Quote Asset and Strike Price Selection
When it comes to selecting quote tokens for an OLM program, envision a pyramid that represents the diverse range of options available:
Breadth vs. Depth Trade-Off
At each level of the pyramid, oToken issuers face a tradeoff between breadth and depth. A program with broader quote tokens allows protocols to start small, adjust, and scale up with shorter epoch durations and narrower strike/price ranges. On the other hand, a program with niche assets requires more complexity, strategic planning, and commitment with longer epoch durations and looser strike/price ranges.
Base Assets
At the base of this pyramid are the base assets, which include ubiquitous assets like USDC, DAI, and ETH that serve as the foundation for many protocols due to their widespread acceptance and stability:
Pros:
Diversifies treasury composition and enhances stability
Simple to acquire and less volatile, making it the optimal choice for users and shorter epoch lengths
Deep liquidity and distribution across crypto → more likely to be held and easier to acquire for oToken recipients wanting to exercise
Cons:
Can be deemed low-impact relative to selecting other assets depending on a protocol’s overall objective
Community Assets
Climbing further, we reach the Community level where quote tokens become broad, focusing on liquidity pool (LP) tokens:
Pros:
Drives further growth of liquidity and allows acquisition of protocol-owned-liquidity (POL)
Win-win scenario for both the protocol and users
Diversifies treasury composition
Allows LPs to exit liquidity positions while acquiring payout assets at an optimal exchange rate
Can be routed to market making and asset management services to accelerate POL capabilities
Cons:
Limited to ERC-20 LP tokens
oToken recipients may not hold LP tokens, in which case they’ll need to acquire them before exercising
oToken recipients holding LP tokens to continually exercise are exposed to IL
Flywheel Assets
Moving up the pyramid, we encounter the Flywheel level where specific quote assets come into play. These quote tokens are specifically chosen to align with the protocol’s ecosystem and mechanisms (e.g. LSTs for LSTfi or FRAX for Frax Finance).
Pros:
Strengthens ties with community and partners
Promotes further growth by utilizing ecosystem assets
Diversifies treasury composition
High flexibility in use cases for protocols with more complex token mechanisms
Cons:
oToken recipients may not hold ecosystem assets, in which case they’ll need to acquire before exercising
Strategic Assets
Finally at the pinnacle of the pyramid, we find the Niche level where quote tokens become hyper-specific and tailored to a protocol’s needs. Some examples of these assets include PENDLE for the Pendle ecosystem, CVX for the Curve ecosystem, or AURA for the Balancer ecosystem.
Pros:
Typically high-impact and tied into advanced liquidity management or partnership strategies
Accelerates flywheel for ecosystem and partner-led growth
Potentially enables protocols to reap all benefits from the prior asset classes depending on the strategy
Cons:
Requires a fully thought out strategy as it can be the most complex
Generally highest barrier-to-entry for oToken exercisers
Strike Price Considerations
OLM is initially launching with a Fixed-Strike pricing model, which enables protocols of all stages to utilize oTokens without needing to rely on an oracle feed. Fixed-Strike oTokens work by setting the strike price to a specific exchange rate between any two ERC-20 tokens. Depending on the quote asset selected, there will be some significant differences in pricing considerations. Using a stablecoin as the quote asset is the most obvious example, where the pricing will behave like a normal option denominated in that stablecoin (USDC, DAI, FRAX, etc.).
Strike price gets more complicated when denominated in a volatile quote asset. As the value of both payout and quote token fluctuates, the effective strike price changes as a result. oToken issuers need to be aware of this fluctuation when selecting volatile quote assets (ETH, LP tokens, CVX, etc.). Some payout assets are highly correlated with ETH, so this may be appropriate for some protocols whose liquidity is denominated in ETH. Similarly, selecting an LP token as the quote asset will be more correlated when it includes the payout token for POL.
Last updated