Crypto derivatives are moving away from an era in which perpetual futures held near-total control over leveraged trading.
Written by Vaidik Mandloi
Translated by Saoirse, Foresight News
Options have existed in crypto for years, but for most of that time they were a niche product. Deribit launched options in 2016, and Binance later added options alongside its perpetual futures business. In 2021, DeFi produced a full wave of options vaults, with total value locked peaking at about $500 million. Those projects gradually faded, including Ribbon Finance, Friktion, and Knox. The basic reason was simple: perpetual futures were easier to use and more capital efficient, which fit the average trader’s demand for leverage.
That picture has changed. Coinbase has just acquired Deribit. Options on the Nasdaq-listed IBIT built open interest larger than Deribit’s entire book within only a few months of launch. Crypto options open interest has now surpassed crypto futures open interest for the first time on record.
The article asks three direct questions: what changed in the market, whether the shift is real, and whether the crypto options industry has reached a genuine inflection point.
Why perpetual futures took over the market
In crypto’s early years, perpetual futures solved a problem options never fully cracked. Perps reduced derivatives trading to a single market for a single asset. Liquidity was concentrated in one pool instead of being fragmented across hundreds of options contracts with different strikes and expiries, each with uneven order-book depth.
Back in 2017 and 2018, crypto market liquidity was still thin. A retail trader who wanted leveraged BTC exposure did not need to think about theta decay, choose a strike, or manage overnight changes in the Greeks. Annual trading volume in perpetual futures now exceeds $90 trillion, and the core reason is that they offered the one thing most traders wanted from derivatives: leverage, without much complexity.
DeFi still tried to build an options sector in 2021 through decentralized options vaults, or DOVs. The model was straightforward. Users deposited ETH or BTC, the vault sold options to market makers on their behalf, and users earned option premium as yield. Ribbon Finance, Friktion, and Knox were all built around this structure.
Why decentralized options vaults lost momentum
The article identifies two major flaws in that model. First, vaults required full collateralization. Compared with perpetual futures, they gave up the leverage advantage from the start and suffered from poor capital efficiency. The deeper problem, though, was in the auction mechanism.
All vaults ran option auctions on Friday afternoons to match Deribit’s Friday expiries, where liquidity was deepest. That meant a large number of vaults were sending predictable sell orders, in the same direction, at the same time, week after week. Market makers knew when the supply would hit and could simply wait to mark down prices.
Paradigm studied implied volatility during those Friday auction windows and found it was consistently 4 volatility points below the weekly average. In practical terms, the vaults were systematically selling options below fair value, while professional counterparties knew exactly when the auctions would occur. Depositors who thought they were earning 15% to 20% annualized yield would, because of this pricing gap alone, lose about 5.35% annualized before even accounting for assignment losses at expiry.
The entire sector ended up choosing the worst possible time to sell options.
The Oct. 10, 2025 selloff changed the conversation
Perpetual futures kept winning, and options stayed in the background. The article argues that this lasted until Oct. 10, 2025. On that day, BTC on Binance fell 12.6% in 10 minutes, triggering $19.37 billion in liquidations, 87% of them on long positions. The root cause, it says, was that the reference price used for liquidation triggers dropped below actual spot and futures transaction prices during extreme volatility, so the liquidation engine executed against prices that had diverged from the real market.
Each wave of liquidations pushed the market lower and triggered more liquidations, creating a self-reinforcing negative feedback loop until selling pressure was exhausted. On Hyperliquid, $2.1 billion was liquidated within 12 minutes. Its auto-deleveraging mechanism produced $704.6 million in asset write-downs to cover $304.5 million in actual losses, consuming capital at eight times the theoretical requirement.
The selloff also changed how institutions discussed basis trades. Basis trading is one of the most common crypto institutional strategies: buy spot BTC, short BTC perpetual futures as a hedge, collect the funding rate, and stay market neutral. During the Oct. 10 crash, however, auto-deleveraging systems at multiple exchanges forcibly closed the profitable short perp leg of that trade, leaving traders suddenly exposed to unhedged long spot positions in a falling market.
Those traders had set up delta-neutral books specifically to avoid directional risk. The exchanges’ liquidation design turned them into unhedged longs at the worst possible moment.
The structural weakness in perps and the case for options
The article frames this as an inherent flaw in perpetual futures: path dependence. This is not a temporary issue but a product-architecture issue. Margin engines assess positions tick by tick instead of settling them on a fixed expiry. BTC could finish the week at exactly the same price where it started, but if it dropped 15% in the middle, a position could already have been liquidated.
Put options work differently. A trader pays premium upfront, and the maximum loss is fixed at the moment the trade is opened. No matter how BTC moves before expiry, that loss boundary does not expand.
Options infrastructure began to change after 10/10
After the Oct. 10 event, the article says, market infrastructure moved quickly. Derive abandoned the old pooled-vault design and rebuilt around a central limit order book, adding request-for-quote functionality and portfolio margin. Traders could hold perpetual futures and options in the same margin account.
That was a key change the first generation of crypto options never had. Traders could reuse margin from perp positions as collateral for options instead of locking capital separately for each product. This has been standard at mature traditional derivatives exchanges for decades. After the rebuild, Derive’s weekly trading volume hit a record $294 million, and open interest moved above $1 billion.
At the same time, Nasdaq launched IBIT options. Regulated central clearing entered the picture, with a central counterparty guaranteeing each trade and reducing counterparty-performance risk. Within months, IBIT options built open interest above Deribit’s, and Deribit’s market share fell from above 90% to below 39%.
