🤔FAQ
🌰 Overview
What is Thetanuts Finance?
Thetanuts Finance is a decentralized on-chain options protocol focused on altcoin options, allowing users to go long or short on on-chain options.
The first iteration of Thetanuts Finance in September 2021 saw the launch of Basic Vaults — where the Basic Vaults sold out-of-money (“OTM”) European cash-settled options to accredited market makers, and generate yields for users in the form of option premiums.
With the v3 upgrade, Thetanuts Finance will pivot toward a decentralized on-chain options protocol focused on altcoin options. Our first-to-market v3 architecture uses our existing Basic Vault LP Tokens to extend new use cases in on-chain options trading — enabled by a Lending Market and Uniswap v3 Pools, which are all housed within the v3 interface.
What is the rationale behind the Thetanuts Finance v3 Upgrade?
Option Vault protocols performed well in 2021/2022 for a number of reasons, hitting a peak TVL of $550m in April 2022 - and currently down ~90% from April 2022 highs.
As Option Vaults became a mature product, market participants have identified a number of structural shortcomings with Option Vault mechanisms — which eventually led to their decline.
Despite the structural shortcomings and decline of the Option Vault sector within DeFi — Thetanuts Finance was the second largest Option Vault protocol by TVL, and the Options protocol with the largest coverage of altcoin options.
With these successes in mind and in wanting to leverage our track record of being a leading Options protocol focused on altcoin options, Thetanuts Finance v3 will see us move away from being an Option Vault protocol and becoming a decentralised on-chain options protocol focused on altcoins.
We outline the benefits of our first-to-market v3 architecture here.
What are the benefits of the Thetanuts Finance v3 Upgrade?
Basic Vaults Remain the Core of Thetanuts Finance v3: Basic Vaults will continue to be at the core of Thetanuts Finance, with the Basic Vault LP tokens being used to bootstrap the rest of the v3 ecosystem. This allows Thetanuts Finance to leverage their prior track record of leading Option Vault protocol focused on altcoins.
Housing v3 under a Unified Interface: v3 will feature an upgraded trading-like interface, abstracting the need for traders to interact individually with Basic Vaults, AMM, and the Lending / Borrowing Market.
Ability to Buy Options: Option Vault strategies mainly center around the sell-side, with no ability for users to go long — v3 will change this through the use of the AMM and Lending Market.
Flexibility to Exit Basic Vault LP Positions: Prior to v3, Vault LPs would need to wait until the end of the next epoch — implying that they could not exit their positions until a week later. With the AMM, a user could simply swap out of the Basic Vault LP token — instantly closing their position without having to wait for the end of the epoch.
Battle-tested Infrastructure: Aave v2 was referenced during the creation of the Thetanuts Finance v3 Lending Market, with the protocol never being exploited prior. Combined with the Thetanuts Finance and Uniswap v3 tech stack that has never been exploited, the Thetanuts Finance team is confident of the security and safety of the v3 upgrade.
Additional Sources of Yield and Incentives: Through Thetanuts Finance v3, users have access to additional sources of yield beyond just option premiums from the Basic Vaults. These additional sources include: lending interest from the Lending Market, trading fees from AMM, potential $NUTS token incentives, and potential additional token incentives.
Protocol Solvency: Basic Vaults in Thetanuts Finance are 100% collateralized.
Free Market Pricing: Unlike other option protocols where IV is used as an input to price options, v3 features free market pricing — whereby if users believe that AMM pricing is incorrect, they can arbitrage this opportunity for profit.
Which networks does Thetanuts Finance support?
We currently support Ethereum, BNB Chain, Polygon, Avalanche, Cronos, Arbitrum, Filecoin, and Polygon ZkEVM. We intend to support additional networks in the future.
Are there incentives associated with providing liquidity on Thetanuts Finance?
Users will have access to up to five sources of yield on Thetanuts Finance v3.
These five sources include: - Option Premiums from Basic Vaults - Lending Interest from Lending Market - Trading Fees from AMM - Potential $NUTS Token Incentives (Future) - Potential Additional Token Incentives (Future) For more information, please see here.
Are there fees associated with using Thetanuts Finance?
Users can expect to see a number of fees on Thetanuts Finance, corresponding to the different modules on Thetanuts Finance v3.
Protocol fees earned by Thetanuts Finance will be accrued to the Treasury, in which the Thetanuts Finance DAO will have governance rights over.
For more information, please see here.
Are options on Thetanuts Finance cash or physically settled?
