The Case for Onchain Options Trading w/ Lev and Serge from DeVol Network

Introduction to DeVol Network

DeVol Network is pioneering the future of options trading in the cryptocurrency space. As a fully on-chain options trading platform built on Solana, DeVol is leveraging blockchain technology to create a more efficient, transparent, and fair marketplace for traders. In this in-depth exploration, we'll dive into the innovative approach DeVol is taking to reshape the landscape of decentralized finance (DeFi) and options trading.

The Limitations of Traditional Options Trading Models

Traditional options trading models, including those implemented on other blockchain platforms, face several challenges when it comes to efficiency and fairness. Lev Gelfer and Serge Levin, the minds behind DeVol Network, explain that existing models often involve significant off-chain activity, which can lead to potential manipulation and lack of transparency.

Uniswap, a popular decentralized exchange protocol, was cited as an example of why traditional automated market maker (AMM) models don't work well for options:

"Uniswap approach, which is you have a token and you have some sort of constant function to provide liquidity, is not really suitable for options for garden-variety reasons. One is options are unbounded. So two is they change pricing as the time goes. And then there's also a lot of strikes."

These limitations led the DeVol team to rethink the entire approach to options trading on the blockchain.

DeVol's Innovative Approach to On-Chain Options Trading

DeVol Network has developed a novel algorithm that addresses the unique challenges of options trading. Unlike traditional models that treat options as individual tokens, DeVol's approach is more holistic:

"We decided to abstract ourselves completely from it. We think of how the underlying market would be actually functioning and reconstruct an option market based on that concept."

This innovative approach allows DeVol to support 95 strikes with a built-in AMM, all functioning entirely on-chain. The platform decomposes the terminal distribution of options into a collection of state variables, making it more tractable and efficient.

The Power of Solana's Blockchain

DeVol's decision to build on Solana was driven by the blockchain's unique capabilities. Solana's high transaction throughput, low fees, and deterministic nature make it ideal for complex financial applications like options trading. Serge explains:

"Transaction TPS - transaction per second - extremely important for us, because we need to have high throughput, and then commitments and confirmations, which are much faster."

The team emphasizes that Solana's architecture, with its account-based system and fast confirmations, was crucial in enabling their fully on-chain solution. This level of on-chain functionality would be extremely difficult, if not impossible, to achieve on other blockchain platforms without resorting to hybrid solutions.

Advantages of Fully On-Chain Options Trading

Building a fully on-chain options trading platform offers several advantages over traditional or hybrid models:

1. Transparency: All transactions and market activities are recorded on the blockchain, making them fully auditable.
2. Fairness: The deterministic nature of the blockchain helps create a level playing field for all participants.
3. Reduced manipulation: By embedding fairness mechanisms directly into smart contracts, DeVol aims to minimize market manipulation.
4. Atomic complex orders: Traders can execute complex multi-leg options strategies in a single transaction, reducing costs and risks.

DeVol's Unique Market Making Approach

One of DeVol's key innovations is its approach to market making. Rather than relying on external market makers, the protocol incorporates market-making functionality directly into its smart contracts. This approach offers several benefits:

1. Eliminates the need for expensive market-making infrastructure
2. Provides a level playing field for all participants, regardless of size
3. Reduces the "arms race" often seen in traditional high-frequency trading environments

Lev explains: "Whether you are a teeny guy who has one Bitcoin versus you are a huge guy who has a billion dollars, you are playing on a level playing field. You might be smarter analytically, but it's much easier to catch up in terms of understanding and analytics and catch up in terms of speed."

Complex Orders and Atomic Execution

One of DeVol's standout features is its ability to handle complex options orders atomically. This means that multi-leg strategies, such as butterflies or straddles, can be executed in a single transaction. This capability offers several advantages:

1. Reduced execution risk: All legs of a strategy are filled simultaneously, eliminating the risk of partial fills.
2. Lower costs: Traders pay a single commission for the entire strategy, rather than per leg.
3. Better pricing: The protocol can offer more competitive pricing for less risky spreads.

Serge elaborates: "Complex orders are atomic, right? Meaning a single transaction is actually going to include all the legs and it can get paid a single commission. And in addition, the way the liquidity provision work, the less risky the spread is for the market maker, the less you're gonna get charged for it."

The Impact Function and Risk Management

DeVol's protocol incorporates a sophisticated impact function that adjusts pricing based on trade size and risk. This function mimics the behavior of traditional market makers, charging more for larger or riskier trades. The team is continually working to refine this function, with plans to enhance it as Solana's compute capabilities improve.

