Why Does the Crypto Market Still Need Options After Perpetual Contracts?

Can on-chain options break the liquidity deadlock?

Written by: Saurabh Deshpande

Compiled by: Saoirse, Foresight News

I have been pondering a question: since perpetual contracts are already so mature and powerful, why does the crypto market still need options? After much reflection, the answer I found is time. You might predict that Bitcoin will rise in three months, but a leveraged perpetual contract could get liquidated tomorrow. Buying call options allows you ample time to wait for your trading view to materialize. You may still lose all your premium, but extreme daily market movements won't force your position to be liquidated immediately.

This led me to research why the market size for on-chain options remains so small. We have actually executed many options trades, researched market liquidity, and reviewed the root causes of numerous past project failures. The core issue largely boils down to one question—is it worth selling options? Perpetual contract platforms have the opportunity to change this situation: they can provide hedging tools for option sellers and reuse the existing pool of traders on the platform. This article will analyze the underlying logic of this model, the existing challenges that need to be addressed, and who will benefit from it. We will also explore various protocol design solutions that can incentivize option sellers.

In the past few weeks, I experienced Papertrade. This platform acts as the counterparty for every trade. For every dollar a trader loses, the platform mints an equivalent amount of PAPER tokens; holding these tokens allows one to share in the platform's fee revenue. This mechanism of "loss minting and token fee sharing" made me start to imagine what it would look like if this logic were applied to options—after all, there hasn't been a truly successful product in the options space yet.

Perpetual contracts allow you to set a range for price fluctuations but cannot tolerate your judgment being wrong for an extended period; options can do that. As early as July 2025, we proposed the view that on-chain options would grow alongside perpetual contracts, with trading volume expected to increase a hundredfold within three years. However, 15 months later, the trading volume of on-chain options is still less than 1% of decentralized perpetual contract trading volume. In contrast, in traditional financial markets, options trading volume is about three times that of futures.

In this article, we will quantify the cost for a type of trader: correct direction but too early entry, and how much it costs to trade on perpetual contracts; explain why the next generation of on-chain options will be built on infrastructures like Hyperliquid; outline the development paths of various projects; and analyze which protocols will reap the greatest rewards after a trading volume explosion. Brief conclusion: the party that masters the hedging channels will become the biggest winner. Key targets to focus on include Hyperliquid as the "landlord" of the hedging market, Derive as the underlying engine for options, and Paradex as a counter for block trades. At the end of the article, we also propose two solutions to fill the supply gap for sellers: one is to embed options into Metric's liquidity pool; the other is an options version of Papertrade.

Correct Judgment, Wrong Trading Tool

How many potentially profitable trades are ruined by perpetual contracts? We extracted the daily closing prices of Bitcoin from January 2018 to October 2026, treating each day as a potential entry point for long positions. We only kept samples where the closing price was above the entry price (indicating the trader's directional judgment was correct) for 7 to 180 days after entry, and we calculated whether the market's interim pullbacks were sufficient to liquidate 5x, 10x, or 20x leveraged perpetual contracts.

Statistics on BTC bulls with correct directional judgment using different leveraged perpetual contracts and their liquidation probabilities during the holding period

Using a 10x leveraged perpetual contract, the liquidation probability after 180 days is 47%, 29% after 90 days, and 18% after 60 days. If options were bought during the same time window, the position would not be forcibly liquidated before expiration. The above calculations only use daily closing prices and do not account for intraday spikes; the actual liquidation probability would be even higher.

In March of this year, we mentioned in a previous article that short-term trading has almost entirely flowed into perpetual contracts. This conclusion still holds in hourly trading scenarios; however, the longer the time required for a trade's logic to materialize, the higher the probability that perpetual contracts will trigger stop-losses or liquidations.

We reviewed the market on October 10, 2025: at 12:00 UTC, three long positions of $1,000 in Bitcoin were opened simultaneously: the first was a 10x perpetual contract; the second used the entire $1,000 to buy a 30-day call option; the third was a 10x perpetual contract with an additional 7-day put option with a strike price 5% below the entry price for protection, with the option cost deducted directly from the $1,000 principal.

