One article to understand the NFT call option agreement Hook

By William M. Peaster

Source: Bankless

Hook is a decentralized NFT call option protocol.

The mechanism of NFT call options is slightly different from call options in mainstream finance, but the overall idea is the same. In other words, NFT call options allow investors to "go long" NFTs, betting that the price of a certain NFT will rise within a specific time window.

Therefore, Hook is an on-chain protocol involving two main stakeholders, namely traders and NFT holders. The project gives traders the opportunity to benefit from price increases in collections of NFTs, while allowing NFT holders to earn royalties on their NFTs and/or sell them at a satisfying price.

Hook's operating mechanism

Suppose you hold a Doodle with a current value of 10 ETH, you can deposit this NFT into Hook and specify the exercise price (the NFT can be purchased at this price) and the expiration time (the date when the exercise price can be paid), so that " Sell" or create NFT call options.

At this point, Hook will host your Doodle and mint a separate ERC721 NFT for you to create and represent your options position. For example, you can set a strike price of 12 ETH, which expires one month from today.

As an option seller, you can then sell the option NFT with a certain premium, such as a premium of 1 ETH. Anyone who purchases this NFT will become the new owner of the option position and, if the bet is successful, will profit from the price increase of the NFT.

Assuming the bet is successful, the value of the Doodle NFT appreciates to 14 ETH, which is 2 ETH higher than the exercise price of 12 ETH shown in the figure above. The option creator will earn 12 ETH from the sale at the strike price, plus the 1 ETH option premium for selling the option. Instead, the option buyer will pay 1 ETH for the option, and in this example, between the strike price of 12 ETH and the price of 14 ETH, they earn a difference of 2 ETH on this part, a net profit of 1 ETH.

In this case, the option buyer changed the invested 1ETH into 2ETH in this investment, and the rate of return reached 100%, without having to bear the full market value of the NFT. However, it should be noted that options are risky. If the value of Doodle depreciates when the option expires, or does not appreciate to the strike price, the buyer will lose 1 ETH of the premium (while the seller will gain 1 ETH).

What can call options bring to the NFT market?

In a July 2022 post titled " Why Call Options Make Sense for NFTs ," Hook founder Jake Nyquist lays out the case for how protocols like Hook could benefit the NFT space. His three main points are as follows:

1. NFT call options can help stabilize NFT prices, the argument being that "option assets are locked in the Hook protocol's vault, reducing the number of NFTs available in the market and floor prices in bear markets."
2. Creating NFT calls offers a new way for large collectors (such as Project Treasury) to earn yield on idle NFTs, since "sell covered calls (hold spot, sell calls) [can] be used for all to generate a continuous stream of royalties."
3. NFT call options offer a capital-efficient way for traders to be long NFT collectibles.

Of course, Hook has only just launched on mainnet, so it remains to be seen how the protocol will realize these benefits. However, these three basic goals are at the heart of the project.

How to use Hooks

Hook only supports a limited number of NFT series when it goes live. At the time of writing, Hook mainly supports Crypto Punks. Therefore, there are not many actual uses at present, but Hook will expand to more NFT series in the future, and it is expected that there will be more liquidity inflows in the next few months.

In the meantime, if you want to learn more details about using the Hook options market, check out the project's guide on creating options and buying calls .

summary

The launch of Hook represents the latest achievement in the field of NFTfi derivatives. To be sure, this space is still very experimental and users should treat it with caution, but it is worth noting that Hook itself is also very cautious, and its smart contract auditor Sherlock has insured it for up to $10 million. With the protocol in place and insurance in place, let's see where Hooks can go from here.