Capital efficiency is the key to many of Charm's key features.
In contrast to Total Value Locked (TVL), capital efficiency is how efficiently that value is used to create benefits for traders and Liquidity Providers (LPs).
Charm is very capital efficient. This is because for a fixed amount of liquidity provided by LPs:
Much higher trading volumes can be generated. This results in higher trading fees for LPs.
Much larger trade sizes can be placed. This means traders can generate more profits.
Much more active markets can be created. This results in better price discovery, and therefore cheaper options for long positions, and higher yields for short positions.
Since Mainnet launch on 18th January 2021, and using only $580,000 of total liquidity provided by LPs, Charm was able to:
Generate $3.8 million worth of trades.
Generate average trade size of $7,355.
Accommodated maximum trade size of up to 90 ETH.
Achieve prices that are up to 50% cheaper, and yields that are up to 200% higher than Deribit.
Generated trading fees of $32,000 for LPs.
Charm is capital efficient because all options for a given underlying and maturity belong to a single pool of options. This allows the liquidity of all option markets to be pooled, so that each option can be priced more efficiently and traded at much larger sizes.
For example, in our current WBTC markets, 1.107 BTC of LP liquidity were used to create 7 spreads in a single pool, and these spreads are used to market 12 options with different strike prices. This is in contrast to only 1 strike prices if all the liquidity is used to launch one market with a single strike.
This approach has resulted in 12 times more markets being created for any given amount of LP liquidity, with each market facilitated by 1.107 BTC of LP liquidity.
To create 12 markets without a single pool of options, each market will only have 0.092 BTC (1.107/12) of LP liquidity and this will limit the size of trades that can be placed.
The next page describes some use cases for Charm's capital efficient option pools.