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

By Validated

Published on 2024-01-16

Discover how DeVol Network is leveraging Solana's speed and efficiency to create a fully on-chain options trading platform, offering fairness and innovation in the DeFi space.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

Introduction to DeVol Network

DeVol Network is pioneering the future of options trading in the decentralized finance (DeFi) space. Built on the Solana blockchain, DeVol offers a fully on-chain options trading platform that leverages the speed, efficiency, and low costs of Solana to provide a revolutionary trading experience. In a recent podcast, Lev Gelfer and Serge Levin, the minds behind DeVol, shared insights into their innovative platform and the advantages of bringing options trading to the blockchain.

The Limitations of Traditional Options Trading Models

Traditional options trading models, especially those adapted for cryptocurrencies, often fall short in the decentralized world. Uniswap, a popular decentralized exchange protocol, doesn't work well for options due to several fundamental issues. Options are unbounded, meaning their potential value can theoretically be infinite, which doesn't fit well with Uniswap's constant function market maker model. Additionally, options pricing changes over time, and there are typically many different strike prices for a single underlying asset, which would require separate liquidity pools for each strike.

Lev Gelfer explains: "The general thought is that 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. Two is they change pricing as the time goes. And then there's also a lot of strikes. Single underlying could have a lot of strikes."

DeVol's Innovative Approach

To overcome these limitations, DeVol has taken a radically different approach. Instead of treating options as individual tokens, they've reconstructed the options market based on how an underlying market would actually function. Drawing inspiration from classical finance works, particularly those by Rode Bro, DeVol decomposes the terminal distribution of an asset's price into a collection of state variables.

Serge Levin describes their method: "We think of how the underlying market would be actually functioning and reconstruct an option market based on that concept. So instead, what we decided to do is we took one of these sort of classical finance works by Rode Bro. And we said, look, instead of thinking of the world that's going to be trading options as securities, we're going to decompose terminal distribution as a collection of state variables."

The Advantages of DeVol's Model

This innovative approach brings several key advantages to options trading in the DeFi space:

  1. Atomic Complex Orders: DeVol allows traders to execute complex orders, such as spreads, in a single transaction. This is a significant improvement over traditional platforms where traders need to "leg" into positions, potentially exposing themselves to price slippage and higher fees.

  2. Liquidity Consolidation: By using a single pool across all strikes, DeVol avoids the liquidity fragmentation issues that plague other options protocols.

  3. Scalability: The platform currently supports 95 strikes, with plans to expand to 200 strikes in the near future, thanks to Solana's increasing computational capabilities.

  4. Rapid Deployment: DeVol can quickly deploy new tokens for options trading, typically within days, as long as there's an oracle available for the underlying asset.

Why Solana is Crucial for DeVol

The choice of Solana as the underlying blockchain for DeVol was not arbitrary. Solana's unique architecture and capabilities make it the ideal platform for a fully on-chain options trading protocol. Here are some key reasons why DeVol is only possible on Solana:

  1. Account-Based Architecture: Solana's account-based model allows DeVol to treat wallets like bank accounts and create separate trading accounts, simplifying the management of positions across multiple strikes.

  2. High Transaction Throughput: Solana's high transactions per second (TPS) is crucial for handling the volume of trades in an options market.

  3. Fast Confirmations: The quick confirmation times on Solana are essential for DeVol's AMM model, which reprices all 95 strikes with each transaction.

  4. Deterministic Signature: This feature ensures that transactions are processed in a predictable order, which is crucial for fair pricing in an options market.

  5. Low and Predictable Transaction Costs: The fixed, low cost of transactions on Solana makes it feasible to trade options without exorbitant fees eating into profits.

Lev Gelfer emphasizes the importance of Solana's architecture: "The architecture, the accounts, how the architecture, the entire kind of on the high-level architecture of them, of Solana is very different from EVMs. And that allowed us to-- like on a high level, we have kind of-- we treat the wallet as a bank account, and then there's a trading account."

The Importance of Full On-Chain Functionality

One of DeVol's core principles is maintaining full on-chain functionality. This commitment to on-chain operations brings several benefits:

  1. Transparency: All operations are inherently auditable, reducing the risk of manipulation or unfair practices.

  2. Fairness: The protocol can implement anti-manipulation measures directly into the smart contract, creating a more level playing field for all participants.

  3. Reduced Intermediary Risk: By eliminating off-chain components, DeVol reduces the risk of hacks or manipulations that often occur at the interface between on-chain and off-chain systems.

Serge Levin explains their philosophy: "We still believe that the pure kind of value of crypto is providing this full solution on-chain. And that's what we aim for. So for us, it was very important. We still rely on so on Oracle. So there is still kind of reliability on some external data sources. But we believe that the next kind of big wave and the end goal of what the development is going to is having 400% functionality on-chain."

