What Are DeFi Options Vaults?

DeFi Options Vaults (DOVs) are platforms that simplify option investment strategies by allowing participants to stake their assets in a vault while earning yield simultaneously. The DOV protocol automatically deploys staked assets into specific options strategies, a process entirely run by smart contracts.

Options strategies provide good yield, but employing the strategies without DOVs can be tiresome. Investors need to calculate premiums, strike prices, suitable dates to position buys or sells, etc. With DeFi option vaults, all the user has to do is stake their assets in the protocol while the protocol invests the staked assets in options strategies on behalf of its users.

DOV users earn yield from the premiums that option buyers pay and, in some cases, native token rewards as well just like with Automated Market Makers. Some protocols incentivize further staking by allowing users to earn more rewards by "re-staking" their native tokens. This approach creates a cascade of passive earning opportunities for DOV users.

DOV strategies that obtain yields from the payment of option premiums provide stable and sustainable yield earnings in both bull and bear markets compared to gains earned from native tokens, which can be unstable.

Summary of Important Points

• A DeFi Option Vault is a staking protocol that allows users to store digital assets and earn yields from options strategies.
• DOVs simplify options strategies for investors by automating the process via smart contracts. This feature is the main value proposition of DOVs.
• Options are time-sensitive contracts that allow investors to sell or purchase assets at a fixed price on or before a specific date.
• Options help traders with price speculation or act as a hedge against risks.
• In traditional finance, options strategies are usually reserved for top-notch investors. However, DOVs democratize this investment instrument, making it available to the masses.

What Exactly Are Options?

DeFi option vaults help users invest in various options strategies to earn yield. An option is a contract that allows users to buy or sell an asset from the market at a specific price and time, usually called the expiring date.

Traders that purchase option contracts pay a premium to the seller. Options are regarded as financial derivatives because they derive value from the assets they track. The most popular options are the call and put options.

A call option contract allows holders to purchase an underlying asset at a predetermined price before its expiry date. A put option contract will enable holders to sell an underlying asset at a fixed price before the expiration.

Option strategies help traders in price speculation or to hedge against risks. For instance, if an investor holds Ethereum but believes the price will crash in the future, they can hedge against this by purchasing a put option for ETH.

Advantages of DeFi Options Vaults

There are many advantages to using DeFi option vaults:

• DeFi options vaults provide users with stable and sustainable yield (earned from the payment of options premiums) without relying on minting native tokens, which are often volatile.
• They democratize option strategies, making them accessible to everyone by automating the process with smart contracts.
• DOV options strategies perform relatively well due to the high volatility of the underlying assets.
• DOVs are not subject to the same regulations as traditional exchanges, thus making them a very accessible and convenient investment tool for users.
• They offer some of the highest base yields (usually around 15 - 50%) amongst DeFi investment instruments.
• Sustainable yields earned by DOVs attract more investors into the DeFi space and help scale DeFi.

Disadvantages of DeFi Options Vaults

There are some potential disadvantages to using DeFi options vaults:

• Some DOVs usually charge ridiculous performance fees. This extra cost can negatively impact the investor's profits.
• Automating the process of deploying staked assets into options strategies removes transparency as investors have no idea how the protocol uses their funds.
• The lack of transparency makes DOVs appear centralized since investors lease power over their assets to the vaults without understanding their internal mechanisms.
• DeFi options vaults are still in the nascent stages of development. Thus, DOVs may be vulnerable to attacks and exploits since they may not necessarily offer top-notch security for investors' funds.