Comparison of performance under a market crash for perpetual contracts, call options, and perpetual contracts with protective options

The perpetual contract position was liquidated at 21:14; the call option dropped to a low of $181 but rebounded to over $800 within an hour; the put option costing $52 helped the 10x long position withstand this market crash. We repeated this test using Deribit quotes across eight different assets and found consistent patterns.

Cost differences of protective strategies for altcoin options

For altcoins, achieving the same protective effect requires consuming $250 to $340 of principal because altcoin options pricing already incorporates a high volatility premium.

Everything Can Be a Trading Target

Traditional financial markets and crypto markets are merging and borrowing from each other in three dimensions:

1. Traditional finance introduces crypto financial instruments. CME now supports around-the-clock trading of cryptocurrency futures and options; Hyperliquid's perpetual contract market connects to Bloomberg terminals; Hyperliquid's policy department and Trade.xyz are applying to the SEC for regulatory rules for perpetual contracts before an IPO; Polymarket launched perpetual contracts for users outside the U.S. in September.

2. The crypto market introduces traditional financial assets. On Hyperliquid, you can trade S&P 500, Nvidia, gold, and crude oil perpetual contracts around the clock. In a previous article, we proposed that assets like government bonds, stocks, computing power, and attention could all be traded on-chain in the future, with perpetual contracts being the vehicle for achieving this. On March 23, Trade.xyz's WTI and Brent crude oil perpetual contracts reached a daily trading volume of $2.3 billion. Now, the market has even seen perpetual contracts for hourly rentals of Nvidia H100 GPUs and Pokémon card index perpetual contracts. CME and ICE are waiting for CFTC approval to list computing power futures.

The more tradable targets there are, the stronger the demand from users for diversified trading tools. Some trade GPU perpetual contracts betting on computing power shortages; AI companies hope to hedge against future computing power price increases. Businesses can pay a fixed premium to buy options for risk protection: if computing power rental exceeds the agreed price, the option pays the difference; if rental prices drop, the business enjoys lower-cost computing power, with the maximum loss being the premium initially paid. Meanwhile, perpetual contracts can serve as hedging tools for option sellers; every new perpetual contract market that emerges will give rise to a corresponding options market.

3. Traditional financial tools serve crypto-native assets. In April, BlackRock's Bitcoin ETF options had a notional open interest of $27.6 billion, surpassing Deribit's Bitcoin options; Coinbase spent $2.9 billion to acquire Deribit.

In the future, the same trading platform is expected to provide spot, perpetual contracts, options, and binary contracts, covering Bitcoin, stocks, and commodities. The first to implement this system will capture the vast majority of trading volume. The crypto space has two inherent advantages:

1. New targets are determined solely by software decisions. IBIT will launch in January 2024, but its corresponding options will not complete the entire approval process with exchanges, clearinghouses, and the SEC until November of the same year. Hypercall launched SpaceX options nine days before its NASDAQ listing (2026-06-03), directly using Pre-IPO perpetual contracts as the price benchmark.
2. The market trades continuously around the clock. With perpetual contracts, trading can occur even on Sundays; Hypercall supports Sunday trading for Nvidia and SpaceX options. During non-U.S. stock trading hours, the bid-ask spread can widen by 1.5 to 2 times, but traditional platforms cannot provide options trading during these hours.

The vigorous development of the perpetual contract space is a significant boon for on-chain options, as perpetual contracts are the hedging vehicle for option sellers. The deeper the liquidity in the perpetual contract market, the lower the hedging costs for selling options. Every new perpetual contract market potentially corresponds to an options market.

Why On-Chain Options Keep Failing

Since 2019, dozens of protocols have attempted to build on-chain options, with the vast majority ultimately shutting down, pivoting, or seeing trading volumes approach zero. We previously outlined various generations of projects, and here we briefly review them. Options are inherently more challenging to implement than perpetual contracts for three main reasons:

1. A single asset can generate hundreds of order books, severely fragmenting liquidity. A BTC perpetual contract only requires one order book; however, just on Deribit, BTC has 11 expiration dates, totaling 884 options contracts, and market makers need to continuously quote all contracts.

Illustration of order book fragmentation, comparing the number of order books for perpetual contracts and options

2. Sellers find it difficult to hedge at low costs. Sellers need to continuously trade the underlying asset to maintain delta neutrality, and there must be a sufficiently deep trading market nearby.