The article compares this moment with the rise of the Chicago Board Options Exchange. The Options Clearing Corporation removed bilateral counterparty risk in equity options, while the Black-Scholes model gave the market a common pricing framework. Equity options moved from interbank telephone trading into a pillar of modern finance in five years. In crypto, the article argues, that institutional buildout has been compressed into a matter of months.
Coinbase then acquired Deribit, placing the leading crypto options venue inside a U.S. regulatory framework and giving U.S. institutions easier access. Before that, Deribit had operated almost entirely offshore.
Most of the growth is on centrally cleared venues, not on-chain
The article describes the current setup as the strongest growth window crypto options have ever had. Even so, on-chain options, meaning options cleared and settled on blockchain rails rather than through traditional exchanges, still account for less than 1% of total trading volume. Most of the new liquidity has flowed to regulated, centrally cleared venues such as Nasdaq and Deribit, not to DeFi protocols.
In other words, the growth story in options is still mostly unfolding inside institutional structures borrowed from traditional finance. Retail-facing on-chain products have not yet produced hundreds of billions of dollars in open interest.
Who is really on the other side of retail options products
Most on-chain options products available to ordinary users today are upgraded covered-call strategies. Users deposit BTC or ETH, the protocol sells call options to market makers against those holdings, and users earn premium income. The marketing pitch is familiar: keep your crypto exposure and collect passive yield at the same time.
But in economic terms, depositors are selling volatility. They collect regular premium in exchange for giving up all upside above a certain price level, while the counterparty is a professional market maker that benefits when volatility spikes.
Some products take a different route. Euphoria, for example, lets users click price-time grid levels and pays out if BTC lands in the selected range within five seconds. The article says this is essentially a binary option spread. The European Securities and Markets Authority banned the sale of such products to retail investors in 2018. Israel’s parliament passed a ban in 2017 by a 51-0 vote. The FBI estimates global binary-options fraud at $10 billion a year. Euphoria still raised $7.5 million from more than 100 investors and brought the product on-chain.
Traditional finance has sold volatility as income for years
The article notes that traditional finance has long understood how to package short-volatility exposure as an income product for retail buyers. Derivatives-income ETFs have done this in equities for years by selling covered calls or cash-secured puts against stock positions and distributing the premium as dividends. Assets in that segment have quietly reached $147 billion.
JPMorgan’s JEPI and JEPQ are the two largest products in that category. They sell options against broad equity indexes that tend to rise gradually over time. The tradeoff is mainly capped upside, and the principal usually does not face catastrophic damage. Apply the same idea to a highly volatile underlying, though, and the result changes sharply.
MSTY is a covered-call ETF built on MicroStrategy stock, with a headline distribution yield of 244%. The article points out that the fund’s net assets have fallen 62% since launch. A breakdown of its distributions shows that 98.54% came from return of capital. Put plainly, investors are getting their own money back and still paying income tax on it.
Monthly distributions can look like yield while the real source of value keeps shrinking underneath. Investors receive back portions of their principal and owe tax on the payment.
Narrower yields, the FTX lesson, and composability form the next catalyst set
The MSTY example is used to show what can happen when a short-volatility strategy is applied to a high-volatility asset. Crypto is in that category. The article argues that this helps explain why the market may now be at a turning point. The drivers are not limited to better vault design or cleaner interfaces. Several broader forces are lining up.
First, and most important, yields have compressed. In 2021, annualized returns on basis trades could reach 25% by buying spot BTC and shorting perpetual futures to earn funding. That figure has now fallen to 4.46%. The high-yield tailwind that once supported crypto growth has faded, and options premium has become one of the few native yield sources with a direct economic rationale because one side is explicitly paying to transfer risk.
When basis trades yielded 25%, the market did not need options to generate income. At 4.46%, it has a real incentive to price risk through options. Demand is also coming from institutions that actually need hedges rather than from retail traders chasing leverage.
Second is the lesson of the FTX collapse. Billions of dollars in derivatives positions were trapped in bankruptcy estates. Traders could see profitable positions on their accounts but could not close them. They had to file claims and wait for years. On-chain options settle directly to personal wallets, while collateral sits in smart contracts that can be verified on Etherscan rather than on an exchange balance sheet. After losses running into the billions, the article says, this settlement structure has practical appeal for institutional trading desks and can pass compliance review.
Third is composability, which the article describes as a unique advantage of on-chain options. If option positions exist as on-chain tokens, they can plug into the wider DeFi stack. Covered-call positions can serve as collateral in lending protocols. Multiple options contracts can be assembled in code into new products and delivered to users in one click. Portfolio margin between perps and options can be calculated on-chain in real time rather than waiting for an overnight clearinghouse process.
The Friday-auction era of decentralized options vaults in 2021 could not do this. Nasdaq and Deribit cannot do it either, because their settlement architecture was never designed for open, permissionless composability. The article’s view is that crypto is building capabilities traditional derivatives markets cannot easily reproduce, not simply trying to catch up with them.
Options open interest moving above futures is presented as the signal
The piece closes with one central data point. Combined, Deribit and IBIT have seen BTC options open interest rise about 10x since the start of 2024, reaching $80 billion. For the first time in crypto derivatives history, options open interest has surpassed futures.
That implies total capital allocated to options exposure is now larger than the capital allocated to the leveraged directional trading that dominated crypto for the past decade. The article treats that as a sign of a real turning point: infrastructure has matured, the capital-efficiency problem has been addressed to a greater extent, regulatory frameworks are landing in multiple places, and tens of billions of dollars have already backed the shift with actual capital.
