How Does the Complexity of American Option Pricing Affect Its Smart Contract Implementation?
American options are complex because the optimal exercise time is unknown, requiring a more complex pricing model than European options. Implementing this complex model on-chain is computationally expensive and high in gas fees.
As a result, many DeFi options protocols default to the simpler, cheaper European style or use simplified models.
Glossar
Optimal Exercise Time
Time ⎊ Optimal Exercise Time denotes the precise moment during the life of an American-style option contract when exercising the option yields the highest expected value for the holder.
DeFi Options Protocols
Volatility ⎊ DeFi options protocols represent a nascent layer within decentralized finance, enabling the creation and trading of options contracts without traditional intermediaries.
American Option Smart Contract
Contract ⎊ An American Option Smart Contract represents a self-executing agreement encoded on a blockchain, specifically designed to replicate the functionality of an American-style options contract.
American Option Pricing
Valuation ⎊ American option pricing, within cryptocurrency markets, diverges from traditional models due to unique characteristics like 24/7 trading and volatility clustering.