3. Selling options consumes a large amount of capital. Early protocols required sellers to lock up full collateral for their maximum potential losses. For example, selling a BTC call option with a strike price of $110,000 only generates $1,800 in premium income but requires locking up $100,000 in collateral, yielding only 1.8% monthly returns, which professional market makers would not accept.

Comparison of capital consumption, illustrating the high collateral requirements of early options protocols

One generation of protocols solves one problem but stumbles on another. Hegic depositors lost about $80 million in principal in May 2021; within seven months of Lyra's early version launch, the BTC liquidity pool lost 4.9%, and the ETH liquidity pool lost 17.6%; PsyOptions will shut down its products in June 2024.

Summary of historical on-chain options project losses and shutdowns

Why are market makers reluctant to join? Before retail flow arrives, the vast majority of quote requests received by new platforms are from arbitrageurs looking to arbitrage between platforms and Deribit. Arbitrageurs only execute trades when there are discrepancies in platform quotes, meaning market makers incur losses on nearly every trade. Platforms have two options: subsidize market makers to cover losses or attract retail order flow that did not previously exist.

How Current Platforms Are Breaking the Deadlock

Today, the operational architecture of platforms is largely similar: off-chain order matching, on-chain custody of collateral and margin, execution of clearing and settlement, while users retain control of their assets.

However, no matter how good the architecture, sufficient incentives must be provided to sellers; the most effective incentive is to allow sellers to complete low-cost hedging within the same account. Returning to the previous example: selling a BTC call option requires locking up $100,000 in margin.

Illustration of the principle of the portfolio margin mechanism, showing a significant reduction in margin usage

Portfolio margin engines will calculate margin based on the maximum potential risk of all positions. Assuming a reasonable maximum volatility of 15%, sellers only need to pledge about $15,000, while the premium income remains $1,800, increasing the monthly return on pledged funds from 1.8% to about 12%.

Thus, options business will explode in places where perpetual contract liquidity already exists, with typical representatives being Hyperliquid and Lighter. Sellers of options on Hyperliquid enjoy three core conditions that are difficult for others to provide simultaneously:

1. Deep liquidity: The deepest perpetual order book on-chain, with an open developer API;
2. Unified account system: The collateral for selling put options can be reused in perpetual long positions. The same risk engine is shared across spot, perpetual, and event contracts, which is the most critical improvement compared to previous products;
3. User flow: Platforms that control liquidity and distribution channels find it easier to retain the value brought by business.

Hypercall is the first options platform built on this system. Market makers selling Nvidia call options can buy Nvidia perpetual contracts for hedging in the same account; the hedging operation directly reduces the margin required for the options. Its founder estimates that the number of perpetual contract market makers is 10 to 100 times that of options market makers; Hypercall aims to convert this group of perpetual market makers into options quoting parties.

Other platforms are exploring different supply solutions for sellers:

Overview of various on-chain options platform models

Derive (formerly Lyra) chooses to directly subsidize sellers. As of October 19, the nominal clearing scale over the past year is about $18 billion; the only publicly cooperating market maker is FalconX. FalconX's funds are retained in its own custody institution, and Derive maps its balance on-chain, allowing institutions to quote without migrating funds on-chain.

Paradex "introduces external sellers." On September 15, it connected to the Paradigm network (which accounts for a quarter of Deribit's large trades), with single-day options trading volume soaring from less than $3 million to $58.7 million within a week; however, by October 14, the open interest dropped from $250 million to $96 million. Large traders leave after completing trades, making it difficult to establish long-term positions.

Rysk transforms ordinary token holders into sellers. Users deposit HYPE, BTC, and ETH, selling covered call options to whitelisted market makers and immediately receiving premiums. As of October 14, the nominal trading volume over the previous 30 days is $148 million; however, once the HYPE risk exposure of call option buyers reaches its limit, trading volume stagnates.

Upper front-end products can completely hide the complex strike price grid. Dream supports deposits via Apple Pay, allowing users to simply choose the trading direction and size, with the platform automatically buying options for them; Tacticalls, built on Derive, supports three-step ordering and copy trading. Excellent front-ends can attract new users, but if the underlying order book lacks sellers, the front-end cannot create liquidity out of thin air.

Are Contracts Live, but is Liquidity Really Sufficient?

