Feasibility study for DEFI (vanilla) options

Reddit discussion: https://www.reddit.com/r/pancakeswap/comments/qc3d82/community_vote_discussion_feasibility_study_for/

Background:

Pancake swap is in the unique position to offer liquidity for a vast majority of tokens as well as having a prominent amount of community exposure. One of the main products, liquidity pools, are susceptible to impermanent loss and short selling coins is not possible. Currently no derivative exists to hedge against these risks for novel tokens. While weighted LPs offer a way to reduce exposure, using a portfolio of classic vanilla options allows to create payout profiles which can be used to offset potential losses. In exchange for a share of the apy, options could serve as an insurance in case of drastic market swings. With their prediction feature pancakeswap has already shown that they are able to support exotic (binary) options.

Pro:

• Creating a defi option market allows users to hedge risk against LPs impermanent loss
• Options allow to naked short crypto coins without needing to borrow them in the first place
• Option writers have a new instrument to earn additional profit
• More utility for the cake token and a unique selling proposition for pancake swap (additional possibilities to introduce new mechanics to burn cake tokens)
• Pancake swap could expand to a novel innovative market segment which has not been explored yet potentially generating a lot of growth

Con / Risk:

• Massive undertaking: Option pricing is challenging and a lot of research has to be put into getting pricing and valuation correct
• Additional smart contract risk due to high complexity. Extensive auditing will be necessary
• Dilution of platform and competence. First of all pancake swap is a lp and not an option market.
• Options are not accepted as a financial instrument by the users and we are left without any liquidity in the market

More background: While the vast majority of crypto traders are somewhat financially savvy, option terminology is not intuitive. A clear UX would have to be developed in order to make the product useable for the user base. e.g. composite products with clear payout profiles and associated costs.

Currently only limited support for option trading exists on the cryptoverse:

• Finnexus with options for: BTC, ETH, LINK, SNX, and MKR https://www.finnexus.io/
• Whitepaper for collateral liquidity pools: https://github.com/Phoenix-Finance/Pdfs/blob/master/Product%20Paper%20for%20Phoenix%20Protocol%20for%20Options%20v1.0%20%20July%20-2021.pdf
• Binance has a small vanilla market for BTC options
• Deribit offers ETH and BTC options https://www.deribit.com/
• CME Options on BTC future https://www.cmegroup.com/markets/cryptocurrencies/bitcoin/bitcoin.contractSpecs.options.html This proposal aims to call for some basic research into if adding an option marketplace to pancake swap would add any value and how it could be performed. (Uniswap Style Pools, Finnexus Liquidity Pools, a centralised orderbook, a defi orderbook with sidechain, ...)