Reflecting on Thetanuts Finance
Thetanuts Finance recently celebrated its 2nd year anniversary, after being launched in September 2021. The first iteration of Thetanuts Finance saw the launch of Basic Vaults — where the Basic Vaults sell out-of-money (“OTM”) European cash-settled options to accredited market makers, and generate yields for users in the form of option premiums. Option Vault protocols performed well in 2021/2022 for a number of reasons outlined below, with Thetanuts Finance achieving a peak TVL of $50mm in May 2022.
1. Higher Volatility & Higher Premiums
Market volatility was much higher in 2021/2022, resulting in higher option premiums and yields for users. In January 2022, with Thetanuts Finance’s ETH Covered Call Basic Vault yielding ~30% APY.
2. Multiple Sources of Yield
From a narrative perspective, Option Vaults were marketed as having multiple sources of yield — yield from option premiums, token emissions, and additional staking rewards from vaults with staked assets as the underlying. While the term “Real Yield” is used frequently today, Option Vaults were one of the first proper implementations — where they were marketed as having “Organic Yields” that were not emissions-focused.
3. Appetite for Yield Strategies
Digital asset markets in were characterized by leverage and ease of credit, largely enabled by aggressive lending desks. This had spillover effects on other parts of the market — where yield-focused strategies were viable and had compelling risk/reward, including deploying capital into Option Vaults.
Structural Shortcomings of Option Vaults
As Option Vaults became a mature product, market participants have identified a number of structural shortcomings with Option Vault mechanisms — which eventually led to their decline.
1. Unattractive Risk/Reward
With lower market volatility today, users also earn lower yields. Given that users take on risk that the option will be in-the-money and may thus lose part of their collateral — users may instead consider deploying their assets into risk-free instruments that give better risk-adjusted returns like 3mo U.S. Treasuries.
2. Sell-side only & Inability to Exit Between Epochs
Option Vault strategies mainly center around the sell-side, by selling covered calls or selling puts — users of Option Vaults thus have no means of going long on options. Furthermore with a limited withdrawal window every Friday — we see that users have little liquidity in between epochs, even if they require the capital to deploy elsewhere.
3. Not a Leave & Forget Strategy
Through Option Vaults, users sell out-the-money options and receive option premiums for doing so — with the option premiums being reinvested into the vault, compounding yields for users over time. While this mechanism encourages users to leave their collateral in the vaults in a “Leave & Forget” strategy, users still bear the risk that large price movements in the underlying asset could cause them to lose part of their collateral. Furthermore, Option Vaults run the same strategies regardless of market conditions — where the burden is on users to find the right Option Vault strategy. We see a movement toward users interacting with Vaults in a more nimble manner — moving their collateral in and out of vaults depending on their view of markets.
Celebrating our Successes
Despite the structural shortcomings and decline of the Option Vault sector within DeFi, we are thankful to the Thetanuts Finance community for helping us get to where we are today — where we are proud to say that Thetanuts Finance is the second largest Option Vault protocol, and the Options protocol with the largest coverage of altcoin options.
Moving toward a Decentralised On-chain Options Protocol focused on Altcoins
With these successes in mind and in wanting to leverage our track record of being a leading Options protocol focused on altcoin options, Thetanuts Finance v3 will see us move away from being an Option Vault protocol and becoming a decentralised on-chain options protocol focused on altcoins.
Unlike other options protocols where IV is input by protocol teams to price options, Thetanuts Finance v3 will feature free-market pricing — where users express their view on what pricing should be. The launch of $NUTS (outlined below) will also allow us to eventually achieve our goals for decentralised governance.
Enabling Both Buy & Sell
A major shortcoming of our Basic Vaults was that it mainly centered around the sell-side, by selling covered calls or cash-secured puts — with users having no means of going long. The Thetanuts Finance v3 upgrade changes this, allowing users to go long or short on on-chain options.
