options-elements

Write call/put options on elements using elements-miniscript. This tool does NOT have access to the wallet/blockchain. It will help you create/sign transactions with help of elements-cli.

General Info

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.

For issusing options in elements, we need additional token assets(assets with 1 unit/satoshi) to represent the ownership of option. We refer to opt-token as token that represents the ownership of option. And bene-token which represents the other side(ownership of the locked btc). These tokens can be traded freely to transfer the long/short side of the option. For security of the system, it is important these opt-token and bene-token have exactly 1 unit of supply with no reissuance. It is the responsibility of the user to make sure that these are issued correctly.

NOTE: The opt-token does not need to 1 unit of supply. It's supply needs to match the number of option-tokens. Throughout the codebase, the term locked asset is represented asset that is locked in options contract and the term claim asset is used to for the asset that is used in order to exercise the option. For ex, in bitcoin call option for 1BTC 50k$, the locked asset would be native btc asset and claim asset would be l-usd asset.

Using option-elements

We first need to initialize the options-elements with respective parameters for l-usd(claim-asset) asset, bene-token, lock-asset, opt-token. These options are saved by default in opt_cfg.conf file in the current directory. You can either edit create the file(YAML) manually or use the init command for creating it.

sanket1729@sanket-pc:~/options-elements$ more opt_cfg.conf
---
lock_asset: b2e15d0d7a0c94e4e2ce0fe6e8691b9e451377f6e46e8045a86f7c4b5d4f0f23
btc_asset: b2e15d0d7a0c94e4e2ce0fe6e8691b9e451377f6e46e8045a86f7c4b5d4f0f23
claim_asset: e855b6b5cfa07860a6df2f6174c51a4c1408a75d228e674d88d7522c3ca15362
opt_token: d37963f81b572b2726a0fed03507b693f7ee2b6b0270cf02b30e73b71a2f231d
bene_token: 75b8fb4cf7fb147f5d31cc47c3e45656e6424b60b5f407cbe41afa298898277b
locked_asset_amount: 100000000
control_pk: 039b6347398505f5ec93826dc61c19f47c66c0283ee9be980e29ce325a0f4679ef
control_sk: cVt4o7BGAig1UXywgGSmARhxMdzP5qvQsxKkSsc1XEkw3tDTQFpy

All paramters in the file can be edited. The locked_asset_amount represents the amount of asset locked in when creating a call option. The init command takes in some default values for the configuration that can supplied as optional arguments. See init --help for details.

options-elements init [FLAGS] [OPTIONS] --bene-token <bene-token> --claim-asset <claim-asset> --lock-asset <lock-asset> --opt-token <opt-token>

NOTE: All interactions with options-elements binary would read this conf file and would for this file in the current directory. All commands have a option to provide a location for reading this file incase you don't save it at a default location.

Creating Call options:

After initializing, we have fixed what bene-token, opt-token, locked-asset, claim-asset we are dealing with. This process only one options-contract at a time, therefore it is important to maintain separate files per options contract. Call options can be created by options-elements call create. See options-elements call create --help for details.

options-elements call create [FLAGS] [OPTIONS] --expiry <expiry> --strike <strike>

Since we have fixed all assets and tokens, options are now similar to regular stock options, but that can be identified by expiry and strike.

Operations on Options Contracts:

There are three major operations supported on options contract.

1. Exercise
2. Cancel
3. Expiry

We also a fourth operation called claimbene that is used for claiming the lusd incase the option is exercised. 4.

The general operation of the app is as follows.(assuming the app has a proper cfg file and it is option contract has been created). See --help for more information on args.

1. Create a raw transaction using options-elements exercise <args>. This creates a partial transaction that can be passed to fundrawtransaction. We need to do this in two steps because the elements fundrawtransction does not understand covenant descriptors and hence it cannot infer the fees for satisfaction. So, initially we pass a transaction without the covenant prevout and the corresponding output. This steps outputs a transaction with a dummy fee rate that can be used in regtest mode. Ex: Assuming default location of cfg file, expiry = 2021-05-30, strike = 100.0

./target/debug/options-elements call exercise --expiry=2021-05-30 --strike=100.0

2. Pass the funded the to elements-cli

FUNDED=$(e1-cli fundrawtransaction $RAW '''{"feeRate": 0.03}''' | jq '.hex' | tr -d '"')

The jq utility parses the output json and tr trims the " symbol.

3. This step is same for all operations of exercise, expiry, cancel and claimbene. This adds information about contract prevout, the type of operation and receiving address. Since we add the same amount to input and output the transaction amounts are still balanced. This outputs a unblinded transcation, a list of auxillary generators that can be passed to blindrawtransaction. Note when using this for claiming l-usd when the option is exercised, the prevout information for the exercise transaction must be supplied instead of the contract prevout.

./target/debug/options-elements call addcontract --expiry=2021-05-30 --strike=100.0 --addr=$ADDR --prev-txid=$TXID --prev-vout=$VOUT --type=exercise --funded-tx=$FUNDED

4. Blind the tx. Note that Step 3 also outputs aux gen list that is to supplied as third parameter. This blinds all outputs of the transaction that are marked for blinding

BLINDED=$(e1-cli blindrawtransaction $UNBLINDED true  <aux_gen_list>)

5. Sign the transaction. This will only sign inputs that are owned by the wallet. This cannot finalize the covenant input which we will do in final step.

SIGNED=$(e1-cli signrawtransactionwithwallet $BLINDED | jq '.hex' | tr -d '"')

6. Finalize the transaction. This does all the covenant miniscript magic and satisfies the covenant input. Outputs a raw hex can be sent by sendrawtransaction

./target/debug/options-elements call finalize --expiry=2021-05-18 --strike=100.0 --signed-tx=$SIGNED --type=exercise

7. Send the tx

e1-cli sendrawtransaction <hex>

Cancel, Expiry and Claiming Bene

Claiming expiry, cancelling and claiming bene only differ in the first step(Step 1 above).

1. expiry options-elements call expiry <args>
2. cancel options-elements call cancel <args>
3. claimbene options-elements call claimbene <args>

While Steps 2 -6 remain the same, user must be pass the type of operation --type=exercise/cancel/claimbene/expiry accordingly.