Guide: Adding Liquidity the Options AMM
A quick overview on Pods' AMM
In order to facilitate bootstrapping an options market that is initially illiquid, Pods Protocol counts with an Automated Market Maker adapted for the case of options tokens.
The main reason for selecting the approach of creating a completely new AMM rather than using a general-purpose AMM is because the latest does not take important variables into consideration when pricing options according to the Black-Scholes pricing model we have chosen. This can result in a severe impermanent loss for liquidity providers.
You can read more and find further details about the use of General-Purpose AMMs and Options in the article we have published a couple of months ago:
General-purpose AMMs and Options
Why general-purpose AMMs aren’t the best fit for options trading
As a summary, Pods Protocol's Options AMM implementation allows:
- pricing options algorithmically using Black-Scholes and account for changes in factors such as
time to maturityand
- programmatically updating the
Implied Volatilitybased on the pool's conditions.
- providing liquidity with options tokens and stablecoins and earn trading fees from the pools
One important concept in our AMM when providing liquidity is the difference between Exposition x Position — as it is an intensive topic, we will release an article digging more into it in the future.
Preparing to provide liquidity
Providing options tokens as liquidity require that the user holds options tokens on their wallets. So please make sure you have a balance of option tokens on your wallet. This can be done either through buying or minting an option and you can follow the tutorials below.
Providing liquidity to the pool
In the Pool section, once selecting the series you’re interested in, you can:
- Provide liquidity
- Remove liquidity
- Mint options
- Unmint options
For each series, the following information will be provided about each option pool:
- Option token.
- Stablecoin pair.
- Strike Price: the price will define whether the option is ITM or OTM.
- Expiration: the day that the pool expires.
- Wallet balance: how many options from that series you currently hold in your wallet.
- Your liquidity: how many options and/or stablecoins you’ve provided as liquidity to that specific pool.
- Pool liquidity: how many options and/or stablecoins the pool currently has — if you rover over the pool liquidity information, the total liquidity in USD will show up.
In our updated version of the protocol, when providing liquidity, you have to provide both stablecoins and option tokens.
Once you decide which pool they would like to provide liquidity of either stablecoins or options or even both, click on the manage button.
Note that you need to either buy options or mint options from that same series to provide option to the pool.
Make sure you are in the “Add” tab.
In the Step 1, input the amount of options or stablecoins you want to provide. With the input number, our app will calculate automatically the equivalent amount of tokens for the other side of the pool.
Step 2 will give you a summary of the liquidity you are willing to provide.
To provide liquidity, please note that you need to allow both options and stablecoins tokens.
Your position will be updated — both the Position card of this page and the “Liquidity provided” section in the Dashboard.
We did a demo of providing liquidity in the video below:
This blogpost was updated after some changes in our app and protocol.
Pods is a decentralized non-custodial options protocol. Users can create options and trade them through an Options AMM on the Ethereum Blockchain. Pods is the easiest way to hedge crypto in DeFi.
We invite you to take the first step in your new mission: start testing the app on app.pods.finance
Crypto volatility keeps you from having a good night’s sleep. Hedge crypto and protect your portfolio with Pods…