On-Chain OTC Options Trading: Revolutionizing Finance with Transparency and Security

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Trading over-the-counter (OTC) options on-chain is now seen as the next step in financial evolution, following the collapse of various centralized heavyweights in the sector. Executives at Galaxy Digital have partnered with crypto investment firm Coinfund to trade OTC options tied to digital assets, boosting transparency and alleviating credit risk.

OTC options are derivatives contracts that trade outside of a formal exchange, allowing the buyer and seller to create their own terms for the private transaction. On-chain trading of these options addresses credit risks and protects privacy, as explained by Jason Urban, Galaxy’s global head of trading. By using smart contracts to manage collateral, both parties are ensured that they get the funds owed even if the counterparty defaults. This stands in stark contrast to off-chain margining, which sees crypto OTC options resembling their counterparts in other asset classes.

On-chain “trustless” settlement necessitates both parties submitting their side of the settlement before funds are released, according to Lini Gao, Galaxy’s vice president of institutional sales and structuring. Counterparties are required to adhere to predefined rules governing margin requirements during the trade. Demand for such on-chain solutions has increased following the collapse of crypto exchange FTX and other centralized entities.

To facilitate trading, margining, and settlement, Galaxy employed Aevo, an on-chain options trading platform developed by Ribbon Finance. When Aevo’s OTC exchange was launched, it allowed users to trade altcoin options on-chain across varying maturities.

Coinfund opted to use Aevo due to the potential for advantageous margin requirements on on-chain payoff enforcement and precise strike price selection. Interestingly, just over a year ago, Galaxy executed an OTC crypto transaction with banking giant Goldman Sachs through a bitcoin non-deliverable option.

The benefits of on-chain OTC options trading are increasingly apparent. Compared to traditional off-chain options trades, on-chain trading offers enhanced transparency, reduced credit risk, and greater privacy protection. The positive impact of Galaxy’s involvement in on-chain OTC options trading only serves to underscore the potential for these solutions in the coming years, which could reshape the financial landscape as we know it.

Source: Blockworks

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