Decentralized Finance, or DeFi, has opened up a world of possibilities for financial instruments, and one of the most exciting developments in this space is the emergence of DeFi derivatives projects. Its adoption is very needed for such a volatile and uncertain environment as crypto markets.
In this article, Blaize team has gathered the top DeFi derivatives project and prepared a list of protocols that successfully run the market. Find the advantages of creating a decentralized derivatives platform or see how to gain more interest and save your crypto.
Why DeFi derivatives in crypto?
Cryptocurrency derivatives are financial instruments that enable hedging against future possibility of price change. This works the same for both traditional and crypto markets. Yet, DeFi derivatives bring a few important advantages that take trading to another level. Read: Blockchain Technology Trends
Smart contract execution
DeFi derivatives protocols performance is completed by finest work of smart contracts. Those allow for creation of tokenized derivatives contracts without a third party intervention.
See other advantages of smart contract adoption in this article.
The agreements are cryptographically encoded which gives a higher level of security and mitigates malicious activities. In addition, it allows for adaptation of newer trading instruments such as leverage to the crypto market.
THINKING THAT SMART CONTRACTS ARE NECESSARY FOR YOUR BUSINESS? FIND OUT MORE ABOUT SMART CONTRACT DEVELOPMENT.
The concept of leverage and margin trading
Margin trading is an act of buying securities (derivatives) for a borrowed money. In crypto derivatives there is a concept of leverage instead of borrowing.
As we all know the volatility of the crypto market is off the charts and stakeholders use this type of contracts to manage risks. On one hand, miners can use crypto derivatives to get some certainty about their future profits and for loss mitigation. On the other hand, traders use it as a speculation tool.
The leverage is defined as a collateral for a borrowed amount of needed assets. In order to take an x2 leverage the one needs to collateralize either crypto asset (ETH) or stablecoin (Dai) to secure the transaction in case of price falling. The collateral will be liquidated in case the price of an asset you are trading on will go down.
An easy example of x2 leverage might be described as follows: you are sure the current price of DOT will go up. You collateralized a certain amount of Dai to be able to get a x2 risk-to-return on the price of DOTs.
If the price goes up by $1, you will take x2 (so $2) profit as far as you have leveraged for such a rate. But in case you were wrong and the price goes down, the contract will execute your collateral in a proportion to the leveraged amount.
The possibility of leveraging is an advanced technique of margin trading which is considered a risky one. But worth noting, that in case of short term price fluctuations and such a volatile environment as crypto leverage can bring a fortune if used appropriately.
Essentially, parties trade such contracts, without having to actually own any crypto asset. Worth mentioning, there are several types of these contracts. So, let’s walk through the DeFi derivatives list and take a look at the most popular ones:
Read also: How to Perform DeFi Security Audit.
Futures
DeFi futures is a kind of agreement between two parties involved that helps to determine the terms of the future deal beforehand. This agreement obliges them to buy and to sell some particular crypto asset at a given price before a specific date in the future, the so-called expiration date. One important notion is that the deal is supposed to be concluded at some defined price, the current market price is irrelevant in this case.
Options
The next classical type of contract is called DeFi options. Basically, it’s quite similar to the futures contract where stakeholders agree to make a deal at a specific price by a set date. However, there is one crucial proviso: there is no mandatory condition to purchase(call options contracts) or sell(put options contracts) an underlying asset, a stakeholder is just able to choose whether to do it or not.
Swaps
One more commonly used type of contract is perpetual swap. Like in the case with futures and options it allows you to bet on the future price movement of an underlying cryptocurrency. The main difference here is that swaps don’t include any settlement or expiration date and traders can keep their positions indefinitely. Using swaps, they’re betting on future price uncertainty without worrying about the expiration date and ready to price changes.
Many companies see great potential and demand in this market and strive to take their place. There are a lot of platforms that provide opportunities and tools for this kind of trade. Let’s take a look at a brief overview of some of the major players.
Read Also: How to Avoid Impermanent Loss and Front-running Problem in DeFi.
OPYN
OPYN is one of the most popular decentralized options platforms. Its DeFi protocol is built initially for providing crypto insurance solutions within the DeFi ecosystem. It protects users from technical and financial risks while their investments in such DeFi ecosystems as Compound and Uniswap. And using DeFi insurance on this platform people take steps to prevent the loss of their assets.
OPYN platform is implemented on the top of Convexity protocol. It allows users to operate with options on ERC-20 using native oTokens. And its execution is ensured by Ethereum smart contracts.
The number of various decentralized investment solutions has increased recently and the market has become in need of projects that help users to mitigate risks. Also, market participants use OPYN to create put and call options as an opportunity to get income on speculations.
SEE WHICH TOOLS YOU NEED FOR DEFI DEVELOPMENT.
Synthetix
One more popular blockchain platform for derivative trading in the space of decentralized finance is Synthetix. This protocol issues tokenized crypto derivatives called Synths for such assets as cryptocurrencies, commodities, stocks, fiat currencies, and indexes. In essence, synthetic assets are blockchain powered financial tools that exist in the form of Ethereum based smart contracts.
These contracts follow price valuations and pay participants the returns of this asset they are issued for. Synthetic derivatives are sort of digital substitutes that relieve you of the need to own an underlying asset. Moreover, their use is not limited to the Synthetix platform. The fact that Synths are issued on such a platform as Ethereum empowers you with the possibility to provide them as a liquidity into pools on various DeFi ecosystems and get rewards.
Synthetix’s native token, SNX, works as collateral against synthetic assets minted. It means that this collateral is kept to cover potential losses users may have while trading. The platform also has its native stablecoin sUSD that is in use for paying all transaction fees. In turn, these fees are paid to the holders of SNX and miners of synthetic assets. Ultimately, all these measures incentivize the creation of Synths. broad the usage of DeFi financial tools on a wider range of assets.
