In traditional finance and its blockchain-based counterparts, an option grants the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a predetermined price before a set expiration. A private option executes this agreement through off-chain channels, such as a signed legal document or a private messaging layer. The core transaction details—including the strike price, premium, expiration, and the identities of the involved parties—remain confidential, known only to the participants and any designated intermediaries or auditors. This contrasts with on-chain options, where the contract logic and often the terms are deployed as a public smart contract.
LABS
Glossary
Private Options
Private options are financial derivatives contracts traded on a blockchain where the strike price, premium, and identities of the counterparties are kept confidential using cryptographic techniques like zero-knowledge proofs.
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definition
BLOCKCHAIN FINANCE
What is Private Options?
A private option is a financial derivative contract that is created, settled, and recorded off-chain, typically between two known counterparties, with its existence and terms not publicly broadcast on a blockchain ledger.
The primary mechanisms enabling private options involve commitment schemes and zero-knowledge proofs (ZKPs). Parties may cryptographically commit to the terms of the trade without revealing them, later proving settlement or execution validity. Platforms utilizing this model often employ a custodial or trusted operator model to facilitate the private matching and settlement, or they may use advanced cryptographic protocols like zk-SNARKs to enable non-custodial privacy. The final outcome—such as the transfer of the premium or the underlying asset upon exercise—is typically settled on-chain, but the transaction appears as a simple transfer, obscuring its connection to the specific options contract.
Key use cases for private options include institutional trading strategies, where funds wish to hedge exposure or gain leverage without revealing their positions to the market, thereby avoiding front-running and minimizing market impact. They also cater to regulatory and compliance requirements where trade details must be shielded. However, this privacy introduces trade-offs, such as increased counterparty risk if not properly collateralized, reduced market transparency, and reliance on the integrity of the off-chain operator or cryptographic assumptions. In the decentralized finance (DeFi) ecosystem, private options represent a niche but growing sector that bridges the confidentiality of traditional over-the-counter (OTC) desks with the final settlement assurance of blockchain networks.
how-it-works
MECHANISM
How Private Options Work
Private options are a specialized financial derivative that enables confidential, over-the-counter trading of options contracts on blockchain assets, distinct from public order books.
A private option is a bilateral contract created directly between a buyer and a seller, typically facilitated by a specialized protocol or broker. Unlike public options traded on centralized or decentralized exchanges with visible order books, these contracts are negotiated off-chain or through private communication channels. The core agreement specifies the underlying asset (e.g., ETH, BTC), strike price, expiration date, and premium, but its existence and terms are not broadcast to the public ledger, preserving the traders' strategies and market positions.
The execution and settlement of these contracts rely on cryptographic proofs and smart contracts. Common mechanisms involve commit-reveal schemes or zero-knowledge proofs (ZKPs). For instance, parties may commit hashes of the deal terms to a smart contract. Upon expiration, they reveal the original data to prove the outcome, and the contract autonomously settles by transferring the collateral and any profit. This ensures the contract is trust-minimized and enforceable without revealing its details during its active life, a process sometimes called dark pool trading for derivatives.
Key technical components enabling privacy include confidential assets to obscure transaction amounts and stealth addresses to hide counterparty identities. Protocols may use bulletproofs or zk-SNARKs to validate that a settlement is correct according to the hidden terms without disclosing them. This cryptographic layer sits atop the standard options payoff structure, where a call option gives the right to buy and a put option gives the right to sell, with the buyer's maximum loss capped at the premium paid.
The primary use cases cater to institutional traders and large holders (whales) who need to execute sizable derivatives positions without causing market impact or front-running. By keeping the intent and size of their hedge or speculative bet private, they avoid moving the market against their own order. This is particularly valuable for delta-neutral strategies, portfolio hedging, and covered call writing on volatile crypto assets, where information leakage is costly.
From a regulatory and risk perspective, private options exist in a complex landscape. While they offer transactional privacy, they do not inherently provide regulatory anonymity and may still be subject to KYC/AML requirements depending on the jurisdiction and facilitator. Counterparty risk is mitigated by the smart contract's collateral lock-up, but users must trust the correctness of the cryptographic implementation and the oracle providing the final settlement price, introducing oracle risk as a key consideration.
key-features
PRIVATE OPTIONS
Key Features
Private options are a financial derivative that grants the right, but not the obligation, to buy or sell an asset at a predetermined price, executed confidentially on-chain without exposing intent to the public market.
01
Pre-Trade Privacy
The core innovation is the complete concealment of trading intent before execution. Unlike public decentralized exchanges (DEXs), where open orders reveal strategy, private options keep the strike price, size, and direction hidden. This prevents front-running and market impact, allowing institutions and large traders to establish positions without moving the market.
