In an European option where the option holder cannot exercise their option prematurely before expiry, the option holder typically pays an option premium at t=0, and waits until maturity to determine if the option is in-the-money (ITM) or out-of-the-money (OTM).

In the event the option is ITM, the option holder exercises the option and profits an amount = the difference between spot price and strike price. In the event the option is OTM, the user gets nothing in return.

Because the option holder has to fork out the entire option premium at the start of the option lifecycle, capital is locked up and the holder has to manually unwind the position in the market. In the event that the market swings in a wildly unfavourable direction to the option holder’s view, the option holder will find that the value of unwinding the option would be close to 0, as the intrinsic value is 0 and time value is close to 0. In the illustration above, the option holder is stuck with a sunk cost of -10 which is the option premium.

PAYG (Pay-As-You-Go) Model

In the PAYG model, the option holder is given a chance to hedge his risk of buying an option by paying for the option in instalments aka Buy Now, Pay Later (BNPL) options.

Compared to the traditional model of option sales, the option holder is able to observe the market, and in the event the option goes deeply OTM, the holder can choose to stop paying for the option if he holds the view that the market will continue to trend unfavourably until maturity. In the model below, the user achieves a lower loss up till t=7 compared to the traditional model.

Value Proposition Behind PAYG Options

Consistent yet sustainable returns: In this model, the upside for when the option is ITM is reduced, but the downside when the option is OTM is also reduced. Hence this results in a lower range of payouts for the holder and is more suited for extremely uncertain markets. In a highly uncertain market, there is value for option holders to strive for lower risk, lower return strategies to yield consistent yet sustainable returns.

Capital efficiency: Although buying options are inherently more capital efficient than outright longs and are sometimes viewed as leveraged with the credit risk being borne by the option buyer, the PAYG model further enhances an option's capital efficiency by allowing partial funding at the onset.

Transfer of credit risk: . Instead of forking out the full premium for options, buyers will be able to partially fund the option at the start of the tenor, with the remainder of the option risk being borne by the protocol. This results in a partial shift of credit risk from the buyer to the seller. In the traditional model, the option buyer takes on the credit of the option seller. If the option seller does not honour the option contract, the buyer may be left with little to no recourse in the absence of a clearing house. In the PAYG model, because the option seller relies on the option buyer to fulfil an obligation to continue paying the price of the option, some of the credit risk is now offset from the buyer to the protocol.

Real-time market feedback: The option buyer is able to continually monitor the market outlook and decide the default on the option purchase. If the market swings in a wildly unfavourable direction to the option buyer's initial view, the option buyer may re-assess the position and choose to cut loss by wilfully defaulting on the option premium. Option default risks are appropriately priced in via structuring models in collaboration with market makers.

The simplification

Options are not widely understood, and even those with the theoretical knowledge of option pricing may find trading in the options markets daunting, because in essence, option trading requires not only a correct view on the direction of the market, but equally important is the correct velocity at which market prices will move.

This is why we have created the PokPok protocol, which aims to make options investments palatable and easily understood by all. In addition to pioneering the BNPL model for options, education via gamification and entertainment via fun games is something we seek to achieve.

Pricing

A simpler way to break down the economic theory behind BNPL options is to think about the insurance markets. The economic principle behind BNPL options is essentially allowing users to buy market-priced insurance on their options should there be a need to cut losses and default.

• L = number of losing positions

• F = % of defaulted losing positions

• Z = total number of options purchased in protocol

• P = normal price premium of an uninsured option

• p = additional premium for BNPL options

• d = % downpayment on BNPL option premium

• s = remainder of servicing fee for BNPL options

• W = number of winning positions

• A = % of winning positions

The theoretical pricing formula for BNPL options is given by the following formulae:

Premium charged for BNPL option = P(1+p)

Pricing additional premium: pZ = (1+p)(P)(AW) + (1+p)(P)(d) - (FL)(s)

p = [(1+p)(P)(AW) + (1+p)(P)(d) - (FL)(s)]/Z

The value of p will have to be constantly rebalanced and subject to regression testing to determine the fair market price.