Lev explains: "When you first come to the platform, you could see how much it's going to cost you to trade a particular structure, whether it's a single option or a spread, if you're trading in the minimum size. But if you're a guy who says, you know what? I'm going to go big, the microwave. Then it's going to charge you for two things. It's going to charge you for the liquidity removing from the system, because you're reducing overall liquidity for others. And it's going to charge you for the risk that you're putting into the market, into the LP, into the LP pool."

Targeting Professional Traders and Crypto Enthusiasts

DeVol Network is targeting two main categories of users:

1. Professional options traders: Experienced traders from traditional finance who are allocating capital to crypto options trading.
2. Crypto natives: Experienced crypto traders looking to expand into options and more complex trading strategies.

The platform's focus on complex orders and short-duration trades makes it particularly attractive to sophisticated traders who understand the nuances of options strategies.

The Advantages of Building on Solana

DeVol's decision to build on Solana was driven by several factors:

1. High transaction throughput: Solana's ability to process thousands of transactions per second is crucial for a responsive options trading platform.
2. Low transaction costs: Solana's low fees make it economically viable to execute complex, multi-leg strategies.
3. Deterministic finality: Quick and predictable transaction confirmations are essential for options trading, where timing is critical.
4. Account-based architecture: Solana's account model is well-suited to DeVol's approach of treating options as state variables rather than individual tokens.

Serge emphasizes: "We could not afford - it would not work, even like, haptatically speaking, like would not work. Like we have some other products developed in the company, which can potentially work - not potentially, they could work on EVM, but they were not deterministic kind of state machine, which has to go from state to state and pricing changes."

The Future of DeVol Network

Looking ahead, DeVol Network has several exciting developments in the pipeline:

1. Token launch: The team is preparing to launch a token, with careful consideration given to its economics and utility within the ecosystem.
2. Futures trading: DeVol plans to introduce futures trading using the same underlying protocol, demonstrating the flexibility of their approach.
3. Structured products: The team has developed 16 structured products that they plan to roll out gradually, potentially through white-label partnerships with larger institutional players.

The Importance of On-Chain Solutions in DeFi

DeVol's commitment to building a fully on-chain solution reflects a broader trend in the DeFi space towards greater transparency and decentralization. The team believes that the future of finance lies in on-chain solutions that can be audited and verified by anyone.

Serge states: "I still believe that the pure kind of value of crypto is providing this full solution on-chain. And that's what we aim for."

Overcoming Technical Challenges

Building a complex financial application like DeVol on a blockchain presents numerous technical challenges. The team has had to optimize their smart contracts to work within Solana's compute limits while still providing the necessary functionality. As Solana's capabilities continue to improve, DeVol plans to enhance its offerings further.

Lev notes: "We had to enhance the computation and take some specific shortcuts, little shortcuts, but optimization techniques, because we have to be cognizant of the available compute."

The Role of MEV in On-Chain Trading

Miner Extractable Value (MEV) is a concern in many blockchain-based trading systems. However, DeVol's design, combined with Solana's architecture, helps mitigate many MEV-related issues. The deterministic nature of Solana's transaction processing and DeVol's built-in market-making functionality reduce the opportunities for front-running and other MEV strategies.

Education and Onboarding Institutional Players

As DeVol works to onboard larger liquidity providers and institutional players, education plays a crucial role. The team finds themselves educating traditional finance professionals about blockchain technology and crypto natives about advanced options strategies. This two-way education process is helping to bridge the gap between traditional finance and the world of cryptocurrency.

The Potential Impact on Traditional Finance

DeVol's approach to options trading has the potential to disrupt not just the crypto options market, but also influence how options are traded in traditional finance. By demonstrating the benefits of fully on-chain, transparent, and efficient options trading, DeVol could inspire changes in the broader financial industry.

Addressing Market Manipulation Concerns

One of the key advantages of DeVol's on-chain approach is its ability to build anti-manipulation mechanisms directly into the protocol. By designing fairness into the system from the ground up, DeVol aims to create a more equitable trading environment for all participants.

Lev explains: "In crypto, you literally have to say, look, any type of regulatory framework, or more like untime manipulation framework, could be built directly into the smart contract."

The Importance of Continuous Innovation

The DeVol team emphasizes the importance of continuous innovation in the fast-moving world of cryptocurrency and DeFi. As Solana's capabilities expand, DeVol plans to enhance its offerings, particularly in areas like the impact function and risk management.

