult, and traders consistently opt for simpler products. Perpetual contracts became the default tool for expressing directional views, while prediction markets became the easier way to trade event outcomes.
That's exactly why Vitalik's recent proposal caught my attention. He suggested that an option-like rights structure could be used to build an algorithmic stablecoin without a liquidation mechanism.
What really intrigued me was the perspective: options not as a product to be traded, but as underlying infrastructure for a product.
This is the view I've been advocating for the past few years and is the core idea behind our construction of Rysk V12. For us, the product is yield; for Vitalik, the product is stability. The more I think about it, the more familiar this design feels.
The stable side he describes is essentially a covered call.
Why It Is a Covered Call
His design splits one unit of ETH into two types of rights. One side is P, which holds the value up to a certain strike price; the other side is N, which receives all gains above that strike price. Together they always equal one unit of ETH, so there is no debt, no margin, and nothing to liquidate.
Assume the current ETH price is $2,500 and the strike price is $1,500. As long as ETH stays above $1,500, P behaves like an asset stable at $1,500; P only starts bearing downside risk if ETH falls below $1,500. N receives all the upside gains above $1,500.
This is precisely the payoff structure of a covered call.
The holder retains the asset itself, sells the upside above a certain strike price, and collects the option premium. P replicates exactly this covered call payoff. N corresponds to the long call option held by the buyer.
More accurately, it's a synthetic covered call. No one is selling an option externally; instead, the same payoff is reconstructed by splitting the rights.
This is the same thesis behind Rysk V12. Users hold ETH, BTC, or HYPE and obtain upfront yield by selling covered calls. Vitalik applies the same foundational module to stability.
Same engine, different product.
The Problem: It Is Deep In-the-Money and Must Be Continuously Rolled
Today, most Rysk users sell out-of-the-money covered calls. The holder owns ETH, then selects a strike price above the current price: either betting the price won't reach there, or being willing to sell and take profits at a higher price if it does, while keeping the premium regardless.
But the stable side in Vitalik's vision requires a different structure. To behave like a stable amount, the strike price must be far below the spot price, making this call deep in-the-money, with most of its value being intrinsic value.
With a spot price of $2,500 and a strike of $1,500, $1,000 of that is intrinsic value the buyer must pay upfront. This makes the transaction much more capital intensive.
But a call option can only stay stable for an instant. Once ETH moves down towards the strike, it starts bearing ETH's downside risk, so it must be continuously adjusted to a lower strike price, rolled over again and again.
Therefore, this stable asset is essentially a continuously rolling covered call program.
Vitalik himself pointed out this risk. The slippage from repeated rollovers is the biggest threat to the entire design, and how to execute the rollover is the truly difficult part.
And any mechanism that trades on a fixed, public schedule is easily front-run. This was exactly the problem faced by DeFi Options Vaults (DOVs): they sold options with the same tenor and same strikes every week at the same time, so the market knew exactly what was coming and positioned ahead, extracting value from that trade flow.
Regardless, each rollover requires a buyer. The question is: Who buys? At what price?
The Hardest Part Is Who Provides the Funding
In Vitalik's model, someone must deposit a full unit of ETH, split it, sell the stable side, and hold the upside side. This depositor is the person the entire system relies on to function.
The most obvious candidates are market makers.
But the position they end up holding is actually a leveraged ETH long. And anyone wanting leveraged long ETH exposure could just buy a call option or go long a perpetual contract. That's simpler, more efficient, and more familiar. This depositor is taking a more difficult path to get a position they could obtain more easily elsewhere.
The upside side does have one genuine advantage: it offers real leverage with no funding rates and no liquidation risk, something perpetuals cannot provide.
But it still needs to find buyers, and not just once. For every unit of stable asset that exists, someone must be holding the corresponding upside side.
To scale, this model needs a persistent group of people willing to hold ETH leveraged longs in this specific form, consistently, in any market environment.
Market makers are essentially resource optimizers. Without a clear reason, they won't readily adopt something new, capital intensive, and with heavy integration costs. 'Speculators and market makers will provide liquidity' is the assumption the entire design relies on. But that behavior doesn't just happen spontaneously.
What We Learned at Rysk
At Rysk, we learned this the hard way. Earlier versions of the protocol struggled to scale, lacked natural demand, and never found product-market fit.
In the current protocol, Rysk V12, both sides of the trade have strong reasons to participate. Therefore, Rysk starts with two groups of people who already want to be involved. Holders want yield from assets they already hold, and their assets themselves are the collateral.
Market makers compete to buy this trade flow via an RFQ (Request for Quote) mechanism. They only pay the option premium, don't need to provide collateral, and ultimately get the option risk exposure they actually want, which they can price and hedge on their own books. This is the more capital-efficient side of the trade, which is why trading teams integrate spontaneously.
No party is required to hold a position they could more easily obtain elsewhere.
The system also doesn't rely on incentives or token emissions.
Worth Building
I'm glad to see this design being seriously explored. The challenges are real, but they are the interesting kind. This is exactly the design space DeFi should explore.
What feels validating is that this proposal further reinforces the same choices we made at Rysk: fully collateralized, no liquidation, no counterparty risk, and physical settlement at expiry only requiring an oracle.
Use case differs, foundation is the same. This foundation is live and proven on HyperEVM, with market makers competing for flow. We've also deployed to Ethereum mainnet and will soon open to the public.
If you are exploring stablecoins, structured products, index products, or anything with an optionality profile underneath, feel free to reach out.
Options are building blocks. What's truly interesting is what gets built on top.
