There are some key differences between Bumper and a Put option. Although both are technically hedging strategies, there is a significant divergence in design, application and functionality.
PUT: Options are effectively a gamble on the future price, and do not require the buyer to actually own the associated token. There are only ever two outcomes: Either the Option expires ‘in-the-money’, earning a profit, or it expires ‘out-of-the money’, in which case it expires worthless. BUMPER: Bumper protects the value of tokens owned by by the user.
PUT: Almost all in-the-money crypto options contracts are cash-settled either at the point of expiry, or when the buyer exercises early (if available).
BUMPER: Settlement occurs when a protection takers position is closed, with the form of settlement varying depending on whether the closing price is below or above the floor.The table below outlines the different methods of settlement:
PUT: Premiums are determined by the seller and always paid in full when the contract is opened. On some platforms, premiums may be calculated by the protocol, often using a standard model such as the Black Scholes method.
BUMPER: Bumper calculates premiums incrementally when the protocol’s state changes (normally as a result of volatility or change in the balance of locked assets). Premiums are deducted when a position is closed.
PUT: Options cannot be renewed.
BUMPER: Positions can be renewed after the term expires.
PUT: Almost all Options contracts are adversarial between two individual participants, a buyer and a seller.
BUMPER: All interactions are between the user and either the protocol’s Asset pool or Capital pool. Users are never matched directly.
PUT: Almost all crypto Options desks do not require users to bond or even hold the protocol’s native token to participate
BUMPER: Users opening positions must hold, and bond, BUMP tokens. The specific amount required is determined by the system based on the size (value) of the position being opened.
PUT: Contract sellers earn a yield derived from premiums levied on buyers
BUMPER: Liquidity providers earn yield derived from premiums AND automated yield farming.
PUT: Not available
BUMPER: When a position is opened and the user deposits their asset into the protocol, a tokenised asset is returned to them which represents their protected asset with the downside volatility removed (due to the protection floor level). This asset, called a Bumpered Asset, is composable.
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In this article, we compare using Bumper with Put Options and examine its advantages for DeFi traders wanting to trade volatility with more flexibility.