September 2026 was the best month in the history of on-chain options: nominal trading volume nearly doubled to $5 billion, premium volume increased by one-third to $85 million; open interest peaked at nearly $2.5 billion. However, this only accounts for 7% of Deribit's trading volume that month, with the vast majority of trades occurring on Derive.

Monthly core indicators statistics for on-chain options, comparing nominal volume, premiums, and open interest

It is worth noting that platforms listing a large number of deeply out-of-the-money cheap contracts can inflate nominal trading amounts, but actual turnover cash (premiums) is a more objective measure; based on premium statistics, Derive's market share exceeds 90%.

Market share statistics for Derive based on premiums

Most of Hypercall's nominal trading volume comes from deeply out-of-the-money short-term options on the S&P 500, with users buying them like lottery tickets. Pink Brains estimates that for every $1 premium on Hypercall, it can leverage about $1,000 in nominal value; whereas $1 premium on Derive corresponds to only about $50 in nominal value. The huge gap arises from three points:

1. Volatility differences: The annualized volatility of the S&P 500 is about 16%, while BTC is 43%, making index options themselves cheaper to price;
2. Contract characteristics: Short-term, deeply out-of-the-money call options have a very low premium-to-nominal value ratio;
3. Platform rewards: During Hypercall's daily distribution of $1,000 in HYPE rewards, nominal volume skyrocketed 50 times, but premiums hardly increased; traders buy the cheapest contracts solely to obtain rewards; traders who genuinely need options risk exposure primarily use Derive.

How is the quality of Derive's order book? On the evening of October 19, we extracted BTC and ETH options that were simultaneously launched on Derive and Deribit, excluding deeply out-of-the-money contracts and those expiring within three days; Deribit had all 346 strike prices with simultaneous buy and sell quotes; Derive only had 206 strike prices supporting bilateral trading. For contracts with quotes on Derive, the selling price deviated from Deribit by no more than 0.2%; the bid-ask spread accounted for 3.8% of the option price, while Deribit was 2.6%. Compared to the data from "Trading Optionality" in July 2025, when Derive's spreads were 2-5 times that of Deribit, the gap has clearly narrowed.

Assets other than BTC and ETH present a completely different picture. Derive has launched options for a total of 12 assets; we extracted all strike prices expiring on December 25.

Proportion of contracts without sell quotes for various currencies on the Derive platform; mainstream assets like HYPE, BTC, and ETH still have sell orders, while LIT and other altcoins have almost no sell prices.

For PUMP, LIT, ADA, VVV, and CC, a total of 220 strike prices exist, but only 1 sell order. I attempted to buy a PUMP call option expiring in December, and the order took a long time to execute. Even if there are quotes, once the strike price deviates from the current price, the spread will quickly widen. Even the most liquid mid-cap asset HYPE on Derive faces this issue.

Illustration of liquidity decay for mid and small-cap options; the spread quickly widens once the strike price deviates from the current price.

We tested all platforms and observed the same phenomenon. Aevo's MEME token options can only be traded over-the-counter (OTC); Dream has migrated trading of PUMP and LIT to a single OTC counterparty. Launching options contracts incurs almost zero cost, but the costs and risks of market making and selling options are high.

Development Space for the Options Track

In 2025, traditional market options trading reached 88.65 billion contracts, while futures reached 30.64 billion contracts. As of October 19, 2026, the on-chain market had nominal options trading of $4.9 billion over the past 30 days; during the same period, decentralized perpetual contracts had a trading volume of $627 billion, with options accounting for only about 0.8%.

Comparison of traditional markets and on-chain derivatives scale, highlighting the huge disparity in size between the two.

Many products are essentially options, just not called options: mortgages that allow early repayment are akin to buying call options from a bank; insurance is essentially a put option; employee stock options are call options distributed in the form of compensation. These demands in the real world also exist in the cryptocurrency market.

We do not believe that on-chain options can achieve the transaction ratio of traditional financial options; binary contracts, prediction markets, and platform-native binary products will siphon off some of the demand for options. Lighter has launched BTC and ETH binary options on October 19.

