Original Title: Vitalik’s Stablecoin Is Basically a Covered Call
Original Author: Dan Rysk
Translation: Peggy, BlockBeats

Editor's Note: For a long time, DeFi options have never become a mainstream trading category. Compared to perpetual contracts, they are more complex, have more dispersed liquidity, and are harder to generate stable natural demand.

But the recent algorithmic stablecoin proposal by Vitalik opens up a new possibility for options: it is no longer treated as an independent trading product but becomes a core financial building block behind stablecoins, yield products, and structured assets.

This article interprets this scheme from an options perspective. The author believes that the stable-side asset in Vitalik’s design is essentially similar to a synthetic covered call option: users split 1 ETH into two parts, one part gains a “stable value” below a certain strike price, and the other part gains upside gains above the strike price. Since both parts always sum to 1 ETH, the system does not need to introduce debt, collateral, or liquidation mechanisms, thus avoiding the core liquidation risk of traditional CDP stablecoins.

However, the design also faces obvious challenges. To make the stable-side asset approximate a stablecoin, it needs to continuously roll deep in-the-money call options, which can lead to rollover slippage, front-running of fixed trading paths, and liquidity shortages. More importantly, each stable asset requires someone to continuously hold the corresponding upside-side asset, which is a leveraged ETH long position with no funding rate and no liquidation risk. Whether this demand can exist long-term determines whether the system can truly expand.

The author concludes by referencing Rysk’s experience, pointing out that the reason DeFi options have historically struggled to scale is because they are too complex as direct trading products and user demand is not natural enough. But if options are placed at the core of more complex assets like stablecoins, structured yields, and indices, they might be better suited as foundational infrastructure for DeFi. In other words, the opportunity for options in DeFi may not be to become the next perpetual contract but to serve as the underlying pricing and risk distribution engine behind the next generation of on-chain financial products.

Below is the original text:

Over the years, I’ve heard the same phrase: “Options don’t work in DeFi.”

After working on Rysk, I admit there is some truth to that. Most DeFi options products are hard to scale. Liquidity is dispersed, natural trading volume is hard to attract, and traders keep choosing simpler products. Perpetual contracts have become the default tool for expressing directional views, while prediction markets have become a simpler way to trade event outcomes.

It’s precisely because of this that Vitalik’s recent proposal caught my attention. He suggests that a rights structure similar to options can be used to build an algorithmic stablecoin without a liquidation mechanism.

What truly attracts me is the idea: options are not just trading products but foundational infrastructure.

This has been my core belief for the past few years and is also the main idea behind building Rysk V12. For us, the product is yield; for Vitalik, the product is stability. The more I think about it, the more familiar this design feels.

The stable side described by him is essentially a covered call.

Why is it a covered call?

His design splits one ETH into two rights. One is P, which holds value up to a certain strike price; the other is N, which gains the upside beyond that strike. Both always sum to one ETH, so there’s no debt, no collateral, and nothing that needs to be liquidated.

Suppose ETH is currently priced at $2,500, with a strike at $1,500. As long as ETH stays above $1,500, P acts like a rights holding a stable value of $1,500; only if ETH drops below $1,500 does P start to bear downside risk. Meanwhile, N captures all upside gains above $1,500.

This is precisely the payoff structure of a covered call.

The holder retains the asset itself, sells the upside potential above a certain strike, and collects the option premium. P replicates this covered call payoff structure. N is equivalent to the holder of the call option.

More precisely, it’s a synthetic covered call. No one is actually selling an option externally; instead, by splitting the rights, the same payoff structure is reconstructed.

This is also the same principle behind Rysk V12. Users hold ETH, BTC, or HYPE, and earn upfront income by selling covered call options. Vitalik points this same base module toward stability.

One engine, different products.

The problem is: it’s a deep in-the-money option that must be continuously rolled

Today, most Rysk users sell out-of-the-money covered calls. They hold ETH and choose a strike above the current price: either betting that the price won’t reach there, or willing to sell at a higher price and take profit if it does, while keeping the option premium regardless.

But the stability side envisioned by Vitalik requires a different structure. To behave like a stable amount, the strike must be far below the spot price, making this a deep in-the-money call, with most of its value intrinsic.

For example, with ETH at $2,500 and a strike at $1,500, $1,000 of the value is the intrinsic value the buyer must prepay. This makes the capital requirement much higher.

However, a call option can only stay stable at a single moment. If ETH drops below the strike, it begins to bear downside risk, requiring continuous downward adjustments to a lower strike, rolling repeatedly.

Therefore, this stable asset is essentially a continuously rolling covered call program.

Vitalik himself also points out this risk. The slippage caused by repeated rollovers is the biggest threat to the entire design, and how to execute rollovers is the real challenge.

Any mechanism that trades on a fixed, public schedule is vulnerable to front-running. This was the problem faced by DeFi options vaults like DOV: they sell options of the same expiry and strike at the same weekly time, so the market fully anticipates what will happen next and front-runs the trades, extracting value from this flow.

In any case, each rollover requires a buyer. The question is: who will buy? At what price?

The hardest part: who provides the capital?

In Vitalik’s model, someone must deposit a full ETH, split it, sell the stable side, and hold the upside side. This depositor is the core participant that keeps the system running.

The most obvious candidate is a market maker.

But their position ultimately is a leveraged ETH long. Anyone wanting leverage long ETH can simply buy a call option or go long perpetuals. That’s simpler, more efficient, and more familiar. This depositor is essentially taking a more difficult route to obtain a position that could be acquired more easily elsewhere.

The upside side does have a real advantage: it offers genuine leverage without funding rates or liquidation risk, which perpetuals cannot provide.

But it still needs to find buyers, and not just once. Every stable asset must have someone holding the corresponding upside position on the other side.

To scale, this model requires a continuous pool of participants willing to hold ETH leveraged longs in this specific form, regardless of market conditions.

Market makers are resource optimizers. There’s no obvious reason they wouldn’t readily accept a new, capital-intensive, high-cost product. “Speculators and market makers will provide liquidity”—this is the assumption the entire design relies on. But such behavior doesn’t happen out of thin air.

Lessons from Rysk

We learned this the hard way at Rysk. Early versions of the protocol struggled to expand, lacked natural demand, and never found product-market fit.

In the current Rysk V12, both sides have strong incentives to participate. Rysk starts from two groups that are naturally interested: holders who want yield from their assets, which are themselves collateral; and market makers competing in RFQ (Request for Quote) mechanisms to buy this flow. They only pay option premiums, don’t need collateral, and ultimately get the option risk exposure they desire, which they can price and hedge in their own books. This results in higher capital efficiency and encourages trading teams to participate voluntarily.

No party is required to hold a position they could more easily obtain elsewhere.

The system also doesn’t rely on incentives or token emissions.

Worth Building

I’m glad to see this kind of design being seriously explored. The challenges are real, but they are the interesting kind—precisely the design space DeFi should be exploring.

What reassures me is that this proposal further reinforces the same choices we made at Rysk: full collateralization, no liquidation, no counterparty risk, and only on-expiry oracle-based physical settlement.

Different use cases, same foundation. This foundation has already been validated on HyperEVM, with market makers competing for flow. We’ve also deployed it on Ethereum mainnet and are about to open it to the public.

If you’re exploring stablecoins, structured products, indices, or any underlying with options-like properties, feel free to contact me.

Options are the core modules. What’s truly interesting is what can be built on top of them.

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