Laura Shin hosts Nick Forster, CEO and founder of Derive (formerly Lyra), and LTR, venture investor at Cosmos, to discuss the current state and future of on-chain derivatives. The conversation covers the evolution from centralized options trading on Deribit to emerging on-chain solutions.

The discussion explores how derivatives markets in crypto began with spot trading on Uniswap in 2017, evolved through perpetuals with BitMEX in 2016 and later DYDX in 2020, before Hyperliquid achieved breakthrough success in 2022-2023. Options represent the next frontier, with significant technical and market challenges still being addressed.

Key topics include the dominance of Deribit in crypto options, the graveyard of failed on-chain options projects, the impact of yield farming on options competitiveness, and the potential for institutional adoption through improved custody solutions and AI-powered trading interfaces.

Deribit's Market Dominance and the Options Landscape

Deribit emerged in 2016 as the first major crypto options exchange, bringing real-time order books and transparent pricing to a previously opaque OTC market that relied on gut feel and whims.

"Deribit really led the game in a lot of pricing and a lot of risk and portfolio management" - LTR, noting how it created the first Bitcoin IV surface for transparent pricing.

The platform achieved $2.7 billion in open interest, matching Coinbase's $2.9 billion acquisition price, demonstrating the maturity and value of crypto options markets.

Coinbase's acquisition signaled the difficulty of replicating network effects in options due to long onboarding cycles, high institutional barriers, and year-long capital commitments from market makers.

The Graveyard of Failed On-Chain Options Projects

Multiple early attempts at on-chain options failed due to regulatory issues, poor risk management, and security vulnerabilities, including Opyn, Hegic, Dopex, and Strike.

"Opyn originally got hit with like a CFTC fine. So this is partly like regulatory, which kind of is tough" - LTR, explaining how regulatory pressure shut down early projects.

Hegic suffered an 80% TVL death spiral due to poor smart contract risk management, while Dopex and Strike had security vulnerabilities that made them unsafe to use.

The Ribbon and Avo fiasco particularly soured institutional appetite for on-chain options, leaving Deribit to capture the entire market by default.

Yield Mageddon and the End of Risk-Free Returns

The basis trade in crypto yielded 15-30% almost risk-free returns from 2020-2024, making it impossible for options to compete as a yield product during this period.

"It was impossible. Like it was actually just impossible to make any headway" - Nick, describing attempts to get funds to sell options for 15-20% yield when basis trades offered higher returns.

The 1010 market event marked the final nail in the coffin for the basis trade, forcing funds to seek new yield sources and making options more competitive.

Many delta-neutral funds built around basis trades are now shutting down or pivoting strategies, with Athena announcing a shift away from pure basis trading to incorporate wider strategies.

Derive's Technical Architecture and Growth Strategy

Derive uses an off-chain order book with integrated RFQ for price discovery, while maintaining self-custodial settlement, liquidations, and clearing on an OP stack app chain.

The platform has grown from 0.1% to 2.5-3% of Deribit's average daily volume in six months, targeting 10-15% market share within the next year.

"We've done a couple of foundational deals for liquidity with Falcon X" - Nick, explaining how partnerships with established market makers helped bootstrap differentiated order flow.

Derive offers the most liquid venue globally for Hyperliquid options, forcing new market makers to integrate with the platform to access this flow.

AI Agents as the Perfect Options Users

"AI agents are exactly the kinds of users who aren't going to preference bluntness over precision or care much about complexity" - Nick on why agents are ideal for options.

Agents can translate complex trading opinions into precise option structures, solving the major barrier that prevents even experienced finance professionals from using options effectively.

"If you've ever had an opinion where you think, like, hey, like, if Trump does this, then I think Bitcoin goes to 76K to 80K range in two weeks" - Nick illustrating how agents can structure complex conditional trades.

AI can also improve options literacy by explaining hedging strategies to token holders, making payoff diagrams and PNL scenarios more digestible for retail users.

Institutional Adoption Through Qualified Custody

Derive partnered with qualified custodians and Strands to tokenize balances in BitGo accounts, allowing institutions to trade with segregated funds that can't be double-pledged.

"We have one fund who asked us to list Cardano options via the RFQ and they're going to do 50 to 100 million a month in volume" - Nick on custom institutional requests.

The institutional pitch centers on lowest fees, best execution, widest range of assets, qualified custody, and reduced credit risk compared to centralized venues.

Trust and regulatory reporting remain major hurdles, as institutions worry about code-is-law regimes and SEC reporting requirements for on-chain activities.

The RWA Integration Opportunity

Tokenized stocks from BlackRock, Franklin Templeton and others create opportunities for 24/7 options trading, though current implementations remain siloed with KYC requirements.

"Options have a really good advantage where they don't necessarily need to have the underlying quite in the same fashion" - LTR on how derivatives can work around RWA limitations.

Private market RWAs pose risks due to Gensler SPV structures where companies can zero tokens if they discover secondary trading, making public markets safer for tokenization.

Solutions like Superstate's fund structure and ZKTLS for KYC offer potential workarounds to make tokenized assets more accessible without cumbersome compliance processes.