Even so, on-chain options still have three major sources of demand:

1. Assets that traditional finance cannot quickly launch: HYPE, pre-IPO targets, GPU rental fees; trading stocks and crude oil over the weekend.
2. Users that traditional finance cannot reach: users outside the U.S., those without brokerage accounts, and retail investors who only want to participate with $1. The culture of retail options in India is a typical example, with NSE weekly options accounting for 95% of total transactions.
3. Options capabilities embedded in other products: perpetual contracts with added downside protection, treasury-backed calls, and loan liquidation insurance; embedding options capabilities into any DApp via API.

New Market, Old Winners

Tracking the flow of transaction fees from an options trade can reveal the market structure: options platforms only charge a small fee upon transaction; every time the seller adjusts their hedge position, it creates fees for the perpetual contract platform. This is how options trading drives perpetual contract trading volume. Deribit has over $2 billion in open futures, primarily used to hedge platform options positions. Three core roles:

1. Hedge Market Landlords (Hyperliquid): controls the hedge market, margin accounts, and user base; HIP-4 binary contracts share accounts with options. HIP-4 itself is a quasi-options tool and may even siphon off Hypercall's business; but in any case, all transaction volume generated from hedging stays with Hyperliquid.
2. Options Underlying Engine (Derive): order book depth, risk engine, institutional users, open V3 API to the outside. If wallets, vaults, and AI agents route options orders here, Derive will become the on-chain options backend; otherwise, it will only be a trading venue reliant on subsidies and supported by a few market makers.
3. Block Trading Desk (Paradex): connects to Paradigm's institutional order flow, highlighting large trade values; institutional market makers will also enhance the order book depth for regular users.

Platforms that cannot provide hedging channels for sellers are losing ground: the overall scale of the sector has quadrupled, while Aevo's options business has shrunk by over 90%. Isolated options products find it hard to compete with products that can be used in conjunction with spot and perpetual combinations. In the future, a structure will form: underlying platforms will host liquidity, with numerous front-end applications connecting and calling, similar to the current DeFi Builder Code model.

The market is already pricing this expectation. Citrini Research's "Breaking The Wall" portfolio allocates 10% to DRV; DRV has risen over 1000% this year. On October 22, its market cap was $390 million; net income over the past 30 days was $486,000, corresponding to a 66x annualized income valuation.

Projecting Derive's growth potential: assuming on-chain options trading volume reaches 5% of perpetual contract transaction volume. The expected total transaction volume for perpetual contracts in October is $660 billion; 5% corresponds to a nominal scale of $33 billion in options. If Derive maintains an 80% market share, with a fee of 1.1 basis points, this corresponds to an annualized fee of $35 million. Compared to the current market cap, there is an 11-fold revenue upside. The current price of DRV implies market expectations: the sector's scale expands sixfold, Derive maintains market share, while also facing competition from Hyperliquid, Lighter, and Paradex.

Options Embedded in Liquidity Pools

Options sellers do not necessarily all come from options trading platforms. Metric is a DEX whose active liquidity pool is similar to Uniswap's concentrated liquidity. LPs provide liquidity by placing orders at different price levels, earning fees when orders are filled. The difference between the two lies in the price range settings: Uniswap's LP range is fixed and needs to be manually reset by LPs after market fluctuations; Metric introduces oracles, allowing price levels to automatically shift according to oracle quotes. As of October 21, the deposit scale was about $12 million, with a total transaction volume of $4.4 billion.

What would happen if these liquidity pools directly quoted options? Metric's documentation mentions that the Black-Scholes model (input volatility parameters) is an alternative oracle pricing model. Liquidity pool managers can price tokenized ETH call options based on real-time volatility.

For example: if the ETH price is about $2430 with an implied volatility of 50%; a call option expiring on October 30 with a strike price of $2600 would be priced at $18 according to the BS model. When ETH rises to $2500, the value of this option increases to $35, and all liquidity levels shift upwards simultaneously. The Metric pool connects to aggregators like 0x, 1inch, CoW Swap, and PancakeSwap, allowing users to purchase options tokens just like exchanging regular tokens.

Disadvantage: Strong distribution capability but poor capital efficiency.

