[Paper Review] Panoptic: the perpetual, oracle-free options protocol

G. Lambert, Jesper Kristensen|arXiv (Cornell University)|Apr 27, 2022

Blockchain Technology Applications and Security4 citations

TL;DR

Panoptic introduces a trustless, oracle-free, perpetual options protocol built on Uniswap v3 that enables permissionless, capital-efficient trading of options by leveraging concentrated liquidity positions as underlying derivatives. By treating Uni v3 LP positions as synthetic options and using a path-dependent streaming premium model, Panoptic achieves Black-Scholes-like pricing without oracles, enabling perpetual, composable, and dynamically hedgable options with on-chain settlement and multi-legged strategies.

ABSTRACT

Panoptic is the perpetual, oracle-free, instant-settlement options trading protocol on the Ethereum blockchain. Panoptic enables the permissionless trading of options on top of any asset pool in the Uniswap v3 ecosystem and seeks to develop a trustless, permissionless, and composable options product, i.e., do for decentralized options markets what x*y=k automated market maker protocols did for spot trading.

Motivation & Objective

• To address the limitations of on-chain options protocols that rely on fixed-expiration, strike-based options and external oracles.
• To enable perpetual options trading without expiration or decay, using Uniswap v3 concentrated liquidity as a foundational primitive.
• To eliminate oracle dependency by deriving option pricing from on-chain trading activity and liquidity dynamics.
• To design a composable, permissionless options protocol that supports multi-legged strategies and ERC1155 tokenization.
• To achieve capital efficiency and risk management through undercollateralized options and dynamic gamma exposure.

Proposed method

• Leverages Uniswap v3 liquidity provider (LP) positions as synthetic options: moving liquidity closer to spot price creates a short option position, while moving it away creates a long position.
• Employs a streaming premium model that starts at zero and increases over time, converging to Black-Scholes pricing through path-dependent accumulation.
• Uses a novel $\Gamma$ transformation to compile any desired payoff by composing liquidity across discrete price ticks, analogous to a Fourier transform of impulses.
• Introduces a Greeks compiler to optimize liquidity distribution for desired risk exposures (e.g., delta, gamma) via inverse problem solving.
• Enables multi-leg options through simultaneous deployment of multiple liquidity ranges, supporting strategies like spreads and straddles in a single transaction.
• Tokenizes complex option positions as ERC1155 tokens for composability with DeFi protocols and secondary trading.

Experimental results

Research questions

• RQ1 How can perpetual options be constructed on-chain without relying on oracles or fixed expiration dates?
• RQ2 Can a streaming premium model based on on-chain liquidity dynamics converge to Black-Scholes pricing without external price feeds?
• RQ3 To what extent can Uniswap v3 LP positions be repurposed as synthetic options with predictable payoff profiles?
• RQ4 How can complex, multi-legged option strategies be composed and tokenized in a composable, on-chain manner?
• RQ5 What mechanisms enable capital efficiency and risk management in an undercollateralized options market?

Key findings

• Panoptic enables perpetual options trading by treating Uniswap v3 concentrated liquidity positions as synthetic options, with no fixed expiration or time decay.
• The protocol achieves oracle-free pricing through a path-dependent streaming premium that asymptotically converges to Black-Scholes valuation without external data feeds.
• Liquidity distribution across price ticks can be modeled as a $\Gamma$ transformation, allowing precise compilation of any desired payoff profile via impulse composition.
• The Greeks compiler enables optimization of liquidity placement to achieve target risk exposures such as delta neutrality or specific gamma profiles.
• Multi-leg options with up to four puts or calls can be deployed in a single transaction, enabling strategies like spreads and straddles with dynamic hedging.
• Tokenized option positions are issued as ERC1155 assets, enabling composability with other DeFi protocols and secondary market trading.