Author: Dan Rysk
Compiled by Peggy, BlockBeats
Editor’s Note: For a long time, DeFi options have not become a mainstream trading instrument. Compared to perpetual contracts, they are more complex, have more fragmented liquidity, and are harder to generate stable natural demand.
But Vitalik’s recent proposal for an algorithmic stablecoin opens another possibility for options: they are no longer viewed as standalone trading products, but rather as foundational financial building blocks behind stablecoins, yield products, and structured assets.
The author of this article interprets the proposal from an options perspective. He argues that the stable-side asset in Vitalik’s design is essentially similar to a synthetic covered call option: users split 1 ETH into two parts—one receiving a "stable value" below a certain strike price, and the other capturing upside gains above the strike price. Since the two parts always sum to exactly 1 ETH, the system requires no debt, margin, or liquidation mechanisms, thereby avoiding the core liquidation risk inherent in traditional CDP stablecoins.
However, the challenges of this design are equally clear. To keep the stable-side asset close to a stablecoin, it requires continuously rolling deep-in-the-money call options, which introduces rollover slippage, front-running of fixed trading paths, and insufficient liquidity. More importantly, for every unit of stable asset, someone must continuously hold the corresponding upside-side asset—that is, a leveraged ETH long position with no funding rate and no liquidation risk. Whether this demand can persist long-term determines whether the system can truly scale.
Finally, drawing on Rysk’s experience, the author argues that DeFi options have historically struggled to scale because, as direct trading products, they are too complex and lack natural user demand. However, if repositioned as the underlying layer for more complex assets such as stablecoins, structured yields, or index products, options may instead prove better suited as infrastructure for DeFi. In other words, the opportunity for options in DeFi may not lie in becoming the next perpetual contract, but in serving as the underlying pricing and risk allocation engine for the next generation of on-chain financial products.
The following is the original text:
For years, I’ve heard the same phrase: “Options don’t work in DeFi.”
After doing Rysk, I admit that there is some truth to this statement: most DeFi options products struggle to scale. Liquidity is fragmented, natural trading volume is hard to attract, and traders continually opt for simpler products. Perpetual contracts have become the default tool for expressing directional views, while prediction markets have emerged as a simpler way to trade event outcomes.
It is precisely for this reason that Vitalik’s recent proposal caught my attention. He proposed constructing an algorithmic stablecoin without a liquidation mechanism using an option-like equity structure.
What truly attracted me was its approach: options are not a product to be traded, but rather infrastructure underlying the product.
This is a perspective I’ve been advocating for years and the core idea behind building 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 position he described is essentially a covered call option.
Why is it a covered call?
His design splits one unit of ETH into two types of entitlements. One side, P, holds the value up to a certain strike price; the other side, N, captures any price appreciation above that strike price. Together, they always sum to one unit of ETH, so there is no debt, no margin, and nothing that requires liquidation.
Assume ETH is currently priced at $2,500 with a strike price of $1,500. As long as ETH remains above $1,500, P behaves like an equity with a stable value of $1,500; P only begins to bear downside risk if ETH falls below $1,500. Meanwhile, N captures the full upside gain above $1,500.
This is precisely the payoff structure of a covered call option.
The holder retains ownership of the underlying asset, sells the upside potential above a certain strike price, and collects the option premium. P replicates precisely this covered call payoff structure. N is equivalent to the call option held by the buyer.
More precisely, it is a synthetic covered call option. No actual option is sold from outside; instead, the same payoff structure is recreated by splitting the equity.
This is the same argument behind Rysk V12: users hold ETH, BTC, or HYPE and generate upfront income by selling covered call options. Vitalik points the same foundational module toward stability.
The same engine, different products.
The issue is that it is a deeply in-the-money option and must be continuously rolled over.
Today, most Rysk users sell out-of-the-money covered call options. Holders own ETH and choose a strike price above the current price—either betting the price won’t reach that level, or being willing to sell at a higher price and lock in profits, while still keeping the premium regardless.
But the stable endpoint envisioned by Vitalik requires a different structure. To behave like a stable amount, the strike price must be significantly below the spot price, making this call option deeply in-the-money, with most of its value consisting of intrinsic value.
With a spot price of $2,500 and a strike price of $1,500, the buyer must prepay $1,000 in intrinsic value, making this transaction significantly more capital-intensive.
However, a call option can only remain stable for an instant. Once ETH declines toward the strike price, it begins to absorb ETH’s downside risk and must be continuously rolled down to lower strike prices, again and again.
Therefore, this stable asset is essentially a continuously rolling covered call options strategy.
Vitalik himself pointed out this risk. The slippage caused by repeated roll-overs represents the greatest threat to the entire design, and how to execute the roll-overs is the truly difficult part.
Any mechanism that trades according to a fixed, public schedule is vulnerable to front-running. This was precisely the issue faced by DeFi options vaults like DOV: they sold options with the same expiration and strike price at the same time each week, allowing the market to fully anticipate what would happen and position ahead to extract value from this trading flow.
Regardless, each rollover requires a buyer. The question is: who will buy? And at what price?
The hardest part is who will fund it.
In Vitalik’s model, someone must deposit a full unit of ETH, split it, sell the stable portion, and hold the upside portion. This depositor is the person upon whom the entire system relies.
The most obvious candidates are market makers.
But the position they ultimately hold is effectively a leveraged long ETH position. Anyone wanting leveraged exposure to ETH can simply buy call options or go long on perpetual futures—this is simpler, more efficient, and more familiar. This depositor is essentially taking a more complicated route to achieve a position that could be obtained more easily elsewhere.
The upside does offer a genuine advantage: it provides real leverage without funding rates or liquidation risk, something perpetual contracts cannot offer.
But it still needs to find a buyer, and not just once. For every unit of stable asset, there must be someone on the other side holding the corresponding upside position.
To scale, this model requires a consistent group of individuals who are willing to maintain ETH leveraged long positions in this specific form, regardless of market conditions.
Market makers are essentially resource optimizers. Without a clear reason, they won’t readily adopt something new that requires significant capital and high integration costs. The entire design relies on the assumption that “speculators and market makers will provide liquidity,” but this behavior doesn’t occur spontaneously.
What we learned at Rysk
At Rysk, we learned this the hard way. The early versions of the protocol were difficult to scale, lacked organic demand, and never achieved product-market fit.
In the current Rysk V12 protocol, both parties have strong incentives to participate. Therefore, Rysk starts with two groups of people who already want to participate: holders who seek to earn yield from their held assets, which serve as collateral themselves.
Market makers compete to purchase this portion of trading flow through the RFQ quoting mechanism. They pay only the option premium and are not required to post collateral, ultimately gaining the option risk exposure they seek while being able to price and hedge it on their own books. This represents the more capital-efficient side of trading, which is why trading teams voluntarily integrate with it.
Neither party is required to hold a position that they could more easily obtain elsewhere.
This system also does not rely on incentives or token emissions.
Worth building
I'm glad to see this design being seriously explored. The challenges are real, but they're the kind of interesting challenges. This is precisely the design space that DeFi should be exploring.
What validates me is that this proposal further reinforces the same choices we made at Rysk: fully collateralized, no liquidations, no counterparty risk, and physical settlement requiring oracles only at expiration.
Use cases differ, but the foundation is the same. This foundation has already been launched and validated on HyperEVM, with market makers competing for trading flow. We have also deployed to Ethereum mainnet and are soon opening to the public.
If you're exploring stablecoins, structured products, index products, or any products with underlying options characteristics, feel free to reach out to me.
Options are a foundational module. The real interest lies in what is built on top of them.