Our Focus on Altcoins
Looking at the decentralised options landscape — we see that most protocols focus on Ethereum Mainnet, and utilizing majors (i.e. $ETH and $WBTC) as underlying assets. We see a distinct gap within the decentralized altcoin options space, as:
- Altcoins have higher volatility compared to majors, with users needing an avenue to go long or short on altcoin volatility.
- No means for certain altcoins to generate organic yields (i.e. through PoS Staking), with option premiums representing one way of doing so.
Leveraging our prior track record of being a leading Option Vault protocol focused on altcoins, we believe that Thetanuts Finance can fill this gap within the altcoin options space.
Thetanuts Finance v3 Upgrade
We expect to launch the Thetanuts Finance v3 Upgrade in Q4 2023 — with Thetanuts Finance becoming a Decentralised On-chain Options Protocol, where users can go long or short on on-chain options. Thetanuts Finance’s v3 architecture will feature its existing Basic Vaults, a Lending Market, and Uniswap v3 pools — all housed within the Thetanuts Finance interface.
Architecture & User Flow for v3
Thetanuts Finance will continue to leverage its Basic Vaults, where users will continue to sell OTM European cash-settled options to accredited market makers — and receive yields in the form of option premiums. Users will receive a Basic Vault LP token (i.e. $XYZ-C or XYZ-P) which can be used to do three things:
- Provide Liquidity on AMM: Basic Vault LP tokens can be paired with the underlying asset in the AMM, creating a stable pair and enabling users to buy or sell the Basic Vault LP token.
- Provide Liquidity on Lending Market: Basic Vault LP tokens can be used to provide liquidity to the Lending / Borrowing market, enabling users to leverage long or short on their options position.
- Sold on AMM: Selling the Basic Vault LP token on the AMM for the underlying asset can either represent 1) closing off a Basic Vault LP position, or 2) creating a long option position.
Thetanuts Finance will leverage Aave v2’s contracts to create a Lending Market within the Thetanuts Finance Interface. The Lending Market has two participants: Lenders and Borrowers.
- Lenders: Lenders can deposit their Basic Vault LP tokens into the Lending / Borrowing market, creating liquidity for Borrowers. To close Basic Vault position after depositing Basic Vault LP tokens into the pools, Lenders will first need to redeem their lending positions for the Basic Vault LP token — and proceed to redeem their collateral in the Basic Vault.
- Borrowers: Borrowers can borrow Basic Vault LP tokens from the Lending / Borrowing market, and proceed to sell these Basic Vault LP tokens for the underlying asset on the AMM — this essentially creates a long option position. Borrowers need to pay Lenders a borrowing rate, and can borrow up to 20x their collateral value (5% collateralization ratio) on the lending market.
Thetanuts Finance will utilize battle-tested Uniswap v3 pools to enable users to go long or short on on-chain options. The AMM has two participants: Liquidity Providers and Traders.
- Liquidity Providers: Liquidity Providers on the AMM provide $XYZ-C / $XYZ stable pair TVL. This TVL enables users to go long (i.e. hold $XYZ) or short (i.e. hold $XYZ-C) on the option.
- Long Option: 1) Swap $XYZ-C for $XYZ, or 2) borrow $XYZ-C and swap for $XYZ for leveraged long exposure.
- Short Option: Swap $XYZ for $XYZ-C. No ability to gain leveraged short exposure given that XYZ-C cannot be used as collateral.
Benefits of the v3 Upgrade
Basic Vaults at the Core of v3: v1 Basic Vaults will continue to be at the core of Thetanuts Finance, with the Basic Vault LP tokens being used to bootstrap the rest of the v3 ecosystem. This allows Thetanuts Finance to leverage their prior track record of leading DOV focused on altcoins.
Housing v3 under a Single Interface: v3 will feature a trading-like interface, abstracting the need for traders to interact with Basic Vaults, Lending Market, and AMM.
Ability to Buy Options: DOV strategies mainly center around the sell-side, with no ability for users to go long — v3 will change this through the use of the AMM and Lending Market.
