Smile

While prediction markets — binary options on event outcomes — have been widely successful in DeFi (Polymarket, Augur), standard options have not. In contrast, standard options are popular with retail investors, but gate kept, e.g. 2021 Gamestop trading was halted by brokers. Prediction markets do not offer many strategies retail traders have been increasingly investing in: selling covered calls to generate yield on held ETH, selling cash-secured puts to acquire ETH at a discount, buying butterflies to express a range-bound view on volatility, etc. The building blocks for this popular market requires a functioning options market with real liquidity across strikes and expiries for standard options (buys and sells of puts and calls). That market has never materialized on-chain: Ribbon and Friktion pioneered DeFi Options Vaults (DOVs) but suffer from trapped liquidity: collateral is locked per strike chosen by the vault manager, leaving the rest of the chain empty. Premia introduced RFQ-based pricing that relies on institutional market makers for quotes, creating a dependency on off-chain liquidity.

Smile attempts to overcome these limitations to on-chain standard opions trading by using Aqua's non-custodial LP to remediate:

Liquidity fragmentation across strikes and expiries, until a buyer is matched. Makers can offer liquidity across a range of strikes and expiries, increasing net liquidity. Collateral lockup in LPs, and forfeited dividend yield — which is not a limitation of standard options writers — is also removed by Aqua's non-custodial LP. Standard options markets work because broker-dealers delta-hedge their books against the spot market. Smile attempts to use the trading and settlement functionality provided by Uniswap and Chainlink to allow clever LPs and arbitrageurs to continuously arbitraging away mispricings between options and the underlying. Specifically: Fast trading and premium transfer via Uniswap Trading API Vol surface repricing post-trade via Uniswap v4 Hooks across strikes and expiries Options payoff settlement and redemption via Chainlink CRE

SwapVM used to make a market for the whole volatility surface on chain Aqua used to provide liquidity across strikes (until a strike is bought). It is used to keep the collateral and dividends in the hands of the maker. Chainlink CRE is used for settlement. Chainlink is also used for oracle collateral pricing. Uniswap is used to trade the options contracts minted by Aqua for USDC. The user can see quotes for the entire vol surface. Uniswap hooks are used to reprice the surface after trades, and vetoes mispriced trades.