02
On-Chain Settlement & Custody
While the negotiation is private, the final option contract and its exercise are settled on a public blockchain. This provides:
- Transparent and verifiable settlement once the trade is complete.
- Non-custodial asset control using smart contracts, eliminating counterparty risk with a centralized entity.
- Automated payout upon exercise, enforced by immutable code.
03
Flexible Counterparty Discovery
Traders can find counterparties through various private channels, not a public order book. Common methods include:
- Over-the-Counter (OTC) desks and RFQ (Request-for-Quote) systems.
- Private peer-to-peer networks or whitelisted pools.
- Dark pools built specifically for derivatives. This allows for bespoke, large-size contracts tailored to specific needs.
04
Reduced MEV & Slippage
By shielding the order flow, private options significantly mitigate two major costs in DeFi:
- Miners/Maximal Extractable Value (MEV): Bots cannot see the pending transaction to front-run it.
- Slippage: The market price is not affected by the trader's own large order, as it is not broadcast publicly. This results in better execution prices for large positions.
05
Institutional-Grade Workflows
The architecture supports compliance and operational needs typical for hedge funds and trading firms:
- KYC/AML integration at the access layer for regulated entities.
- Settlement finality on-chain provides a clear audit trail.
- Integration with traditional prime brokerage services for cross-margin and collateral management.
06
Underlying Asset Agnostic
Private options smart contracts can be written for a wide range of on-chain assets, including:
- Cryptocurrencies (e.g., BTC, ETH).
- Tokenized real-world assets (RWAs) like treasury bonds or commodities.
- Other derivatives, creating complex structured products. This flexibility makes them a foundational primitive for private DeFi.
examples
PRIVATE OPTIONS
Examples & Protocols
While the core concept is protocol-agnostic, several platforms have pioneered implementations of private options trading, each with distinct architectural approaches.
05
Key Architectural Challenge: Oracle Reliance
A core technical challenge for private options is oracle dependency. Protocols must source reliable price feeds for:
- Spot Price: To determine intrinsic value.
- Implied Volatility: For pricing models (e.g., Black-Scholes).
- Expiry Settlement: For final payoff calculation. Manipulation resistance is critical.
06
The Hedging Imperative
For an AMM to act as a passive counterparty, it must dynamically hedge its risk. This typically involves:
- Delta Hedging: Continuously buying or selling the underlying asset to offset price exposure.
- Gamma Management: Adjusting the hedge as delta changes. This process incurs transaction costs (gas, slippage) which are factored into the option's premium.
ecosystem-usage
PRIVATE OPTIONS
Ecosystem Usage & Applications
Private options are over-the-counter (OTC) derivative contracts that are negotiated directly between two parties, offering bespoke terms and privacy not available on public exchanges. Their primary applications in the blockchain ecosystem focus on institutional-grade risk management, capital efficiency, and strategic positioning.
01
Institutional Hedging & Risk Management
Private options are a core tool for institutional investors, treasuries, and mining operations to hedge exposure to crypto asset volatility. They allow for the creation of bespoke contracts that precisely match the size, duration, and strike price needed to protect a portfolio or future cash flows from adverse price movements, without revealing the strategy to the public market.
Tailored
Contract Terms
02
Capital-Efficient Yield Generation
Sophisticated market makers and DeFi protocols use private options to generate yield on idle assets with defined risk parameters. By writing (selling) covered calls or cash-secured puts directly to a known counterparty, they can earn premium income. This is often more capital-efficient than public options markets due to reduced collateral requirements negotiated in the private contract.
03
Strategic Acquisition & Exit Planning
Entities use private options to structure strategic acquisitions of large token positions or to plan orderly exits. A token project treasury might sell a call option to a long-term investor, providing capital upfront while setting a future price for a token sale. Conversely, a venture capital firm might use a put option to secure a downside-protected exit for its portfolio tokens.
04
Liquidity Provision & OTC Desks
Specialized OTC desks and liquidity providers act as intermediaries in the private options market. They warehouse risk by taking the opposite side of client trades and then hedge their exposure across other derivatives venues. This service provides essential liquidity for large, block-sized trades that would be impossible or prohibitively expensive to execute on public limit order books.
05
Structured Products & Token Vesting
Private options are the building blocks for structured financial products like token warrants, convertible notes, and vesting schedules with performance triggers. For example, a project can grant team members options that vest based on milestones, or issue warrants to investors that are exercisable upon achieving specific protocol metrics, aligning incentives without immediate dilution.