Economics

The above pricing model achieves two very important economic aims in the value proposition of this model, which is to increase capital efficiency and redistribute returns such that, given that no single investor can always make the right directional call on markets, buffer downside risk by capping upside returns. This narrows the standard deviation and allows a more consistent level of returns over time.

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Chicken NFTs are in-game pets that can generate profits, golden eggs, and more. They are backed by PAYG Options. There will be a limited supply of mintable chickens at the start, but this will gradually increase over time.

Purchasing a Chicken

Users can purchase chickens from the Vendor, which would give users a quote and an estimation of how much food and the intervals that chickens have to be fed at. When you purchase a chicken, you are required to make a call on the future direction of the markets (e.g. you think ETH will be higher than current price in 1 weeks time). If your call turns out right, you will be handsomely rewarded if you keep your chicken alive. If your call turns out wrong, you may choose stop feeding your chicken, and let your chicken starve and die.

Feeding & Monitoring of Chicken

Once users have bought chickens, they have to feed their chickens at fixed intervals to ensure that the chickens stay alive. If a chicken is not fed on time, they will starve and die.

Chickens have 2 key indicators:

• ​Health Bar: Shows how profitable the chicken is. A healthy chicken will have health bar more than or equal to 0, and a diseased chicken will have health bar statistics less than 0.

• ​Satiation Bar: Shows the number of feeds left until the chicken NFT starves. The higher the satiation bar, the higher the chicken can stay alive without being fed. Users can increase their chicken's satiation bar by purchasing meal plans from vendors. Once a meal plan is purchased, it cannot be refunded and will be used to feed the chicken until it is fully used.

Harvest Day

On harvest day, healthy chickens may take one of the following actions

• Explode the chicken to receive profits

• Keep the chicken & harvest golden eggs

• Engage in chicken battles to bet your profits

Diseased chickens will not be eligible for any of the above actions. Diseased chickens can be burned to return a small random number of Golden Eggs.

HATCH

Minting a chicken NFT represents the user opening an options position. When minting a chicken NFT, users have to pick a direction of an underlying asset (e.g. Ethereum). They are required to pay a certain percentage of the chicken's initial value (premium) as downpayment, and can service the rest of the premium through the life of the chicken NFT.

FEED

Feeding the chicken NFT represents the servicing of the option loan. Chickens are living and breathing creatures, and just as humans need 3 meals a day, they need to eat food daily. Players have to feed their chickens regularly with the specific feed sold by the vendor. to ensure that they are kept alive and for a chance of the chicken's being healthy.

Meal Plan represents how much chicken feed is required to keep the chicken fed and alive till the expiration date. There will be an indicator of how many feeding sessions are left, which is also indicative of how close expiration is.

Once a feeding session is missed, the chicken NFT will starve and the NFT becomes worthless. Missing a feeding session is the equivalent of users defaulting on their option payments. Users can choose to pre-pay a certain amount of feed so that there is buffer for missed feeding sessions.

BURN

Burning a chicken represents taking profit from the options position.​​ Health is an indicator of how much the chicken may be worth on harvest day, and can be tracked either visually or more accurately by the health bar in the coop. If a chicken is healthy by harvest day, a user can burn the chicken NFT and cash out his profits. After exploding a chicken NFT, the NFT is burnt permanently.​

HARVEST

Farming allows users to share in the protocol revenue by delaying gratification of profits. Only healthy (ITM) chickens are able to be staked for Golden Eggs. Users would have to evaluate whether it would be worth accumulating healthy chickens for the farming of Golden Eggs, or to harvest the healthy chickens and roll profits into creating a larger amount of healthy chickens.​

FIGHT

Healthy chickens can be pit against one another in a high stakes high return battle. This enables users to increase their profits by siphoning profits off other healthy chickens. Winning chicken fights increases a chicken's level and allows it to initiate higher stakes battles against other chickens. Chickens are randomly matched according to both dollar value wagers and within a specific band of levels and timeframe, to prevent gaming of the system where a single bad faith actor constantly pits two self-owned chickens together to raise the level of one chicken.