Read Also: AMM Types & Differentiations Examples Use Cases.
Hegic
Hegic protocol is DeFi trading protocol based on Ethereum blockchain and powered by liquidity pools and hedge contracts. This is an options trading platform where traders can engage for income, or provide liquidity. It means that they stake tokens in the pool in order to receive a part of settlement fees. This platform is attractive for users because they can trade without any registration and passing KYC.
Trading on Hegic is non-custodial which means that you don’t have to deposit your crypto at this platform. You just need to connect your Ethereum wallet. Using Hegic, you can trade put/call options for such assets as ETH and WBTC and you’re able to choose a strike price for them. As an example with other DeFi derivatives platforms, people use Hegic for both goals – price speculations and hedging positions.
This platform has a self-titled ERC-20 native utility token HEGIC. It ensures the distribution of commission fees between its holders. They can also leverage HEGIC tokens for the governance of the ecosystem. Token holders vote to determine rates, types of assets HEGIC supports, fee sizes, the strike price multipliers.
dYdX
dYdX is a decentralized non-custodial crypto exchange. This platform allows users to trade without any middlemen via Ethereum smart contracts and provides opportunities for perpetual, margin, and spot trading. dYdX offers 25 pairs for perpetual swap trade including BTC-USD, ETH-USD, LINK-USD, AAVE-USD, and others.
What’s interesting is that all trades are settled on a Layer 2 solution called ZK-Rollup which dYdX has implemented with help of StarkWare platform. As you know the scalability of Ethereum Layer 1 is quite limited and this helps significantly reduce gas costs, decrease trading fees and minimize trade sizes.
Read also: Curious about the differences and advantages of different blockchain layers? Dive into our article on layer 1 vs layer 2 to get a comprehensive understanding.
The model of dYdX provides users with a global lending pool instead of individual borrowers and lenders making and accepting loan offers. There is a special lending pool for each particular asset and it is run by a smart contract. And all the operations can happen at any time without needing to wait for matches between two parties. The protocol has its own native token DYDX that the community uses for governance.
UMA
UMA (Universal Market Access) is an open-source platform that seeks to provide users with versatile access to financial markets. Its decentralized infrastructure allows parties to issue derivatives on underlying assets without the need to hold these assets. On UMA you can build synthetic assets of stocks, commodities, and cryptocurrencies in the form of self-contained financial contracts using the Ethereum blockchain.
Among other products, UMA offers put/call options on any ERC-20 token. To create this type of derivative on UMA you should lock your collateral in the form of ETH, DAI or another allowed asset. Platform’s native token UMA token can be broadly used for governance within the ecosystem and voting on various improvements of the ecosystem.
Worth mentioning that DeFi platforms leverage special software called oracles to transact data from the real world to smart contracts. In the case with UMA, this project doesn’t rely on external oracles and uses its own one to receive the info about current prices of assets. It consists of two parts – Optimistic Oracle and Data Verification Mechanism.
Read more about UMA, OPYN and other dApps in our previous article Top Underestimated DeFi Apps
Mirror Protocol
One more interesting solution is offered by Terra ecosystem. Its Mirror Protocol allows the creation of synthetic assets called mAssets. These synths are tied to the stock market and track the price of US-based publicly traded US companies, with real-time confirmation by an oracle. You’re also able to trade mAssets in Terraswap and Uniswap liquidity pools. In order to create a new synthetic asset, you have to lock Terra’s stable coin TerraUSD as collateral.
The Mirror Protocol is under the governance of the community of this platform. Surprisingly, the native MIR tokens were not allocated to the team and investors. They were distributed among users as a reward for providing liquidity. And they can leverage these tokens to propose and vote on changes on the list mAssets to be minted, modifying the ratio of collateralization, and optimizing trading fees.
The world of informational technology evolves constantly and brings miraculous changes in all the industries and spheres of our lives. And the financial industry is no exception. In recent years it has been fundamentally altered with the advent of blockchain, crypto, smart contracts, and DeFi.
In the application to such conventional financial tools as derivatives, it creates tremendous opportunities that users had missed before. Along with decentralization, it revolutionized this field, lowering the threshold for investments. Now ordinary people can access huge financial markets through DeFi derivatives applications and benefit from such powerful financial instruments that used to be the privilege of professional investors.
Ready to launch your own dApp? Let’s find out more about the decentralised dApp development and start the development process with Blaize!
FAQ
- How do DeFi derivatives work?
DeFi derivatives are decentralized financial products that derive their value from underlying assets, such as cryptocurrencies, stocks, or commodities. They enable users to trade, hedge, and speculate on price movements using smart contracts on blockchain platforms like Ethereum. Common DeFi derivatives include futures, options, and swaps.
- What are the risks of DeFi derivatives?
Smart contract vulnerabilities: DeFi derivatives rely on smart contracts, which may contain bugs or security flaws
Market volatility: The value of underlying assets can fluctuate significantly, affecting the value of derivatives
Counterparty risk: Although minimized in DeFi, counterparty risk may still exist in some cases
Regulatory uncertainty: DeFi derivatives may face future regulatory changes that could impact their functionality
- How can I invest in DeFi derivatives?
To invest in DeFi derivatives, follow these steps:
- Acquire a compatible cryptocurrency, such as Ether (ETH) or a stablecoin
- Set up a wallet that supports DeFi interactions, like MetaMask or Trust Wallet
- Connect your wallet to a DeFi derivatives platform, such as Synthetix, dYdX, or Injective Protocol
- Trade or invest in the desired derivative product following the platform’s guidelines