The Factory

The Factory leverages on Polarity's infrastructure to allow every project to seamlessly integrate options trading capabilities for their communities in a semi-permissionless manner.

By enabling options trading for virtually any token, the Factory promotes broader participation, diversification, and democratization within the ecosystem.

Democratizing Access to Derivatives

The derivatives market, particularly for options trading, has traditionally been highly centralized or restricted to tokens with substantial market capitalization. This limitation stems from the intense volatility inherent in the cryptocurrency market, which poses challenges for facilitating derivatives trading for smaller tokens.

However, there is a growing demand from token communities to have access to options trading capabilities, allowing them to hedge against market movements or explore advanced trading strategies for their favorite tokens, regardless of their market capitalization.

To address this need, the Factory has been designed to dismantle the entry barriers to options trading and to make it accessible to virtually any token that seeks inclusion.

A Semi-permissionless Solution

The Factory is designed to operate under a semi-permissionless model, empowering users by granting them voting rights to list token on Polarity's infrastructure. Not only fostering community engagement, it also maintains a security layer preventing the listing of tokens with potentially malicious intentions. This approach strikes a balance between decentralized governance and necessary oversight, ensuring the integrity and safety of the platform.

How it works

To create a new options pool on Polarity's platform, projects must provide their own liquidity composed of their native tokens and stablecoins. This liquidity forms the basis of the options market and allows traders to take positions.

During the pool creation process, projects decide their desired allocation between their token and the stablecoins, effectively determining the ratio of assets in the pool. Additionally, they have the flexibility to adjust these weights in the future, enabling them to adapt to changing market conditions or project requirements.

One crucial aspect of establishing an options market is accurately determining the volatility of the underlying asset. Volatility is a key input parameter for options pricing models, and it significantly impacts the fair value of options contracts. To estimate volatility, Polarity employs a practical approach by calculating the realized volatility of the token over the past seven days. While this method may not be perfect, it serves as a reasonable approximation, particularly for volatile tokens that exhibit significant price fluctuations.