Are options not feasible in DeFi? Vitalik might not see it that way

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

Author: Rhythm BlockBeats

Source:

Reprint: Mars Finance

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 another possibility for options: it is no longer treated as an independent trading product but becomes the 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 potential 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 close to 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, liquidity shortages, and other issues. 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.

In the end, the author points out, based on Rysk’s experience, 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 you reposition options as the underlying infrastructure for more complex assets like stablecoins, structured yields, and index products, they might be better suited as foundational DeFi infrastructure. In other words, the opportunity for options in DeFi may not be to become the next perpetual contract but to serve as the pricing and risk allocation engine behind the next generation of on-chain financial products.

Below is the original text:

For 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, making it difficult to attract natural trading volume, 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 liquidation mechanisms.

What truly attracted me was 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 asset he describes is essentially a covered call.

Why it’s a covered call

His design splits one ETH into two rights. One side, P, holds value up to a certain strike price; the other side, N, 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 stable value of $1,500; only if ETH drops below $1,500 does P start to bear downside risk. Meanwhile, N captures all the upside 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 long call option held by the buyer.

More precisely, it’s a synthetic covered call. No one externally sells an option; 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 generate upfront income by selling covered calls. 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 the price won’t reach there, or if it does, they’re willing to sell at a higher price and take profits, while still collecting the premium.

Vitalik’s stable-side design 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 intrinsic, which the buyer must prepay. This makes the capital requirement much higher.

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

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

Vitalik himself acknowledges this risk. The slippage caused by repeated rollovers is the biggest threat to the entire design, and executing the rollover properly 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 weekly at the same time, so the market knows what’s coming and can front-run, extracting value from this trading 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 backbone of the entire system.

The most obvious candidate is a market maker.

But their position ultimately is a leveraged ETH long. Anyone wanting leveraged ETH exposure can simply buy a call or go long a perpetual contract. That’s simpler, more efficient, and more familiar. This depositor is taking a more difficult route to get a position that could be obtained 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. For every unit of stable asset, someone on the other side must hold the corresponding upside.

To scale, this model requires a continuous pool of people 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.

What we learned 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 Rysk V12, both sides have strong incentives to participate. We start from two groups that already want to be involved: holders want to earn yield from their assets, which are collateral; market makers compete 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 want, which they can price and hedge in their books. This makes the capital efficiency higher on the trading side, and that’s why trading teams voluntarily participate.

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

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

It’s 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 explore.

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 do we need oracle-based physical settlement.

Different use cases, but the 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, index products, or any underlying with options-like properties, feel free to contact me.

Options are the foundational module. What’s truly interesting is what can be built on top of it.