Satiation Bar Mechanics

The satiation bar is used to gauge how long chickens can stay alive for without being fed. Once a feeding session is missed, the chicken will starve and die. To minimise accidental occurrences, users may purchase multi-day meal plans for chickens so increase their satiation bar.

Health Bar Mechanics

The health bar can be used to assess if the chicken is healthy (profitable/ITM) or diseased (unprofitable/OTM).

• If a chicken is neither profitable nor unprofitable, the health bar would indicate 50%.

• If the chicken is diseased, the health bar would be less than 50%, with health decreasing in accordance with how unprofitable the position is.

• If the chicken is healthy, the health bar would be more than 50%, with health increasing in accordance with how profitable the position is.

Healthy chickens can be harvested for cash or staked for Golden Eggs. Diseased chickens kept alive until maturity can be exchanged for a random number of Golden Eggs.

THE GOLDEN EGGS

Golden Eggs do not hatch into chicks, but they are much more valuable, as they allow users to share in the protocol profits.

How to get Golden Eggs: Healthy chickens reared till maturity can be staked in the protocol to generate profit-accrual tokens called Golden Eggs. Diseased chickens can also be sacrificed for a small amount of Golden Eggs. For each transaction that occurs in the Pokpok protocol, a percentage accrues to a community pot which would be claimable by community members who burn their Golden Eggs.

How to use Golden Eggs: Profit-sharing is time-gated within a week, hence users who burn their Golden Eggs will be eligible for profit-sharing from the community pot in one particular week. Once Golden Eggs are burned, they are removed from circulating supply permanently. New Golden Eggs can only be obtained via the staking of healthy chickens or sacrifice of diseased chickens. The entire community pot would never be claimable as a remainder portion is always set aside as foundational funding for the next round of profit-sharing.

Distribution of profits: The percentage of the community pot each member gets is dependant on the number of Golden Eggs burnt for a particular week, weighted among the Golden Eggs burnt by the entire community for that particular week. Profits here are not consistent and users would have to determine the best strategy of accumulation vs burning of their Golden Eggs.

The OG chickens

OG Chickens: The first 2,000 healthy chickens will receive the title of Free-Range , and will enjoy the best production rate of Golden Eggs. The next 2,000 healthy chickens will receive the title of Cage-Free and have a slightly elevated production rate of Golden Eggs. The rest of the chickens will not receive OG titles and will have an average production rate of Golden Eggs.

The OG titles are refreshed on a rolling basis, and if an earlier token ID harvests their chicken, the next token ID in numerical order will be promoted to the status of an OG chicken.

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​Merging the best of NFTs, options, and tamagotchi-styled gaming. This protocol was conceptualised with the aim of bringing real sustainability to the Play-to-Earn (P2E) gaming industry, where earnings from games are backed by a stream of cash flow derived from market activities such as options trading.

PokPok is a gamified options protocol whereby every stage of an option’s lifecycle is represented by an in-game action related to caring for your chicken NFTs. These actions are minting (entering a position), feeding (servicing the position), harvesting (taking profit), and farming (profit-sharing).

In future versions, we will roll out battling features, which further add game theory mechanics to option investments, allowing potential winners to double down on their earnings.

The basics

The primary game for PokPok is a semi-idle, pokemon-styled game where players assume the role of a chicken caretaker. Players can purchase chickens at the vendor, and the main objective is to keep the chicken healthy until it is time for the chicken to be harvested, balancing feeding the chicken and accounting for external factors that might affect the chicken's health.

Upon reaching harvest day, the chickens can be harvested for profits if they are healthy, or they would be burned for a small amount of returns if they are diseased.

If a user's chicken is healthy, they can also choose to keep the chicken for a longer period of time, and accumulate golden eggs, or send their healthy chickens to battle to increase their returns should they win.

The economics

We believe that we have designed an inherently sustainable P2E model that is both fun and profitable for players, by breaking down traditional investments that may be overly complicated into a simple and easily understood game. Our economic model can be found below:

Pok Pok's economic model:

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