Options

Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. These are commonly known as strike price and expiry date. Similarly, in elements we can create options using covenants and assets. Options can be created between any two assets, however for simplicity we assume bitcoin-lusd call options. The detailed documentation with usage can be found at liquid docs. In case of conflict, refer to the above document for the latest version.

Known Limitations (PoC software):

• The client code does not do any coin selection to select covenant UTXO to interact with. It selects the first covenant UTXO it finds. For example, if there are two covenants with 10 contracts each, and the user wants to exercise 15 contracts, the client would select the first covenant and exercise 10 contracts. Then repeat the process again to exercise the remaining 5 contracts. This is just a limitation of the current PoC implementation, not an inherent limitation of the protocol.
• When initialize contract via init, the client wallet must have two UTXOs with bitcoin asset. This is because we need to create two re-issuance covenants for ORT and CRT. The client code can be modified to split the UTXO into two UTXOs incase there is only one UTXO with bitcoin asset, but this is not implemented in the PoC.

Known Limitations of the Protocol:

• If multiple users try to exercise the same option, there will be a race and only a subset of users can get the tx confirmed. Consider a covenant UTXO where multiple users are trying to spend it. If the covenant is partially exercised/cancel/expired, another covenant output is generated. If multiple users try to spend the same covenant output, only one will get confirmed. In this case, the users should observe the mempool and try to spend the new covenant output from the mempool. In the absolute worst case, only one trade gets executed per block. In other cases, we can spend the unconfirmed covenant outputs and multiple trades can be executed per block. Another solution used for this is to "Sequences" or "Sequencers". These are centralized services, that sequence the transactions from users to have multiple trades executed per block. This is an inherent limitation of the protocol.
• It is possible that an in-the-money option is not fully exercised by the holders of the Option Token. It also may be possible that an out-of-the-money option is exercised by a subset of the Option Token holders. In these cases, the holders of the Grantor Tokens have a choice to try to claim the Settlement Asset or Collateral Asset, however only a small subset will be able to get the more profitable choice. There may be a bidding war with higher fees or an incentive for functionaries to favor certain parties to be able to claim the more profitable choice.

Options-lib:

The underlying code for options library with covenant logic and pset interface

Options Client(opt-cli)

The client that operates with elementsd wallet to interact with the options

Options Http Server(http-server)

The http server that allows interacting with options client.

Terminology:

• ORT: Options Rights Token, represents the right to exercise the option
• CRT: Collateral Rights Token represents
  • underlying collateral if the option is not executed
  • or settlement amount if the option is exercised.
• ORT-RT: Re-Issuance Token for ORT
• CRT-RT: Re-Issuance Token for CRT

Client Usage:

• Change directory to src/client
• Optionally Install the client locally with cargo install --path . This would install the application locally, otherwise you can build it temporarily using cargo build and run it from /target/debug/opt-cli
• By default, the client looks for elementsd config $HOME/liquidtestnet. This can be changed using the --datadir option
• Elements should have atleast one wallet loaded.

Tool demo:

opt-cli initialize --contract-size=1000 --expiry=1661544383 --start=1661544383 --strike-price=100000 --coll-asset=4a75e0dffa7c677e3b18e5570f146cc8cffb201a4fac0e9f7e17ec3cb9082934 --settle-asset=1adc82a9ed873619987cc24cfabbc1c43a5c4078b4a76b14d603c46769031512
Contract Id: d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Issue txid: c90986b9aabec5a281bad4c84ea7ab1d3192748a52ea9637d71d831fb17cc9f2

This outputs a contract id that should be used when interacting with this contract in future. You can always see --help for more help

Funding the contract:

opt-cli fund -n=2 -c=d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Contract Id: d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Funding txid: 44ff85f2f12c796208f612f102a36d4b26483fc406194d232aba3ea085188ec5

Exercise

opt-cli exercise -n=1 -c=d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Contract Id: d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Exercise txid: 41d72a02777e2fb1267f71a9fe5519766a799f3af49b853e5043b541521375b6

Expiry:

opt-cli expiry -n=1 -c=d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Contract Id: d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Expiry txid: a17d0077949683fd868393f82102cd742c885bc08c45093fecaf7f75c31292da

Cancel:

opt-cli cancel -n=1 -c=d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Contract Id: d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Cancel txid: 47ce2678aaa0def2cde5dbb9a2fb0605966a49dd0652780de500e2d096e333ee

Settlement:

opt-cli settle -n=1 -c=d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Contract Id: d467c3ff41ebe998a6012da517cd3307af7ff0f168d1ddf9dda81b09c7477df1
Settle txid: 60d334602d21b778b14c7109373198a9201390d8cb28b3a7a95834736db47927

Unit Test scenario

• Issues CRT/ORT RT tokens with 1 amount to RT covenant
• Fund the covenant by issuing 10 contracts locking the collateral
• Exercise 3 of 10 contracts
• Cancellation of 4 of remaining 7 contracts
• Expire the remaining 4 contracts(no change case)

Claim the settlment in two steps.

• Claim 1 contract (change case)
• Claim the remaining 2 contracts (no change case)