AMM liquidity provisioning vs option selling
It turns out that providing liquidity on Uniswap, especially concentrated liquidity, has very similar payout structures to options, as illustrated above (Source: Panoptic whitepaper).
A Uni v3 LP position with a liquidity range from $2,400-2,500 will be 100% DAI above the range and 100% ETH below the range. This means the upside for the LP position is fixed, while the downside is infinite (until you close the position). In exchange, you accrue yield via trading fees inside the liquidity range. This is already pretty similar to the payout of selling a traditional covered call, but we can get even closer by only providing liquidity for a single tick instead of a range. With an ETH LP position deployed to a single tick, we find that the position will be 100% ETH exactly below the tick, and 100% DAI exactly above the tick – with the tick price being exactly the strike price. Depending on whether your strike is above or below the current price, the sold option becomes a put or a call.
The goal of Panoptic is not to replicate traditional options on-chain but rather to work within the confines of the EVM and create a new, innovative primitive. True DeFi-native innovation often evolves within the confines of blockchains, similar to how Uniswap’s automated market maker (AMM) looks nothing like a traditional CLOB.
With the predefined strategies, Panoptic abstracts a lot of the complexity away for the end user and enables everyone to create sophisticated trading strategies with a simple click of a button.