How Do AMMs Enable Decentralized Options Tokenization?
AMMs can be adapted to trade tokenized options by using liquidity pools that pair the option token with its underlying asset or a stablecoin. The smart contract acts as the counterparty for the option trade.
This enables continuous, liquid trading of options without needing a centralized exchange. The option token itself represents the contract's rights and obligations.
Glossar
Amms
Architecture ⎊ Automated Market Makers (AMMs) represent a paradigm shift in decentralized exchange (DEx) design, moving away from traditional order book models to a constant function market mechanism.
Liquidity Pools
Provision ⎊ Liquidity Pools are smart contracts holding reserves of two or more assets, facilitating automated trading via an algorithmic pricing mechanism rather than a traditional order book, and are the backbone of decentralized exchange functionality.
Tokenized Options
Derivative ⎊ Tokenized options represent a novel intersection of decentralized finance (DeFi) and traditional options trading, enabling the fractionalization and on-chain representation of options contracts.