Bitpush is 50 times bigger than push. Have you seen the real blue ocean of DeFi in 2021? -

In the future, the derivatives market will flourish, and the coexistence of multiple strong players will be an inevitable trend in the development of the industry.

After last year's accumulation and precipitation, decentralized exchange Uniswap and lending protocol Compound have achieved breakthroughs at different levels with the development of DeFi last year, but they have not been widely used in the field of derivatives. It should be noted that in the traditional financial field, the volume of derivatives is 40 to 60 times that of spot, while in the crypto market, the trading market value of derivatives accounts for less than half of the volume of the entire digital asset market.

In contrast, there is still a huge room for imagination in the development of derivatives, and this situation has also seen the dawn this year. A simple example is that under the momentum of Bitcoin's surge this year, due to the instability of value, many institutions have begun to try to use derivatives to avoid risks, discover prices, arbitrage and hedge, and obtain more value capture. It can be said with certainty that the hotter the crypto assets and DeFi are, the stronger the demand for derivatives will be, and the speed of its market penetration and transmission will continue to accelerate, thereby stimulating the continuous emergence of new species in the market to fill the gaps and needs of the existing market.

The definition of financial derivatives generally refers to a bilateral contract that has a transaction swap relationship between two parties or transfers risks to traders. It gives the holder a certain obligation or the option to buy or sell a financial asset. Its value is determined by the price of the financial asset it trades. Options, futures, swap contracts, etc. belong to this category. In the field of DeFi, the definition of derivatives is roughly similar to the above definition. At present, from the perspective of relatively fair mainstream types, there are mainly trading options and futures, synthetic assets, etc. Decentralized insurance and oracle tools are still a very large separate sector. Let's still understand this track through the mainstream derivative types.

Trading derivatives

The first category is Bitcoin futures products. According to data from Glassnode, a crypto market data aggregation service provider, Bitcoin futures trading volume has been growing steadily since November last year. The current average daily trading volume of Bitcoin futures has exceeded US$180 billion. In addition, Bitcoin options trading has also surged and will usher in a new record level this year. At present, some exchanges have achieved regular custody of more than US$1 billion in average daily trading volume. The growing trading volume has also promoted more institutional units to start trying such products. According to public news reports, in early March, Goldman Sachs announced that it had restarted its cryptocurrency trading desk and began to provide Bitcoin futures and non-deliverable forward (NDF) trading services to customers; afterwards, Giant Steps Capital, the largest quantitative asset management company in Latin America, also announced that it would launch a fund focused on investing in Bitcoin and other digital asset futures, and use machine learning strategies to trade Bitcoin and similar asset futures. Bitcoin options and futures trading is entering the incremental market. The more positive news is that in addition to Bitcoin, various exchanges have launched derivatives trading of other cryptocurrencies. It is also developing.

In addition to centralized exchanges and financial institutions, another category is the development of decentralized derivatives protocols. Including dYdX, Kine, and Injective are all projects that conduct futures trading. dYdX was born in 2017 and is a very early DeFi derivatives protocol. It adopts the trading method of off-chain order book and on-chain settlement. In addition to perpetual contracts, it also includes functions such as lending and leveraged trading. At present, the perpetual contracts of this project are running on Ethereum's Lay1, and the Lay2 mainnet test is also being carried out simultaneously. Kine is a model similar to a centralized exchange. It adopts the "on-chain transaction" and the "Peer to Pool" transaction method promoted by Synthetix. Trading users can have unlimited liquidity and zero slippage. Because the transactions in Kine occur off-chain, they are not greatly affected by the performance of the public chain, ensuring the transaction speed. The disadvantage is that Kine cannot be called a decentralized protocol party, and there are certain security risks.

Representative projects of options include Opyn, Hegic, etc. The Opyn protocol allows users to create call or put options. Users can buy and sell options with a given product, delivery time, and strike price. In terms of the trading time of options, Opyn adopts European cash settlement options, that is, option holders do not need to take any measures on or before the expiration date. The delivery will be automatically executed upon expiration, and the products are all priced in USDC. Option sellers must have 100% pledged margin as collateral to cope with market risks. Hegic solves the liquidity problem of option products through a liquidity pool. Currently, it includes BTC and ETH options. Users can provide funds in Hegic to form a liquidity pool. These funds will be used to automatically sell call and put options and become the buyer's counterparty. While assuming the risk of options, liquidity providers also enjoy the benefits of selling options.

