How Are Smart Contracts Used in Decentralized Options Trading?
Smart contracts automate the execution and settlement of options trades without intermediaries. They are used to define the option's terms (strike price, expiry, collateral), lock up the collateral (e.g. cryptocurrency), and automatically execute the payoff or settlement based on external price data (oracles) at expiry.
The code replaces the need for a clearing house, ensuring trustless and transparent execution of the derivative contract.
Glossar
External Price Data
Source ⎊ External price data refers to the off-chain market information, such as the spot price of a cryptocurrency, that is required to determine the value and settlement of on-chain financial derivatives, particularly options and perpetual swaps.
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.
Decentralized Options
Architecture ⎊ Decentralized options represent a paradigm shift in options trading, moving away from centralized exchange reliance towards blockchain-based smart contracts for execution and settlement.
European Option
Valuation ⎊ A European option, within cryptocurrency derivatives, represents a contract granting the holder the right, but not the obligation, to buy or sell an underlying crypto asset at a predetermined price on a specific date.
Transparent Execution
Verification ⎊ Transparent Execution, within cryptocurrency, options, and derivatives, denotes a system where trade details are publicly auditable on a distributed ledger, enhancing trust and reducing counterparty risk.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.