DeVol's Approach to Market Fairness

Traditional order book-based markets often favor those with the fastest technology, creating an unfair advantage. DeVol's AMM model aims to level the playing field by internalizing the market-making function within the smart contract. This approach ensures that all participants, regardless of their technological capabilities, have equal access to the market.

Lev Gelfer highlights this point: "In an AMM structure, you are essentially saying, look, we built all the market making framework inside our smart contract. So 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."

Complex Orders and Their Advantages

One of DeVol's standout features is its support for complex orders. These are orders that involve multiple legs or components, such as spreads or butterflies. On traditional platforms, executing complex orders can be challenging and expensive due to the need to execute multiple transactions and pay fees for each leg.

DeVol's innovation lies in making complex orders atomic, meaning they can be executed in a single transaction. This not only reduces fees but also eliminates the risk of partial execution, where only some legs of a complex order are filled, potentially leaving the trader with an unintended position.

Serge Levin explains the advantage: "We are, the way we built this is 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."

The Impact Function and Dynamic Pricing

DeVol employs a sophisticated impact function to determine the price of options based on the size of the order and its impact on the overall liquidity pool. This function mimics the behavior of traditional market makers, who adjust their prices based on order size and market conditions.

Lev Gelfer describes this feature: "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."

The Role of Compute in DeVol's Evolution

As Solana continues to increase its computational capabilities, DeVol plans to leverage these improvements to enhance its impact function and overall functionality. The team sees the ongoing improvements in Solana's compute as an opportunity to make their protocol more sophisticated and capable of handling a wider range of market conditions and asset types.

Serge Levin notes: "As we architect around that technology, we also understood that it would be very hard to achieve the same one being fully on-chain and any other chain. We could have done hybrid, obviously. But fully on-chain, there would be extremely hard to do it on other platforms."

DeVol's Target Users

DeVol is attracting two main categories of users:

  1. Professional Options Traders: These are typically individuals with Wall Street or equivalent backgrounds who are allocating a portion of their capital (usually $200,000 to $500,000) to crypto options trading. They are drawn to the volatility in the crypto market and see opportunities to apply their traditional finance experience in this new arena.

  2. Experienced Crypto Traders: These are individuals who have been trading crypto for several years and have a good understanding of market directions. While they might not have detailed knowledge of options, they're interested in incorporating options into their trading strategies, especially as the market enters a potential bull phase.

Lev Gelfer describes their user base: "The sweet spot for the two categories of users who we expect to join the platform and who are very excited about the platform. The professional options traders who still have the Wall Street or equivalent of Wall Street jobs and they allocate few hundred thousand to half a million maybe to trade on options for crypto."

The Future of DeVol

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

  1. Token Launch: The team is preparing to launch a token, which will play a role in the protocol's governance and economics.

  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 a family of 16 structured products that they plan to release gradually, potentially through white-label partnerships with larger institutional players.

  4. Enhanced Impact Function: As Solana's computational capabilities increase, DeVol plans to improve its impact function to handle larger trades and more volatile assets more effectively.

Serge Levin shares their vision: "We have 16 structured products, and we discussed with the number of liquidity providers, with the number of existing shops, like large shops who are interested to kind of marketing for them, will white label them initially and let a bigger kind of, like more institutional guys to start selling them to the clients."

The Significance of On-Chain Options Trading

The development of fully on-chain options trading platforms like DeVol represents a significant milestone in the evolution of decentralized finance. By bringing complex financial instruments onto the blockchain, DeVol is not only expanding the toolkit available to crypto traders but also demonstrating the power and potential of blockchain technology in reshaping traditional financial markets.

The ability to execute complex trades atomically, provide fair and transparent pricing, and offer these services with low fees and high speed is a testament to the capabilities of modern blockchain platforms like Solana. As these platforms continue to evolve and improve, we can expect to see even more sophisticated financial products and services emerge in the DeFi space.

Conclusion

DeVol Network stands at the forefront of innovation in the DeFi options trading space. By leveraging the unique capabilities of the Solana blockchain, DeVol has created a platform that offers the speed, efficiency, and fairness that traditional options markets often lack. As the crypto market continues to mature and attract more sophisticated traders and institutional players, platforms like DeVol are likely to play a crucial role in shaping the future of decentralized finance.

The success of DeVol also underscores the importance of continued development and improvement in blockchain technology. As Solana and other platforms enhance their capabilities, they unlock new possibilities for financial innovation, pushing the boundaries of what's possible in decentralized finance. The journey of DeVol serves as a compelling case study in how blockchain technology can revolutionize even the most complex areas of finance, promising a future where financial markets are more accessible, transparent, and fair for all participants.