Ability to Exit Basic Vault LP Positions: Prior to v3, Basic Vault LPs would need to wait until the end of the next epoch — implying that they could not exit their positions until a week later. With the AMM, a user could simply swap the Basic Vault LP token for the underlying asset — instantly closing their position without having to wait for the end of the epoch.
Battle-tested Infrastructure: Aave v2 was referenced during the creation of the Thetanuts Finance v3 Lending Market, which the protocol never being exploited prior. Combined with the Thetanuts Finance and Uniswap v3 tech stack that has never been exploited, the Thetanuts Finance team is confident of the security and safety of the v3 upgrade — although an audit is already underway.
Additional Sources of Yield: Through Thetanuts Finance v3, users have access to additional sources of yield beyond just option premiums from the Basic Vaults. These additional sources include: lending interest from the Lending Market, trading fees from AMM, and potential additional token incentives.
Protocol Solvency: Basic Vaults in Thetanuts Finance are 100% collateralized.
Free Market Pricing: Unlike other option protocols where IV is used as an input to price options, v3 features free market pricing — whereby if users believe that AMM pricing is incorrect, they can arbitrage this opportunity for profit.
How is yield generated?
Thetanuts Finance’s Basic Vaults enable users to generate yields for users in the form of option premiums. Vaults have pre-defined parameters (inc. strike price, delta, and tenor), creating specific risk-adjusted yields on each vault. Option premiums represent organic yields that are not emissions-focused.
With the Thetanuts Finance v3 upgrade, users can generate yields through an additional number of ways:
- Lending Interest: Liquidity providers (Lenders) on the Lending Market will receive an interest from Borrowers.
- AMM Trading Fees: Liquidity providers on the AMM will be eligible for a share of trading fees on the AMM.
- $NUTS Liquidity Rewards: In exchange for providing liquidity on the various components of Thetanuts Finance v3, liquidity providers will be eligible for $NUTS token emissions.
- Additional Token Rewards: Liquidity providers may be eligible for additional token rewards on certain liquidity pools. Typically, this occurs when an external protocol provides additional token rewards to incentivise certain pools within Thetanuts Finance v3.
Streamlining Thetanuts Finance
As part of our transition to Thetanuts Finance v3, we will also be streamlining our user experience. We will look to sunset coverage of networks which have low activity — and in-house certain products that have little synergy with our v3 upgrade, as we look to revamp them for the future.
- Stronghold: Index product, where user $USDC is deposited into various Basic Vaults for diversification.
- Long Vaults: Vaults taking the buy-side of a Basic Vault, allowing users to long calls or puts.
- Degen Vaults: Vaults running spreads and condor strategies.
Launch of $NUTS
In conjunction with the v3 upgrade, we will also look to launch $NUTS — the governance token of Thetanuts Finance. $NUTS will be vital in achieving the long-term objectives of the protocol — including decentralisation, governance, and incentives. Furthermore, we believe that $NUTS should also be used to reward loyal members of the Thetanuts Finance community — and are currently in the midst of finding the most optimal way to do so. More information on the token utility and distribution of $NUTS will be published in the coming weeks.
Launch of v3 Incentivised Alpha
As part of our upcoming v3 upgrade, we are pleased to announce that we will be launching the v3 Incentivised Alpha — a gated launch of Thetanuts Finance v3, where selected participants will have early access to our new features on v3. We intend to begin the v3 Incentivised Alpha in mid November 2023. Any rewards in connection with the v3 Incentivised Alpha will be provided following a successful v3 Mainnet launch, and may be subject to a lock-up period.
Applications will be accepted on a rolling basis, with certain jurisdictional limitations as per Thetanuts Finance’s Terms of Service (i.e. users must be non-US/Canada and OFAC compliant).
Interested participants should access our application form here: https://forms.gle/7NWnJyUdrcrWZKp48
We are excited to embark on this journey with the Thetanuts Finance community for our upcoming v3 upgrade, and remain committed to providing the best on-chain altcoin options trading experience for users. Stay tuned for more exciting updates in the coming weeks, and feel free to reach us on Twitter and Discord.