Each strike price and each expiration date requires independent tokens and independent liquidity pools. For instance, this $2600 strike price ETH call option pays out if the ETH price exceeds $2600 at expiration; for the next expiration date, a completely new token must be generated. Deribit's market makers can quote hundreds of contracts in a single margin account; Derive can sell this call option with a margin of only about $330 after deducting the hedge. However, if Metric sells it using a full collateral model, it would need to lock up 1 ETH (worth $2430) to earn an $18 premium. Five strike prices paired with two expiration dates would require 10 sets of mutually independent liquidity pools where funds cannot be shared.

A feasible improvement plan: Derive should be responsible for issuing options tokens. Derive already supports seller margin and perpetual contract hedging; selling this call option only requires a pledge of $330. Metric only needs to focus on pricing and distributing traffic to end users.

Options Version of Papertrade

Returning to the idea of Papertrade: token incentives can quickly attract funds and traders, which is precisely the motivation currently lacking for on-chain options sellers.

The concept of options version of Papertrade: the treasury acts as the counterparty, selling call and put options. If the options expire worthless, the treasury mints platform tokens proportional to the buyer's loss of premium; users who stake tokens can share in the surplus profits generated by the treasury.

It is common for options buyers to incur losses: backtesting data from January 2018 to October 2026 shows that buying weekly BTC call options with a strike price 10% above the current price results in a loss of the entire premium 87% of the weeks. This framework of Papertrade is very suitable for building such products. However, unlike perpetual contracts: high-leverage perpetuals face liquidation with small fluctuations; options buyers will hold positions until expiration, and the treasury cannot solely rely on liquidations for profit; the pricing of premiums must be fair.

Risk: the treasury selling options typically makes small profits most months; however, if the market experiences a significant unilateral fluctuation, it could lead to massive payouts. Based on historical BTC price data, we conducted a cold start simulation: the treasury starts from zero, continuously selling weekly call options with a strike price 10% above the current price. For every $100,000 nominal BTC position, an average premium of $1300 is collected, which is 50% above the theoretical fair price. In 12% of the weeks (57 out of 458 weeks), the BTC closing price was above the strike price, resulting in an average payout of $6900. Overall calculations show that each options trade averages a premium of $1300 and a payout of $860, netting the treasury $440.

Historical backtesting results of the options treasury, showing treasury profits and extreme market payout pressures

Over an 8-year cycle, the treasury is overall profitable. However, during the extreme market conditions in March 2021, the amount the treasury needed to pay out was equivalent to the total income from 30 weeks of premiums; it was not until April 2022 that all payouts were completed. The maximum payout in a single week was equivalent to the income from 20 weeks of premiums.

Product design must address the payout queue issue: users who earn surplus during good market conditions must share losses during extreme conditions, ensuring profitable users can receive payouts immediately without queuing. The treasury must also dynamically hedge in the external perpetual contract market. When the BTC price approaches the strike price, it should buy BTC perpetual contracts on Hyperliquid to hedge the risk.

After adding daily hedging logic to the simulation model: the worst single-week payout pressure decreased from 20 weeks of income to 10 weeks; during the surge in 2021, the treasury no longer faced debt. Related articles on prediction markets, such as "parlays piece," also reached the same conclusion: a centralized entity must manage liquidity uniformly.

The second improvement idea: the treasury does not simply sell options and take on all counterparty positions; it also buys and sells options from users. When buying and selling positions match each other, the treasury does not bear exposure and only earns the fee spread; risk management is only applied to the net exposure that is not hedged.

There are vulnerabilities in the token mechanism: if any party incurs a loss and mints tokens, users can open two accounts and simultaneously buy and sell the same option, inevitably resulting in a loss on one side, thus minting tokens. Solution: mint tokens based on the net loss of each account for each expiration date, while ensuring that the buy-sell price spread exceeds the token arbitrage profit, similar to the existing mechanism of Papertrade.

There is reason to believe that the exploration of on-chain options in this round is likely to go further. Sellers can now hedge in markets with better liquidity, achieve higher capital utilization efficiency, and reach buyers through more diverse channels. Incentive mechanisms can help projects kickstart. However, once rewards diminish and market conditions turn, whether sellers can earn enough to continue quoting remains uncertain.

But the underlying foundation of this round is far stronger than previous attempts. If this infrastructure can stabilize, more traders can price the time cost of their views—essentially betting on the waiting period required for market conditions to materialize. The crypto industry has already achieved convenient trading with leverage, and "time" may become the next tradable asset.