Table of Links
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Abstract and Introduction
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Preliminaries
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Overview
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Protocol
4.1 Efficient Option Transfer Protocol
4.2 Holder Collateral-Free Cross-Chain Options
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Security Analysis
5.1 Option Transfer Properties
5.2 Option Properties
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Implementation
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Related Work
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Conclusion and Discussion, and References
A. Codes
B. Proofs
Currently, many on-chain options trading platforms are available in the market. They price the options using an Automatic Market Maker (AMM). Lyra [10] stands as the preeminent decentralized options trading platform, commanding around a third of the market’s TVL, and employs an AMM with a Black76 [4] pricing model. However, its operations hinge on external data feeds from oracle, such as spot prices and implied volatility. Hegic [44] decentralizes the writers’ risk and employs a fixed pricing rate based on option expiry date and target prices, which leads to less accurate pricing.
In traditional markets, the price of options is determined by supply and demand. Devising an effective pricing model for options by AMM faces challenges due to the lack of accurate supply and demand modeling. Therefore, an order-book based decentralized exchange shows up. Aevo [2] is a high-performance, order-book based decentralized exchange, which closely resembles the traditional options market. However, its current implementation employs an off-chain orderbook coupled with on-chain settlement, which introduces a higher degree of centralized risk into the protocol. Opyn [30] provides users with the ability to sell European options by minting ERC20 tokens as the option. These tokens can be destroyed to exercise rights or transacted in the market. However, the system faces challenges due to high gas fees on Ethereum and a lack of necessary liquidity for exchanges. All of above on-chain protocols lack universality, most [2, 10, 30, 44] currently only support ETH and BTC options trading and lack the flexibility of customized pricing to meet the needs of the traders
A Hashed Timelock Contract (HTLC) can address the aforementioned issues by enabling two parties to create option contracts across two chains. These contracts lock assets, agreed upon by both parties, on two chains at a predetermined price. HTLCs [23, 29, 48] were originally designed for cross-chain atomic swaps. Subsequently, Han et al. [14] highlighted the optionality and fairness aspects for one party, demonstrating that an atomic crosschain swap is equivalent to a premium-free American call option. They estimate premiums with Cox-Ross-Rubinstein option pricing model [8]. They addresses the unfairness by incorporating a premium mechanism. In [47], the authors define a sore loser attack in cross-chain swaps and let participants escrow assets along with a negotiated option premium, which acts as compensation. Nadahalli et al. [26] separate the premium protocol from the collateral protocol, employs upfront communication of off-chain unspent transaction outputs as the option premium and collateral. [21, 42] introduce cross-chain atomic options, incorporating concepts such as the holder’s late margin deposit and early cancellation of the option. In [12], the authors introduce transferability of options. However, their approach requires long transfer times and does not support concurrent trading involving multiple buyers, which may lead to phantom bid attacks. An adversary can create multiple fake buyers who offer higher prices but fail to complete the transfer. Consequently, the option holder is unable to sell their position
None of these protocols eliminate the holder’s collateral in crosschain options. To eliminate the holder’s upfront collateral requirement, cross-chain transaction confirmation can be adopted to verify the collateral deposition on one chain when the option is exercised. This approach can employ cross-chain bridges. Some cross-chain bridges rely on external verification and introduces a trusted third party to facilitate message transmission. This approach is vulnerable to many attacks [40, 50], such as rug pulls [18], code vulnerabilities [28] and private key leakage [24]. Some bridges employ native verification and use light clients on both chains to verify proofs. This method requires complex smart contracts and incurs high verification and storage costs [9, 39, 46, 49]. The diversity and heterogeneity of blockchains significantly increase the time and cost of implementing a light client for each chain. An alternative is using Trusted Execution Environments (TEE) for cross-chain transactions [3, 41]. Those solutions are susceptible to both software and hardware vulnerabilities, including side-channel attacks, which present significant security risks [7, 20, 25, 36, 43].
Our proposed approach provides an efficient cross-chain option protocol by combining HTLC logic with a signature scheme. This combination facilitates the transfer of positions and replacement of hashlocks in option contracts. Our approach eliminates the need for option holders to provide upfront collateral. Instead of relying on cross-chain bridges, we achieve this through a distributed protocol design bolstered by economic incentives.
Authors:
(1) Zifan Peng, The Hong Kong University of Science and Technology (Guangzhou) Guangzhou, Guangdong, China ([email protected]);
(2) Yingjie Xue, The Hong Kong University of Science and Technology (Guangzhou) Guangzhou, Guangdong, China ([email protected]);
(3) Jingyu Liu, The Hong Kong University of Science and Technology (Guangzhou) Guangzhou, Guangdong, China ([email protected]).
