The Precious Practice of Taming Derivatives in Early DeFi: Simplifying Complex Options with Ribbon

Author: Beichen, Chain Teahouse

The trading strategies for derivatives are quite complex, which often excludes a large number of ordinary users. However, this does not mean that ordinary users do not have a demand for trading derivatives; after all, the needs for leverage, hedging, and arbitrage apply to all traders. It's just that they either do not know how to use them or are too lazy to do so.

The emergence of Ribbon has changed all of this.

Ribbon is a DeFi protocol that provides structured products, primarily offering automated options services aimed at generating relatively stable returns.

Note that Ribbon is not a decentralized options exchange; rather, it offers a series of wealth management products that earn stable returns. The assets deposited by users are used as collateral to sell options, earning option premiums while betting that they will not be exercised. So, strictly speaking, Ribbon is a decentralized options vault (DOV).

Ribbon offers two types of options vaults for retail investors and DeFi protocols—Theta Vaults and Ribbon Treasury. These are two entirely different product logics, which you can think of as B2C products and B2B products.

Theta Vaults for Retail Investors

DeFi retail investors often face a dilemma when participating in liquidity mining—mining new coins or small coins may yield high returns, but they are unstable and may even result in losses. On the other hand, mining with mainstream coins on mainstream platforms yields very low returns.

However, if one understands a bit about derivatives, that is, holding spot assets while also selling options, it can create higher yields (generally exceeding 30%).

But this strategy is relatively complex, requiring the selection of the correct strike price and expiration date, and continuous tracking to assess risks and returns.

Ribbon directly provides these services, so users do not have to worry about these issues. They simply deposit their assets into a specific window of the Theta Vaults, and then Ribbon will automatically start running specific options strategies, allowing users to withdraw their funds later.

Of course, these operations are not difficult to learn, and one could even directly copy Ribbon's homework, but this requires operating three to four times a week, which consumes a lot of gas fees. Theta Vaults allow all users to share the gas fees, effectively making it almost gas-free.

More importantly, after each weekly expiration, users would need to copy new homework again, while Theta Vaults reinvest the previous week's earnings, continuously compounding returns.

So what options strategies does Theta Vaults employ to achieve relatively stable returns?

The first is the covered call strategy, which is the most common, basic, and simple strategy in the traditional options market. It involves holding a certain amount of spot assets while simultaneously selling a certain amount of call options.

If the market declines, the spot assets you hold depreciate, but you at least earn the option premium. However, if the market rises, while your spot assets appreciate, you will have to face exercise, meaning you have to give up the upside gains.

However, when priced in USD, you do not incur a loss because you at least earned the option premium.

The second strategy is selling put options, betting that the asset will rise.

The put option product of Theta Vaults is currently T-USDC-P-AVAX, which means holding USDC spot while simultaneously selling AVAX put options. If, at expiration, the market price of AVAX is above the strike price, you earn both the option premium and retain the value of the USDC spot. But if, at expiration, the market price of AVAX is below the strike price, you will be exercised, resulting in some losses.

So if users expect a certain asset to rise, they can boldly sell put options. In the case of Theta Vaults, they only need to deposit USDC into the vault, and Ribbon will automatically execute this process every week.

Regardless of the strategy, although the user's absolute assets do not incur losses after being exercised, they still lose potential gains. Therefore, to further reduce the risk of being exercised, the options sold should be those that expire in the short term and are unlikely to be exercised.

Note that this is a paradox: if the strike price is too high, there is little gain; if it is too low, it is more likely to be exercised, which poses a certain difficulty for ordinary retail investors.

Theta Vaults provide options with strike prices calculated by a team, and after each weekly expiration, they will readjust their price expectations and automatically reinvest. This tests the team's market prediction capabilities, and the current setting is for 10 delta options with a one-week expiration.

Throughout the process from January 2020, when ETH rose from $80 to $2000, the covered call options sold by Theta Vaults were exercised for less than 5% of the time. Historical data shows that for the vast majority of the time, it earned option premiums while retaining the gains from the rising spot assets.

As the scale of Theta Vaults expands, a series of new options products will be launched in the future, mainly new tokens and new directions, and even combinations of call and put options, making the options vault richer.

Ribbon Treasury for DeFi Protocols

Ribbon Treasury is more like a B2B enterprise product, designed to serve the treasuries of DeFi protocols.

Because DAOs that hold hundreds of millions of native tokens often cannot generate direct returns, but participating in stable wealth management (like Compound) yields very low returns. Directly selling tokens can realize value but will ultimately deplete the treasury. Therefore, earning option premiums can be considered.

The advantage of this approach is that it allows continued enjoyment of the appreciation of treasury assets. Of course, this part of the strategy is more customized, with greater flexibility in terms of tokens and cycles, rather than being as universal as ETH.

Team and Thoughts

Ribbon DAO has two tokens—RBN and veRBN, whose functions can be roughly compared to CRV and veCRV. It is worth introducing the product and the thinking behind the team.

The founder and CEO of Ribbon is Julian Koh, who stumbled upon Ethereum in 2016 and entered the cryptocurrency space during the ICO craze of 2017, making a fortune and then losing it all in the following six months.

"Crypto was the most interesting thing I discovered in 2017, and I knew I had to get into this industry as soon as possible. At that time, I was just a college freshman with no skills, so I had to frantically work to get my first crypto job, which was an internship at Numerai."

Later, he dropped out of college and became a software engineer at Coinbase, responsible for staking and blockchain integration, during a deep bear market in the crypto space.

"I really enjoyed the sense of empowerment that developers get in this field—a small team of highly motivated people can build projects that scale super fast and attract billions of dollars in funding. Other fintech or SaaS companies are the opposite—you need a large sales team to beg customers to use your product."

Later, he went on to found Ribbon.

He disliked the Ponzi economics and overly complex mechanism designs that were popular last year, believing that these mechanisms were entirely unnecessary and merely shoved in to inflate token prices.

Ribbon's core customers are not hedge funds but retail investors, with a median deposit of about $10,000.

Ribbon pursues simplicity. "Simplicity is always underestimated. Over-designing new products or deploying them on ten different chains does not actually bring value—when there is too much complexity or choice, it can even make the product experience worse."

Currently, the development of derivatives DEX is still in its early stages, and the future needs a truly "decentralized FTX." However, the emergence of Ribbon is already impressive.