How Are Options Contracts Represented and Executed as Smart Contracts on a Blockchain?
An options contract is represented as a smart contract by encoding its key terms ⎊ such as the underlying asset, strike price, expiration date, and premium ⎊ directly into the blockchain. The smart contract holds the underlying asset or collateral in escrow.
Execution is automated; the smart contract continuously monitors the asset's price and the expiration date. If the option holder chooses to exercise, the smart contract automatically verifies the conditions and settles the trade by transferring the assets to the respective parties without needing a traditional broker.
Glossar
Options Contracts
Derivative Instruments ⎊ Options Contracts are agreements granting the holder the right, but not the obligation, to buy or sell a specified quantity of an underlying asset, typically a cryptocurrency, at a fixed price within a set timeframe.
Decentralized Finance
Architecture ⎊ Decentralized Finance, or DeFi, fundamentally reimagines traditional financial infrastructure through blockchain technology, specifically leveraging smart contracts to automate and execute financial agreements without intermediaries.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Smart Contract
Code ⎊ The contract is fundamentally self-executing code deployed on a distributed ledger, embodying the terms of the agreement in an immutable format.
Smart Contracts
Function ⎊ Smart contracts are self-executing agreements with the terms of the agreement directly written into lines of code, residing on a decentralized ledger.