Options on Thetanuts Finance v3 are cash-settled - involving the delivery of the net cash amount on the settlement date if the option contract is exercised, as opposed to delivery of the underlying asset in a physically-settled option contract.
Are options on Thetanuts Finance American or European?
Options on Thetanuts Finance v3 are European-styled, meaning that they may only be exercised at the expiration date of the option, i.e. at a single pre-defined point in time. At expiration, the Basic Vault option contracts will be exercised if they are in-the-money ("ITM").
⚙️ Mechanics
What happens under the hood when a long or short position is executed?
A short volatility position on Thetanuts Finance represents holding of a Basic Vault LP Token. - Short Call: $XYZ swapped for $XYZ-C on the AMM, with $XYZ-C representing a short call. - Short Put: $USDC swapped for $XYZ-P on the AMM, with $XYZ-P representing a short put.
Meanwhile, a long volatility position on Thetanuts Finance sees a number of steps within the v3 architecture in order to achieve long exposure. Long Call $XYZ collateral deposited into the v3 Lending Market. A flash loan for $XYZ-C occurs at a 95% LTV on the Lending Market, with up to 20x of collateral value borrowed. Borrowed $XYZ-C is sold for $XYZ in the AMM, achieving a long call position.
Long Put $USDC collateral is supplied into the v3 Lending Market. A flash loan of $XYZ-P occurs at a 95% LTV on the Lending Market, with up to 20x of collateral value borrowed. Borrowed $XYZ-P is sold for $USDC in the AMM, achieving a long put position.
What happens under the hood when a position is Closed Now?
Users on Thetanuts Finance v3 can opt to Close Now on their open positions, which has the effect of closing their positions instantly.
Short Call Swap $XYZ-C to $XYZ on the AMM. If there is insufficient liquidity in the AMM to facilitate a Close Now, the user can instead close the position Upon Expiry instead.
Short Put Swap $XYZ-P to $USDC on the AMM. If there is insufficient liquidity in the AMM to facilitate a Close Now, the user can instead close the position Upon Expiry instead.
Long Call Thetanuts Finance v3 will route the order to the venue with the best pricing, by querying both the Basic Vaults (for Mint Price) and the AMM (for AMM Price).
If AMM Price is more favourable, $XYZ is sold in the AMM for $XYZ-C, with the $XYZ-C loan then being returned to the Lending market – thereafter, the initial $XYZ position is then withdrawn from the Lending market.
If Mint Price is more favourable, $XYZ will be deposited into the Basic Vault to mint $XYZ-C, with the loan being returned and $XYZ collateral in the Lending market redeemed.
$XYZ in excess of loan repaid represents P&L.
Long Put Thetanuts Finance v3 will route the order to the venue with the best pricing, by querying both the Basic Vaults (for Mint Price) and the AMM (for AMM Price).
If AMM Price is more favourable, $USDC is sold in the AMM for $XYZ-P, with the $XYZ-P loan then being returned to the Lending market – thereafter, the initial $USDC position is then withdrawn from the Lending market.
If Mint Price is more favourable, $USDC will be deposited into the Basic Vault to mint $XYZ-P, with the loan being returned and $USDC collateral in the Lending market redeemed.
$USDC in excess of loan repaid represents P&L.
What happens under the hood when a position is Closed Upon Expiry?
Users on Thetanuts Finance v3 can opt to Close Upon Expiry their open positions - which closes the position at the end of the epoch.
Long Call At the end of the epoch, $XYZ position is deposited into the Basic Vault to generate $XYZ-C – which is used to repay any outstanding debt in the Lending Market. $XYZ in excess of loan repaid represents P&L.
Long Put At the end of the epoch, $USDC position is deposited into the Basic Vault to generate $XYZ-P – which is used to repay any outstanding debt in the Lending Market. $USDC in excess of loan repaid represents P&L. Short Call The user closes the Short Call (i.e. $XYZ-C) at the end of the Basic Vault epoch, and claims the collateral after the epoch ends. Short Put The user closes the Short Put (i.e. $XYZ-P) at the end of the Basic Vault epoch, and claims the collateral after the epoch ends.
What is Position Health?
Long positions on Thetanuts Finance v3 have a "Position Health", referring to the collateralization of a position after paying Borrowing Interest to the Lending Market after every epoch.
Positions that have 0% Health will be closed at the end of every epoch by Thetanuts Finance in order to maintain solvency of the Lending Market.
To avoid closure of a long position, a user has the choice to "top-up" collateral to maintain their long position.
What are some considerations for opening positions on Thetanuts Finance v3?