Conclusion: DeVol's Vision for the Future of Options Trading

DeVol Network represents a significant step forward in the evolution of decentralized finance and options trading. By leveraging Solana's high-performance blockchain and innovative protocol design, DeVol is creating a more efficient, transparent, and fair options trading platform. As the project continues to develop and attract both retail and institutional users, it has the potential to reshape not just the crypto options market, but the broader landscape of financial derivatives trading.

The team's commitment to building fully on-chain solutions, combined with their deep understanding of both traditional finance and blockchain technology, positions DeVol at the forefront of the ongoing revolution in decentralized finance. As the crypto ecosystem continues to mature and attract more sophisticated traders and institutions, platforms like DeVol will play a crucial role in bridging the gap between traditional and decentralized finance.

Facts + Figures

• DeVol Network is a fully on-chain options trading platform built on Solana
• The platform supports 95 strikes with a built-in AMM
• DeVol has been live since August, initially with small pools provided by the team
• The platform is currently onboarding large liquidity providers, primarily hedge funds
• DeVol averages about 270 trades per day as of the podcast recording
• The platform targets users with trading amounts ranging from $200,000 to $1.5 million
• DeVol plans to support trading for BTC, USDC, Solana, ETH, and MATIC
• The team has developed 16 structured products that are yet to be released
• DeVol's approach allows for atomic execution of complex orders, reducing costs and risks
• The platform's impact function adjusts pricing based on trade size and risk
• DeVol is preparing to launch its own token
• The team plans to introduce futures trading using the same underlying protocol
• Solana's transaction throughput and low fees were crucial factors in choosing the blockchain
• DeVol's design helps mitigate MEV-related issues common in other blockchain trading systems
• The platform targets both professional options traders from traditional finance and experienced crypto traders

Questions Answered

What is DeVol Network?

DeVol Network is a fully on-chain options trading platform built on the Solana blockchain. It offers a novel approach to options trading by decomposing options into state variables, allowing for more efficient and fair trading. The platform supports 95 strikes with a built-in automated market maker (AMM) and enables complex order execution in a single transaction.

Why did DeVol choose to build on Solana?

DeVol chose Solana for its high transaction throughput, low fees, and deterministic nature. These features are crucial for a responsive and efficient options trading platform. Solana's account-based architecture also aligns well with DeVol's approach of treating options as state variables rather than individual tokens. The team emphasizes that Solana's capabilities make it possible to build a fully on-chain solution that would be extremely difficult or impossible on other blockchains.

How does DeVol's approach differ from traditional options trading platforms?

DeVol's approach differs in several key ways. First, it's fully on-chain, providing complete transparency and auditability. Second, it incorporates market-making functionality directly into the protocol, eliminating the need for external market makers. Third, it allows for atomic execution of complex orders, reducing costs and risks. Finally, its impact function adjusts pricing based on trade size and risk, mimicking sophisticated market-making strategies.

Who are the target users for DeVol Network?

DeVol Network targets two main categories of users. The first is professional options traders from traditional finance who are allocating capital to crypto options trading. The second is experienced crypto traders looking to expand into options and more complex trading strategies. The platform is particularly suited for users trading amounts between $200,000 and $1.5 million.

How does DeVol address concerns about market manipulation?

DeVol addresses market manipulation concerns by building fairness mechanisms directly into its smart contracts. The platform's design, combined with Solana's deterministic transaction processing, helps mitigate issues like front-running. Additionally, by making market-making part of the protocol itself, DeVol reduces the advantages that high-frequency traders might have in traditional markets.

What future developments are planned for DeVol Network?

DeVol has several exciting developments planned. These include launching their own token, introducing futures trading using the same underlying protocol, and gradually rolling out 16 structured products. The team is also continuously working on improving their impact function and risk management capabilities as Solana's compute power increases.

How does DeVol handle complex options orders?

DeVol allows for atomic execution of complex options orders, meaning multi-leg strategies can be executed in a single transaction. This reduces execution risk and costs for traders. The platform's unique approach to decomposing options allows it to price these complex orders more efficiently, often offering better pricing for less risky spreads.

What role does education play in DeVol's strategy?

Education plays a crucial role in DeVol's strategy, especially as they work to onboard larger liquidity providers and institutional players. The team finds themselves educating traditional finance professionals about blockchain technology and crypto natives about advanced options strategies. This two-way education process is helping to bridge the gap between traditional finance and the world of cryptocurrency.