From on-chain options to perpetual contracts: Can innovation in derivatives bring about the next bull market engine?

Over the past few years, the crypto derivatives market has undergone a profound paradigm shift. From dYdX’s order book exploration to GMX’s deepening liquidity pools, the perpetual contract sector has produced several giants with hundreds of billions in trading volume. However, for DeFi miners, the era of earning passively is fading away. As Ethena’s sUSDe yields peaked above 40% at the start of 2024 and have now fallen below 4%, and on-chain lending rates have dropped to a recent low of 2.3%, the traditional “deposit and earn” logic faces unprecedented challenges.

Meanwhile, on the other end of the perpetual contract market, leveraged traders are experiencing a brutal “pinning” baptism. Market structure often causes prices to actively hit the most liquid regions, leading countless directional positions to be liquidated during short-term volatility. Against this backdrop, an ancient yet reborn tool—on-chain options—quietly appears at the crossroads for DeFi miners and contract traders.

Diminishing Returns and Liquidation Dilemmas: The Twilight of the Old World

For miners accustomed to “farming” in DeFi, revenue sources are being systematically drained. Besides the aforementioned decline in stablecoin interest rates, the once-massive airdrop incentives fueling wealth creation have also faded. Continuous bloodletting of altcoins has led projects to be less willing to use token inflation to subsidize users. Real borrowing demand shrinks in the bear market, causing yield flows to dry up sharply.

In the contract market, the plight of degens is even more direct. The “bad roots” of perpetual contracts lie in the fact that over-leveraged users are not only betting against the market but also racing against time. When buy and sell pressures are similar, market mechanisms tend to seek more liquidity, which means prices will actively hit your stop-loss and liquidation lines. Statistics show that in the 2021 market structure, high-leverage traders with different positions and timeframes had an astonishingly high liquidation probability. Even with correct directional judgment, a brief pin can wipe out an account.

One Insurance Policy, Two Worlds Collide

The emergence of options just happens to provide a solution to these anxieties. In simple terms, options are like an insurance policy.

For contract traders, options are the ultimate tool to eliminate “path dependence.” Suppose you buy a call option; regardless of how the price jumps around, your maximum loss is limited to the premium paid. You no longer need to worry about being liquidated in the dark before dawn—your profit depends only on the endpoint, not the path taken. This “non-linear payoff” characteristic naturally fits the high volatility environment of crypto—avoiding liquidation risks while achieving a better risk-reward ratio at manageable costs.

For DeFi miners, options are a new “money printer.” The dual-sided market of options means that for every buyer, there is a seller. Miners can act as “insurance companies,” depositing funds into options protocol treasuries to provide liquidity for market buyers and earning premiums driven by volatility. This revenue model does not rely on new capital inflows but is rooted in market perpetual volatility. As long as the market remains volatile, this “volatility premium” will never disappear.

From “Sitting on the Sidelines” to Breakthrough: On-Chain Options’ Technical Leap

Despite the perfect logic, on-chain options sat on the sidelines for a long time. Data shows that the total trading volume of on-chain options protocols accounts for only 0.2% of centralized exchanges like Deribit and Binance, far behind the erosion of perpetual DEXes on CEXs. The problem lies in market makers’ reluctance to participate.

Early on, on-chain options protocols—whether CLOB or AMM—faced serious “adverse selection” issues. Due to oracle update delays or slow block confirmations, arbitrageurs could exploit the lag between off-chain prices and on-chain pricing for riskless arbitrage, causing liquidity providers (LPs) to suffer continuous losses. Liquidity dries up, leading to poor trading experiences and ultimately a death spiral.

It wasn’t until infrastructure underwent a qualitative leap that new protocol architectures began to loosen the grip:

1. Introduction of hybrid architectures: Projects like Derive (formerly Lyra) introduced RFQ (Request for Quote) mechanisms. When traders request quotes, the system sends requests to professional market makers like FalconX. Market makers perform risk calculations off-chain, then submit quotes on-chain, with the option to “reject trades” to avoid severe volatility. This model of off-chain risk calculation and on-chain settlement effectively blocks arbitrageurs’ attack paths.

2. The power of unified margin: Hyperliquid’s HIP-4 proposal directly integrates options into the core trading engine. Users can trade perpetuals and options within the same account using the same margin. Market makers can manage cross-market risk exposure in one place—for example, buying protective puts while going long on perpetuals—greatly improving capital efficiency.

3. The “dopamine” revolution in user experience: Retail traders are not opposed to options—they dislike complex Greeks. New applications like Euphoria are abstracting options into “click trading” grids: you just click on the grid you think the price will touch, and if it does, you get rewarded. No need to understand strike prices or calculate Deltas. This “instant payoff” experience is dubbed a “dopamine app” by the market.

Gate’s Vision of Smart Finance and Market Data

As a deep participant in the industry, Gate plays a key role in this derivatives innovation wave. Founder Dr. Han stated at the Hong Kong Consensus Conference on February 12 that although the global crypto user base has exceeded 740 million, growth has slowed while asset complexity is soaring. To address this, Gate is deploying an “Intelligent Web3” strategy, leveraging AI agents to analyze user intent and help users find optimal strategies in the complex derivatives market.

As of February 14, 2026, Gate’s derivatives business ranks third globally, covering over 600 assets with an average daily trading volume of approximately $36.913 billion. Gate’s spot trading volume remains second worldwide, supporting over 4,400 cryptocurrencies with an average daily volume of about $5.714 billion. In derivatives innovation, Gate is no longer just focusing on futures contracts but is also integrating traditional finance tools like CFDs and metals futures, aiming to build infrastructure connecting traditional finance and crypto.

Today (February 14), Bitcoin remains above $69,000, while Ethereum hovers around $2,050. Despite mixed flows into ETFs, institutions like BlackRock continue to expand their on-chain bond and DeFi positions. Against this backdrop, whether miners seek sustainable yields or traders look for hedging tools, on-chain options demonstrate unprecedented appeal.

Summary

Of course, on-chain options still face many obstacles before true breakout—market makers’ depth needs to grow, retail education remains lacking, and regulatory frameworks are still being explored. But the direction is clear.

In a world where there are no free lunches, returns will inevitably converge on “mapping risk.” Perpetual contracts have built a kingdom of high leverage, while on-chain options are filling the “time dimension” of this kingdom. When Polymarket’s 1-minute prediction markets start turning sentiment into continuous pricing signals, and Derive’s order book begins attracting institutional hedging demand, we have reason to believe that the next wave of derivatives innovation could be the structural engine propelling markets out of the mud and into a new bull cycle.

For DeFi miners and traders at the crossroads, the choice is clear: continue struggling in the red ocean of the old world, or embrace this new blue ocean defined by volatility. The answer may well be hidden in your next “insurance policy” order.