Theoretical Leverage: While the theoretical leverage based on a 95% LTV is 20x, leverage on Thetanuts Finance v3 is typically in the range of 15–20x — as a result of slippage, price impact, and fees on the AMM.
Managing Borrowing Costs: Leveraging in this manner carries inherent risks. The triggers for liquidation on Thetanuts Finance v3 are the accumulating costs from borrowing (i.e. option premiums), rather than market volatility. This is possible given that value of the borrowed asset (i.e. XYZ-C or XYZ-P) can increase due to option premiums and interest payments, each lending position utilizes the underlying asset as collateral.
Automatic Rollover: Positions not closed at the end of the epoch will automatically roll over to the new epoch, with any P&L captured in the user’s net position in the lending market.
Protocol Solvency: Basic Vaults in Thetanuts Finance are 100% collateralized.
Are there arbitrage opportunities on Thetanuts Finance v3?
The same Basic Vault LP Token will have both a Mint Price and an AMM Price, which may result in an arbitrage opportunity if they do not trade at the same level. This scenario occurs when the Mint Price > AMM Price for a Basic Vault LP Token, where a user could arbitrage this by:
For Calls: Deposit $XYZ in the Basic Vault to mint $XYZ-C; with exposure on Thetanuts Finance v3 achieved by going short call on XYZ. Sell $XYZ-C directly on the AMM, receiving $XYZ.
For Puts: Deposit $USDC in the Basic Vault to mint $XYZ-P; with exposure on Thetanuts Finance v3 achieved by going short put on XYZ. Sell $XYZ-P directly on the AMM, receiving $USDC.
🔒 Basic Vaults
What are Basic Vaults?
Basic Vaults sell out-of-money (“OTM”) European cash-settled options to accredited market makers, and generate yields for users in the form of option premiums. Vaults have pre-defined parameters (inc. strike price, delta, and tenor) – creating specific risk-adjusted yields on each vault, while also abstracting the complexity in users needing to design these parameters on their own.
Basic Vault LP Tokens represent short volatility instruments, either as short call or short put positions: - Selling covered calls (Short Call): Designed to generate income for users. - Selling cash-secured puts (Short Put): Designed to accumulate the underlying asset for users.
For more information, please see here.
Who are the actors in the Basic Vaults?
There are two actors in the Basic Vaults.
Liquidity Providers Liquidity providers deposit collateral into the Basic Vaults, which in turn sells option contracts to market makers. In return, liquidity providers receive option premiums from market makers.
Market Makers Whitelisted accredited market makers that participate in the blind auctions and buy option contracts from the Basic Vaults. In return, market makers pay option premiums to Liquidity Providers.
How do the Basic Vault blind auctions work?
Every Friday, Thetanuts Finance conducts blind auctions for the Basic Vaults off-chain - where whitelisted accredited market makers bid to buy option contracts sold by the Basic Vaults. The winning market maker of each Basic Vault then proceeds to deposit the option premiums upfront into the Basic Vault.
Upon expiry of the contract, Thetanuts Finance references major centralised exchanges as a data source to determine settlement price - including Deribit Index (i.e. for majors), Binance Spot (i.e. for altcoins), and others (i.e. for longer tail assets). This settlement price determines whether the option contract has been struck. The Basic Vault would then settle with the winning market maker of that epoch, depending on whether the option contract is struck.
How are Basic Vaults utilized in Thetanuts Finance v3?
$XYZ-C (Call Basic Vault LP Token) and $XYZ-P (Put Basic Vault LP Token) represent fungible and transferrable tokenized Basic Vault positions – and form the backbone of all trading strategies on Thetanuts Finance v3.
Users that have deposited into the Basic Vaults will mint a Basic Vault LP Token, and can redeem the Basic Vault LP Token by initiating a withdrawal of collateral from their Basic Vault position. This Mint / Redeem mechanism also gives rise to a “Mint Price”, defined as the price of a Basic Vault LP Token when minted or redeemed from a Basic Vault.
What can Basic Vault LP Tokens be used for in Thetanuts Finance v3?
Basic Vault LP Tokens may be used to:
Provide Liquidity on Lending Market: Basic Vault LP tokens can be deposited into the Lending Market to generate additional lending interest.
Provide Liquidity on AMM: Basic Vault LP tokens can be deposited into the AMM to generate additional AMM trading fees.
Go Long: Users interested in a long volatility position may borrow the Basic Vault LP Tokens from the Lending Market and sell them on the AMM, representing a long call or long put position.
Close Basic Vault Position Instantly: A Basic Vault LP Token holder may sell the position on the AMM, representing an instant close of the short call or short put position without having to wait for the end of the Basic Vault epoch.
