For a long time, DeFi options have not become a mainstream trading category. Compared to perpetual contracts, they are more complex, have more dispersed liquidity, and are harder to form a stable natural demand.
However, Vitalik’s recently proposed algorithmic stablecoin concept has opened up another possibility for options: it is no longer treated as a standalone trading product, but becomes a financial foundational module behind stablecoins, yield products, and structured assets.
In this article, the author interprets this proposal from an options perspective. He believes that the stable-side asset in Vitalik’s design is essentially similar to a synthetic covered call option: users split 1 ETH into two parts, with one part receiving a “stable value” below a certain strike price, and the other part receiving the upside profit above the strike price. Since the two parts always add up to 1 ETH, the system does not need to introduce debt, collateral, or a liquidation mechanism, thereby avoiding the core liquidation risk of traditional CDP stablecoins.
However, the challenges of this design are also evident. In order to keep the stable-side asset close to a stablecoin, it needs to continuously roll deep in-the-money call options, which brings about issues such as roll slippage, front-running of fixed trading paths, and insufficient liquidity. More importantly, behind each unit of stable asset, there needs to be someone continuously holding the corresponding upside asset, which is a kind of leverage ETH long position without funding rates or liquidation risks. Whether this demand can exist in the long term will determine if the system can truly scale.
Finally, the author, drawing on Rysk’s experience, points out that the reason why DeFi options have been difficult to scale in the past is that as a direct trading product, they are too complex, and the user demand is not natural enough. However, if we change perspective and place options at the core of more complex assets such as stablecoins, structured yields, and index products, it may be more suitable as the infrastructure of DeFi. In other words, the opportunity for options in DeFi may not necessarily be to become the next perpetual contract, but to become the pricing and risk distribution engine behind the next generation of on-chain financial products.
For years, I have heard the same phrase: “Options do not work in DeFi.” After doing Rysk, I admit that there is indeed some truth in this statement. Most DeFi options products are challenging to scale. Liquidity is dispersed, natural trading flow is difficult to attract, and traders continuously opt for simpler products.
It is for this reason that Vitalik’s recent proposal caught my attention. He suggested that a stablecoin algorithm could be built using an option-like ownership structure without a liquidation mechanism. What truly intrigued me was the concept: options are not seen as a tradable product but as the foundational infrastructure of a product.
His design breaks down one unit of ETH into two types of ownership. One side is P, which holds the value up to a certain strike price, while the other side is N, which receives all upside above that strike price. Together, they always add up to one unit of ETH, so there is no debt, no margin required, and nothing to be liquidated.
This is precisely the payoff structure of a covered call option. The holder retains the asset itself, sells off the upside above a certain strike price, and collects the option premium. P replicates exactly this covered call payoff structure. N is equivalent to the long call held by the buyer.
Today, most Rysk users are selling out-of-the-money covered call options. But Vitalik’s envisioned stability end requires a different structure. To behave like a stablecoin, the strike price must be far below the spot price, making this call option deep in the money. Thus, this stable asset is essentially an ongoing program of covered call options rolling.
In Vitalik’s model, someone must deposit a full unit of ETH, split it, sell the stability end, and hold the upside end. This depositor is the linchpin on which the entire system depends. The most obvious candidate is a liquidity provider, but the position they end up holding is, in essence, a leveraged long ETH position.
At Rysk, we learned this the hard way. The early versions of the protocol struggled to scale, lacked natural demand, and never found product-market fit. However, in the current Rysk V12 protocol, both trading parties have strong incentives to participate. Market makers compete within the RFQ mechanism to purchase this part of the trading flow. They only pay the option premium, do not need to provide collateral, and ultimately get the option exposure they truly desire.
I’m glad to see this design being seriously explored. The challenges are indeed real, but they are the kind of interesting challenges. This is exactly the design space DeFi should explore.
[BlockBeats]
Vitalik Buterin’s latest algorithmic stablecoin proposal isn’t just a novel stablecoin design — it’s a quiet revolution in DeFi derivatives architecture. By reframing options not as speculative trading instruments but as foundational building blocks for structured finance, he has unlocked a path forward for derivatives that has eluded the industry for years. The key insight? Options don’t need to be traded — they need to be embedded.
At the heart of the proposal is the elegant decomposition of 1 ETH into two non-debt-bearing tokens: a “stable” token (P) that captures value up to a strike price (e.g., $1,800), and a “residual” token (N) that captures all upside beyond it. This mirrors a synthetic covered call: the holder of P receives downside protection and stability; the holder of N receives leveraged exposure to ETH without margin, funding rates, or liquidation risk — an ideal, frictionless long position in a world of overcollateralized debt.
This is not theoretical — it’s practically the inverse of how traditional CDP stablecoins work. MakerDAO’s DAI requires massive overcollateralization and relies on liquidation cascades. Here, there is no debt. No liquidations. No oracle risk beyond a single strike price. This isn’t just safer — it’s fundamentally more capital-efficient. The entire system collapses to a zero-sum, self-balancing ownership split, enforced by smart contracts, not incentives.
But herein lies the tightrope: the system only works if there’s persistent, natural demand for the N token — the leveraged ETH long. Who buys it? Liquidity providers? Yield aggregators? Yield farmers seeking gamified upside? Probably, but only if ETH maintains structural bullishness. In a sustained bear market, the N token becomes unattractive. No one wants 2x ETH exposure without the usual leverage costs — but if no one holds N, P loses its peg because there’s no counterparty absorbing the upside. This creates a feedback loop: low N demand → less P issuance → less stability → lower adoption.
The operational challenges are nontrivial. Rolling deep in-the-money call options continuously requires frequent rebalancing. Each rollover risks slippage in illiquid markets and MEV extraction — front-running on strike adjustment triggers could eat up 3–5% of returns annually. Liquidity fragmentation is inevitable: P and N tokens will trade on multiple AMMs with varying spreads, undermining their function as stable units. Rysk’s experience confirms this: options as standalone products flop without natural flow. But when embedded — as in Rysk V12’s RFQ-driven market maker model — they thrive.
This is the paradigm shift: DeFi options aren’t the next PerpDex. They’re the next Aave — invisible, foundational, and embedded in yield structures. Imagine a DeFi money market where you lend DAI and receive a token that pays 10% APY but also gives you exposure to 20% of ETH’s upside above $2,500 — structured using Vitalik’s split mechanism. Or an index fund that holds ratio-balanced P/N pairs across multiple assets, dynamically rebalancing risk exposure.
The opportunity is not to sell options — it’s to sell financial products that use options internally. The real value is in capital efficiency, yield enhancement, and risk partitioning. If ETH holds above $2,000 for the next 18 months, this model could scale to multi-billion dollar TVL. If not, it becomes a niche experiment.
I am convinced: options in DeFi don’t need to be traded. They need to be absorbed. Vitalik didn’t just design a stablecoin — he designed the first viable substrate for a new class of on-chain structured finance. The question is no longer “Can options work in DeFi?” — it’s “How fast can we build the infrastructure to make them invisible?”
The next DeFi supercycle won’t be powered by perpetuals. It will be powered by someone quietly rolling covered calls behind the scenes — enabling stable yields, capital-efficient risk exposure, and institutional-grade products on-chain. And if history repeats, it will be the “boring” infrastructure, not the flashy options UIs, that wins.