Designing On-Chain Options: Amortizing Perpetual Options

2026-05-18

AI Summary

This work addresses the limitations of existing on-chain options, which rely on high-frequency oracles and complex liquidation mechanisms that are prone to failure under market stress and lack a standardized paradigm suitable for blockchain environments. The paper proposes an amortized perpetual options design that enables tail-risk sharing without centralized liquidation by integrating endogenous collateralization with an explicitly priced de-peg insurance mechanism. Leveraging low-frequency on-chain interactions, smart contract–driven amortization logic, and a decentralized market architecture, the protocol operates under minimal consensus requirements. As foundational risk infrastructure for DeFi, this approach significantly enhances system resilience during extreme market conditions and supports a broad range of risk management applications.

Abstract

Financial options are fundamental to traditional markets, enabling strategies ranging from hedging to speculating. Yet, while the Automated Market Maker paradigm has revolutionized decentralized spot markets, no equivalent standard has emerged for on-chain options. Typical designs attempt to replicate centralized exchange mechanics, requiring high-frequency oracles and robust liquidation engines which may fail during stress events. This paper presents a design for amortizing perpetual options tailored to the operational and adversarial constraints of blockchain environments. Leveraging this primitive, we introduce a decentralized market framework with minimal consistency requirements. We demonstrate that this contract functions as a foundational risk primitive for DeFi, enabling applications such as endogenous collateralization and explicitly priced de-peg insurance, thereby showing that this design provides a layer for mutualizing tail risk across protocols without reliance on centralized clearing institutions.

Problem

• on-chain options
• decentralized finance
• perpetual options
• blockchain constraints
• tail risk

Innovation

• amortizing perpetual options
• on-chain options
• decentralized derivatives
• tail risk mutualization
• DeFi risk primitive