When can a user deposit into the Basic Vaults?
Users can deposit into the Basic Vaults via a short position on Thetanuts Finance v3 at any point in time – except when the Basic Vaults are in the Auction in Progress phase, where the Basic Vaults are locked to prevent any additional deposits or withdrawals.
Users that deposit into the Basic Vaults in the middle of an ongoing epoch will not be eligible for option premiums for that epoch, while also assuming the risk that the Basic Vault will be struck – where the user will lose a part of their deposited collateral.
When can I close my Basic Vault position?
Users can close their Basic Vault position (i.e. a short position on Thetanuts Finance v3) at any point in time. Users are given two choices in how they can close their position: - Close Now: Basic Vault position closed instantly via the AMM. - Close Upon Expiry: Basic Vault position closed at the end of the epoch.
If a user chooses to Close Upon Expiry, the Basic Vault collateral will have a “Withdrawal Pending” status – where users can cancel the Close Upon Expiry transaction at any time before the epoch has ended. When Basic Vault collateral has the “Withdrawal Pending” status, the collateral will be deposited into a withdrawal pool and will not participate in the next epoch. At the end of the epoch, the user can “Claim” the collateral from the withdrawal pool at any time.
Why can't I close my positions during the Auction in Progress phase?
The Basic Vaults are locked during the Auction in Progress phase, preventing users from depositing or withdrawing collateral. This is necessary for accredited market makers to determine the size of the options contract that they will bid on.
🏛 Lending Market
What is the Lending Market on Thetanuts Finance v3?
The v3 Lending Market will be housed within the v3 interface, with contracts being inspired by Aave v2. The Lending Market is a core module within Thetanuts Finance v3, enabling users to go long on on-chain options.
The Lending Market will enable flash loans to allow users to go long on on-chain options, borrowing up to 95% LTV and implying a theoretical 20x levreage limit on long positions. In reality - the leverage on a long position may be lower due to slippage, price impact, and fees on the AMM.
For more information, please see here.
What are the supported assets on the Lending Market?
The Lending Market will support $XYZ-C, $XYZ-P, $XYZ, and $USDC assets.
What interest rate model does the Lending Market use?
The Lending Market will use a fixed interest rate model between epochs, which can be changed in the future based on governance.
Who are the actors in the Lending Market?
There are two actors in the Lending Market.
Lenders: Lenders can deposit Basic Vault LP Tokens (i.e. $XYZ-C, $XYZ-P) or Collateral Assets (i.e. $XYZ, $USDC) into the Lending Market, and receive interest from Borrowers.
Borrowers: Borrowers can borrow Basic Vault LP Tokens from the Lending Market, and sell them on the AMM - achieving a long call or long put position.
How do I provide liquidity to the Lending Market?
After a user opens a short call or short put position, the user will be prompted to “Boost” – which deposits the Basic Vault LP Tokens into the Lending Market. By providing liquidity on the Lending Market, Lenders generate yields in the form of Lending Interest. The Lending Market will use a fixed interest rate model between epochs, which can be changed in the future based on governance.
In the future, Thetanuts Finance v3 will enable users to deposit $XYZ and $USDC into the Lending Market for users to generate Lending Interest as well.
Can I borrow against my Lending Market position?
Lenders on the Lending Market may then borrow against their positions, borrowing $XYZ or $USDC depending on the pools that they have supplied. This enables users to achieve greater capital efficiency on their short position trading collateral, and allowing them to use borrowed capital from the Lending Market to interact with other components of the Thetanuts Finance v3 ecosystem.
💧 AMM
What is the AMM on Thetanuts Finance v3?
Thetanuts Finance v3 will utilize battle-tested Uniswap v3 pools to enable users to go long or short on on-chain options, and will form a key part Thetanuts Finance v3.
Uniswap v3 liquidity pool pairs will be denominated as $XYZ/$XYZ-C for Calls, and $XYZ-P/$USDC for Puts. These pools also gives rise to an “AMM Price”, defined as the price of a Basic Vault LP Token as set by the relative concentration of assets within the liquidity pool given by the x*y=k.
Who are the actors in the Lending Market?
There are two actors in the AMM.
Liquidity Providers: Liquidity Providers provide TVL, enabling Traders to go long or short on on-chain options. Liquidity Providers receive a share of AMM Trading Fees.
Traders: With these Uniswap v3 liquidity pools, Traders can take on long volatility or short volatility positions.
How do I provide liquidity to the AMM?