06
Regulatory & Compliance Advantages
Bilateral, privately negotiated contracts can be structured to comply with specific jurisdictional regulations (KYC/AML), which is challenging on permissionless public exchanges. This allows regulated entities like family offices and asset managers to gain crypto exposure through a documented, auditable OTC derivative contract that fits within their existing compliance frameworks.
COMPARISON
Private Options vs. Traditional On-Chain Options
A technical comparison of private, off-chain options protocols and traditional, fully on-chain options protocols.
| Feature | Private Options (e.g., Chainscore) | Traditional On-Chain Options |
|---|---|---|
Settlement & Execution | Off-chain, private matching via MPC/TEEs | On-chain, public smart contract |
Pre-trade Transparency | Zero (order book hidden) | Full (orders visible on-chain) |
Liquidity Provision | Capital-efficient, risk-isolated vaults | Fragmented across public AMM pools |
Gas Cost for Traders | Near-zero for execution | High, scales with network congestion |
Maximum Extractable Value (MEV) Risk | Negligible (no public mempool) | Significant (front-running, sandwiching) |
Counterparty Discovery | Permissioned, curated participants | Permissionless, anonymous counterparties |
Regulatory Compliance | Built-in KYC/AML rails possible | Typically non-compliant by design |
Typical Latency | < 1 second | 12+ seconds (block time dependent) |
security-considerations
PRIVATE OPTIONS
Security & Privacy Considerations
Private options protocols enhance user privacy in DeFi derivatives by concealing sensitive trading data. This section details the core security mechanisms and inherent trade-offs involved.
02
Data Confidentiality
What information is kept private? A robust private options protocol typically conceals:
- Trade size and direction (buy/sell, call/put)
- Strike price and expiration of the option contract
- User's wallet balance and position size
- Counterparty identity in peer-to-peer models This prevents front-running, reduces information leakage to competitors, and protects user financial data from public blockchain analysis.
03
Trusted Setup & Cryptographic Assumptions
A critical security dependency. Many zk-SNARK systems require a trusted setup ceremony to generate public parameters. If compromised, false proofs could be created. zk-STARKs avoid this but have larger proof sizes. The security of the entire system rests on the integrity of these cryptographic primitives and the correctness of their implementation, making audits paramount.
04
On-Chain vs. Off-Chain Execution
Balancing privacy with settlement guarantees. Fully on-chain execution uses ZKPs for private state transitions, ensuring decentralized settlement but with higher gas costs. Off-chain execution (e.g., using a secure enclave or a committee) computes outcomes privately before posting a proof on-chain. This model introduces different trust assumptions regarding the off-chain operator's honesty and liveness.
05
Regulatory & Compliance Challenges
The privacy/transparency trade-off. While privacy is a feature for users, it creates challenges for regulatory compliance (e.g., Anti-Money Laundering, Know Your Customer) and protocol-level risk management. Protocols may implement optional auditability features or privacy-preserving compliance proofs that allow selective disclosure to authorized entities without breaking full privacy for all users.
06
Oracle Privacy & Data Feeds
Securing the input data. Options settlement depends on oracle price feeds. In a private system, fetching this data must not leak which asset or price point a user is querying. Solutions include using decentralized oracles that deliver data to a private compute layer or employing threshold decryption schemes where multiple parties must collaborate to reveal the price for settlement.
PRIVATE OPTIONS
Common Misconceptions
Private options, also known as Over-the-Counter (OTC) options, are a core DeFi primitive for bespoke risk management. This section clarifies frequent misunderstandings about their mechanics, security, and market role.
While they share the OTC (Over-the-Counter) label, private options in DeFi are fundamentally different. Traditional OTC options are bilateral contracts negotiated privately between two parties, with counterparty risk managed by trusted intermediaries like investment banks. DeFi private options are non-custodial smart contracts that automate the entire lifecycle—from collateral lock-up to settlement—on a public blockchain. This eliminates intermediary trust but introduces new considerations like smart contract risk and the transparency of the underlying settlement mechanism. The core similarity is the bespoke, non-standardized nature of the contract terms.
PRIVATE OPTIONS
Frequently Asked Questions
Private options are a specialized financial derivative in DeFi that allow for confidential, over-the-counter (OTC) trading of option contracts. This section addresses common technical and operational questions.
A private option in DeFi is a non-custodial, over-the-counter (OTC) derivative contract whose terms and existence are only visible to the involved counterparties. It works by using zero-knowledge proofs (ZKPs) or secure multi-party computation (MPC) to create and settle a bespoke options contract—specifying an underlying asset, strike price, expiry, and premium—without broadcasting the details to the public blockchain. The contract's state and final settlement are verified cryptographically, ensuring enforceability while maintaining complete privacy for the parties involved. This contrasts with public options protocols where all contract data is on-chain.
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