Facts + Figures

  • DeVol Network is a fully on-chain options trading platform built on the Solana blockchain.
  • The platform currently supports 95 strikes, with plans to expand to 200 strikes in the future.
  • DeVol has been live since August, initially with small liquidity pools provided by the team themselves.
  • The platform is now onboarding large liquidity providers, primarily hedge funds, to provide liquidity for BTC/USDC trading pairs.
  • DeVol plans to support trading for Solana, Ethereum, and MATIC in addition to Bitcoin.
  • The platform allows for atomic execution of complex orders, such as spreads, in a single transaction.
  • DeVol's model treats wallets like bank accounts and creates separate trading accounts for managing positions.
  • The platform is attracting professional options traders allocating $200,000 to $500,000 for crypto options trading.
  • DeVol currently handles about 270 trades per day, with expectations for significant growth as more liquidity providers are onboarded.
  • The team has developed 16 structured products that they plan to release gradually.
  • DeVol is preparing to launch its own token to play a role in governance and economics.
  • The platform plans to introduce futures trading using the same underlying protocol.
  • DeVol's impact function adjusts pricing based on order size and impact on liquidity, mimicking traditional market maker behavior.
  • The team sees Solana's increasing computational capabilities as key to enhancing the platform's functionality and sophistication.

Questions Answered

What is DeVol Network?

DeVol Network is a fully on-chain options trading platform built on the Solana blockchain. It offers a unique approach to options trading by decomposing the terminal distribution of an asset's price into a collection of state variables, allowing for more efficient and fair trading of options. The platform supports complex orders, provides consolidated liquidity across all strikes, and aims to level the playing field for all traders, regardless of their technological capabilities or capital.

How does DeVol differ from traditional options trading platforms?

DeVol differs from traditional options trading platforms in several key ways. Firstly, it operates entirely on-chain, ensuring transparency and reducing intermediary risk. Secondly, it uses an innovative approach to options pricing and liquidity provision, avoiding the pitfalls of traditional AMM models like Uniswap. Thirdly, DeVol allows for atomic execution of complex orders, reducing fees and eliminating the risk of partial execution. Lastly, its pricing model adapts dynamically to order size and market impact, mimicking sophisticated market-making strategies.

Why did DeVol choose to build on Solana?

DeVol chose to build on Solana due to its unique architecture and capabilities that are crucial for a fully on-chain options trading platform. Solana's account-based model, high transaction throughput, fast confirmation times, deterministic signature feature, and low transaction costs make it ideal for handling the complexities of options trading. The platform's increasing computational capabilities also allow DeVol to continually enhance its functionality and sophistication.

Who are the target users for DeVol?

DeVol targets two main categories of users. The first is professional options traders, typically with backgrounds in traditional finance, who are allocating a portion of their capital (usually $200,000 to $500,000) to crypto options trading. The second category is experienced crypto traders who have been in the market for several years and are looking to incorporate options into their trading strategies. Both groups are attracted to the platform's innovative features and the opportunities presented by the volatility in the crypto market.

What are complex orders, and why are they important in options trading?

Complex orders in options trading involve multiple legs or components, such as spreads or butterflies. They are important because they allow traders to implement more sophisticated strategies and manage risk more effectively. DeVol's innovation lies in making these complex orders atomic, meaning they can be executed in a single transaction. This reduces fees, eliminates the risk of partial execution, and makes advanced trading strategies more accessible and cost-effective for traders.

How does DeVol ensure fairness in its trading platform?

DeVol ensures fairness in its trading platform through several mechanisms. First, by internalizing the market-making function within the smart contract, it eliminates the advantage of high-frequency traders. Second, its pricing model adapts dynamically to order size and market impact, preventing large traders from unduly influencing the market. Lastly, the fully on-chain nature of the platform ensures transparency and auditability, reducing the risk of manipulation or unfair practices.

What are DeVol's plans for the future?

DeVol has several plans for the future. These include launching its own token for governance and economics, introducing futures trading using the same underlying protocol, and gradually releasing a family of 16 structured products. The team also plans to enhance the platform's impact function to handle larger trades and more volatile assets more effectively as Solana's computational capabilities increase. Additionally, they aim to expand support for more trading pairs and potentially explore partnerships with larger institutional players.

How does DeVol's approach to options trading differ from other DeFi options platforms?

DeVol's approach differs from other DeFi options platforms in its commitment to full on-chain functionality and its innovative method of decomposing options into state variables. This allows for more efficient pricing, consolidated liquidity, and the ability to execute complex orders atomically. Unlike platforms that use hybrid or off-chain solutions, DeVol leverages Solana's capabilities to keep all operations on-chain, enhancing transparency and reducing intermediary risk. The platform's dynamic pricing model and focus on fairness also set it apart from many other DeFi options platforms.

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