To Add Liquidity into the AMM, a Liquidity Provider would deposit $XYZ (for Calls) or $USDC (for Puts) into the Thetanuts Finance v3 "Add Liquidity Module". Liquidity Providers will be entitled to option premiums from the Basic Vaults, lending interest from the Lending Market, trading fees from AMM, potential $NUTS token incentives, and potential additional token incentives.
For Calls - 50% of $XYZ will be deposited into the Basic Vault to generate $XYZ-C, with $XYZ-C being Boosted in the Lending Market. - 50% of $XYZ will be deposited into the $XYZ/$XYZ-C liquidity pool on Uniswap v3.
For Puts - 50% of $USDC will be deposited into the Basic Vault to generate $XYZ-P, with $XYZ-P being Boosted in the Lending Market. - 50% of $USDC will be deposited into the $XYZ-P/$USDC liquidity pool on Uniswap v3.
🤑 Traders
Why can't I Close Upon Expiry?
To facilitate a Close Upon Expiry, users pay a gas fee to put the position into a queue to be closed at the end of an epoch.
Positions are restricted from Close Upon Expiry if the position size is smaller than the gas fee required, which may cause the user’s P&L to be negative after taking into account gas fees.
Alternatively, a user can also Close Now.
Can I partially close my long position?
Users are not able to partially close their long positions at the moment.
However, this is a high-priority feature that we will look to ship in the near future.
Why is Close Now unavailable?
Close Now is a feature that is only available for networks with the v3 Upgrade enabled.
At the moment, we have only enabled the v3 Upgrade for Arbitrum.
🌊 Liquidity Providers
What are the risks for using the Add Liquidity Module?
The Add Liquidity Module on Thetanuts Finance v3 is not a principal-protected product, and is subjected to a number of risks.
Risk of Impermanent Loss: Given that a part of user collateral is deposited into the AMM, there is risk of impermanent loss.
Short Volatility Risk: A part of user collateral is deposited into the Basic Vaults, which are short volatility positions.
Penalty Risk: If there is insufficient liquidity in the lending market to redeem the collateral asset in the Add Liquidity Module, Thetanuts Finance will enable redemption of the collateral asset from the AMM instead. However, doing so will incur a penalty that scales up to 30% of the collateral value depending on the size of the redemption.
Why is there a periodic rebalancing in the AMM?
On the AMM, liquidity pool pairs are denominated as $XYZ/$XYZ-C for calls and $XYZ-P/$USDC for puts.
To open a long position on Thetanuts Finance v3, a user deposits $XYZ (for calls) or $USDC (for puts) into the lending market – and borrows $XYZ-C (for calls) or $XYZ-P (for puts. The borrowed Basic Vault LP Tokens are then sold on the AMM for $XYZ (for calls) and $USDC (for puts) to achieve the long position.
Opening a long position on Thetanuts Finance v3 thus increases the concentration of $XYZ-C (for calls) and $XYZ-P (for puts) in the liquidity pools, while reducing the concentration of $XYZ (for calls) and $USDC (for puts) – thus increasing the slippage for other users looking to open long positions and increasing the risk of impermanent loss for users looking to add liquidity.
Thetanuts Finance will periodically rebalance the liquidity pools by depositing additional $XYZ (for calls) and $USDC (for puts), which has the effect of improving execution Traders and Liquidity Providers.
To facilitate this, Thetanuts Finance charges a $1 fee for each rebalance event – whereby this fee is shared proportionally across users depending on their share of the Add Liquidity pool.
❓ Others
Does Thetanuts Finance have any investors?
Yes. Thetanuts Finance raised a $18mm Seed round in April 2022, followed by a $17mm Series A round in April 2023. Our investors include Polychain Capital, QCP Capital, Deribit, Paradigm, GSR, Wintermute, Jump, GoldenTree Asset Management, Tribe Capital, and others.
What is Lite Mode?
The Thetantus Finance v3 Lite Mode features a simple interface that allows users to easily express their bullish or bearish views using on-chain options. On Lite Mode, a user can go Long Call (if bullish) or Long Put (if bearish) — and can Close Now when they are satisified with the P&L of their position.
To try Lite Mode, click on the "Lite" toggle on the Thetanuts Finance v3 Trading Interface.
Why were Stronghold, Long Vaults, and Degen Vaults brought in house?
As part of our transition to Thetanuts Finance v3 - we seek to streamline the user experience by bringing in-house certain products that have little synergy with our v3 upgrade, as we look to revamp them for the future.
Stronghold, Long Vaults, and Degen Vaults will enter into Withdrawal-only mode in November 2023. For more information, please visit Legacy Products.
Last updated