How Are Options Contracts Priced in Decentralized Finance (DeFi) Environments?

DeFi options pricing often uses a variation of the Black-Scholes model or is determined algorithmically by an Automated Market Maker (AMM). AMM-based options protocols, however, face challenges in accurately accounting for complex factors like implied volatility and time decay (Theta) due to the constraints of on-chain computation.

This can lead to less efficient pricing compared to centralized exchanges. Some protocols rely on decentralized oracle networks for accurate volatility data.