How Do Decentralized Finance (DeFi) Option Protocols Handle the Equivalent of a Transaction Fee?
DeFi option protocols typically rely on network gas fees (e.g. Ethereum gas) for the on-chain transaction to create, buy, or settle the option.
In addition to gas, the protocol may charge a small fee (a protocol fee) which is often distributed to liquidity providers or the protocol's treasury. The premium itself is paid directly to the option writer or the liquidity pool, not as a transaction fee to a miner.
Glossar
Network Gas Fees
Mechanism ⎊ Network gas fees represent the computational cost required to execute transactions and smart contracts on a blockchain, directly impacting the economic viability of decentralized applications and derivative instruments.
Decentralized Finance (DeFi)
Architecture ⎊ Decentralized Finance (DeFi) represents a fundamental shift in financial systems, constructing open-source protocols and smart contracts on blockchain networks, primarily Ethereum, to replicate traditional financial instruments without intermediaries.
Option Protocols
Protocol ⎊ Option protocols define the decentralized smart contract systems that facilitate the creation, trading, and settlement of options contracts on a blockchain.
Liquidity Providers
Capital ⎊ These entities supply the necessary assets to decentralized exchanges or automated market makers to facilitate continuous trading in crypto derivatives and options.