Among perpetual contract derivatives, dFuture can be regarded as an innovative protocol. The protocol does not adopt the traditional order book trading model, but solves the problems of trading depth, liquidity and control through the innovative "constant sum formula". It also introduces multiple external oracles and decentralized exchanges to feed prices to obtain the current quotes of trading categories, and forms an index price through weighted average. To the greatest extent possible, it guarantees LP's risk-free profit. At present, the platform has been deployed on the HECO chain and the BSC chain, and has initially stabilized. Because it relies on the traffic attribute advantages of the trading public chain, it has also taken over most of the customer traffic driven away by Ethereum congestion, so the overall development is still very smooth.

Synthetic assets

Synthetic assets are a simulated expression of the original assets by mapping almost all priced assets through asset protocols, but they are not the original assets themselves, nor do they represent ownership of the asset in the real world. They are merely anchored to the price of the asset, and are an alternative expression of existing assets in a parallel world on the chain. At present, stocks can be synthesized, as well as fiat currencies, gold, BTC and other assets. The most representative of the synthetic asset track is undoubtedly Synthetix, a synthetic asset issuance protocol based on Ethereum. It supports synthetic assets including fiat currencies, cryptocurrencies, and commodities. It is mainly based on the debt pool method, tracking the underlying assets, and supporting users to provide collateral in the form of SNX Tokens to mint synthetic assets. In more than two years since its birth, the total locked position has exceeded US$3.2 billion. It ranks first in the list of synthetic assets, with a huge gap from other projects.

(Data source: Debank)

Another synthetic asset with a fierce rise is Mirror. After several US brokerages successively announced restrictions on opening positions in GME and AMC stocks on Robinhood, the brokerage platform where investors fought together last month, the synthetic asset platform took the opportunity to launch a vote and launched synthetic asset transactions corresponding to GME stocks, providing investors with trading needs with new possibilities that are not restricted by centralized platform transactions. As a newcomer, Mirror has developed rapidly and has become the largest synthetic US stock trading platform. The platform has launched more than 20 synthetic assets, covering US stocks, encrypted assets, commodities, etc. In general, Mirror, which is one step ahead in market demand insights, is constantly emerging with opportunities.

Another decentralized synthetic derivatives platform, Supercash, claims to have the ability to make money, which allows the free addition and free trading of various digital asset derivative pairs in a single currency. It supports trading pairs including BTC, ETH, ERC-20s, gold, stocks, etc. The oracle service has also been introduced from the initial external to the current independent research and development. The platform's greater outstanding ability is the ability to synthesize automatic market makers, which allows liquidity providers (LPs) to only provide one asset, and the other asset will be automatically synthesized by smart contracts. That is, among the assets you provide, half of the assets will automatically create futures positions through contracts, which greatly reduces the user's participation threshold. In addition, the automatic liquidator smart contract it introduced to assist in liquidation is a passive market maker model similar to AMM. Since anyone is allowed to provide liquidity through the agreement to become an automatic liquidator, based on the customer base of a large number of liquidators, the platform has further made the liquidation pool business into a separate product, providing liquidation services for other DeFi projects.

Taking advantage of the borderless nature of the crypto market and the innovative combination of market elements, the general public is able to participate in asset trading. Synthetic assets, a derivatives track, have great potential. Specifically, with the help of blockchain decentralized trading platform operators, access without permission and other features, it simulates hot investment scenarios on the chain, providing ordinary investors with low thresholds to trade diversified asset categories such as US stocks and gold. In addition, synthetic assets are almost unconstrained in the richness of assets, and can cover gold, crude oil, US stocks and even foreign exchange markets. There is no license for trading products, and any asset with a public price feed can be traded. This is very in line with the development of traditional finance and the existing DeFi market.

In addition to the futures, options, and synthetic assets mentioned above, there are also other types of derivatives such as augur prediction markets, Nexus Mutual insurance, and interest rate swaps. In fact, we have found that DeFi derivatives are no longer just serving native crypto assets on the chain, but are constantly exploring unknown possible areas, making assets on the chain and all assets anchored to real-world asset transactions simple with more open and transparent infrastructure and more diverse and fair financial distribution models, and truly ensuring users' safe and secure transactions.

Compared with the substantial promotion costs of most derivatives in the traditional financial field, derivatives in the DeFi field are created at almost zero cost and quickly pushed to the trading market, because the DeFi ecosystem includes oracle services, asset protocols, transaction layers, data layers, clearing layers and insurance layers, and derivatives trading layer ecological components, which can achieve highly free financial Lego combination innovation drive. Derivatives creators can leverage more market opportunities with fewer resources, and the unilateral innovation and improvement in the field of derivatives also makes the network effect of the entire DeFi ecosystem stronger. It directly brings a very different experience to the entire ecological construction and user awakening. In the future, the derivatives market will be flourishing, and the coexistence of multiple strong players in the future will also be an inevitable trend of industry development. In short, the future of DeFi derivatives will exceed the development potential of traditional finance and release unlimited possibilities.