Paper: arXiv 2508.07068

Authors: Hardhik Mohanty, Giovanni Zaarour, Bhaskar Krishnamachari

Abstract

Everlasting options, a relatively new class of perpetual financial derivatives, have emerged to tackle the challenges of rolling contracts and liquidity fragmentation in decentralized finance markets. This paper offers an in-depth analysis of markets for everlasting options, modeled using a dynamic proactive market maker. We examine the behavior of funding fees and transaction costs across varying liquidity conditions. Using simulations and modeling, we demonstrate that liquidity providers can aim to achieve a net positive PnL by employing effective hedging strategies, even in challenging environments characterized by low liquidity and high transaction costs. Additionally, we provide insights into the incentives that drive liquidity providers to support the growth of everlasting option markets and highlight the significant benefits these instruments offer to traders as a reliable and efficient financial tool.

Complexity vs Empirical Score

  • Math Complexity: 7.0/10
  • Empirical Rigor: 6.0/10 (capped from 8.0: no out-of-sample test; see penalty flags)
  • Quadrant: Holy Grail — high math complexity, high empirical rigor

Why this score: The paper employs advanced stochastic calculus (Geometric Brownian Motion, Black-Scholes pricing derivations, and dynamic hedging equations) demonstrating high mathematical density. It also shows strong empirical rigor by providing simulation code links, detailed parameter tables, and graphical analysis of slippage and funding fees across varying liquidity conditions.

Research Flowchart

  flowchart TD
  A["Research Goal: Analyze proactive market making for everlasting options in DeFi"] --> B["Data Inputs: Simulated Market Conditions<br/>Liquidity & Transaction Cost Variables"]
  B --> C["Modeling: Dynamic Proactive Market Maker<br/>& Funding Fee Mechanics"]
  C --> D["Computation: PnL Simulation &<br/>Hedging Strategy Analysis"]
  D --> E{"Outcome: Net Positive PnL Achieved?"}
  E -- Yes --> F["Key Findings: Effective hedging ensures profitability<br/>even in low liquidity/high cost environments"]
  E -- No --> G["Refine Model Parameters"]
  G --> D

Cited References (17)

  1. Option Contracts in the DeFi Ecosystem: Motivation, Solutions, & Technical Challenges (2024)
  2. Time-efficient decentralized exchange of everlasting options with exotic payoff functions (2022)
  3. Bitcoin: A peer-to-peer electronic cash system Bitcoin: A Peer-to-Peer Electronic Cash System (2009)
  4. A Low-Volatility Strategy based on Hedging a Quanto Perpetual Swap on BitMEX (2024)
  5. Options, Futures, and Other Derivative Securities Prentice Hall (1993)
  6. Dynamic asset pricing theory (2010)
  7. Everlasting Options (2019)
  8. The Exchange Protocol of Everlasting Options (2021)
and 9 more
  1. Hedging cryptocurrency options (2023)
  2. A next-generation smart contract and decentralized application platform (2014)
  3. Optimal Gas Fee Minimization in DeFi: Enhancing Efficiency and Security on the Ethereum Blockchain (2024)
  4. The pricing of options and corporate liabilities (1973)
  5. BitMEX bitcoin derivatives: Price discovery, informational efficiency, and hedging effectiveness (2020)
  6. DeFi Arbitrage in Hedged Liquidity Tokens — → 2409.11339
  7. Improving DeFi Accessibility through Efficient Liquidity Provisioning with Deep Reinforcement Learning — → 2501.07508
  8. An empirical study of defi liquidations: Incentives, risks, and instabilities (2021)
  9. Lyra: A Decentralized Options Protocol (2021)

2 of 17 cited works are in the corpus; resolved via arXiv source bundles, Semantic Scholar and OpenAlex. Corpus-wide: 2518 linked papers.