List of DeFi derivatives popular among institutions: Synthetix, Hegic, Serum, etc. (www.blockcast.cc)

The development of derivatives trading started relatively slowly compared to spot trading, and as the market enters a highly volatile cycle, derivatives will gradually keep up with the pace of spot trading.

Original title: ” DeFi Study Notes丨Having been sought after by VCs, what happened to decentralized encryption derivatives? 》
Author: Free and easy

As one of the most complex and mature tools in the financial market, the magic power of derivatives is undoubtedly huge. Its high leverage and other characteristics have attracted a large number of risk-conscious traders who pursue high returns, according to data from the Bank for International Settlements (BIS) It shows that in the first half of 2019, the total outstanding value of derivatives contracts was approximately US$640 trillion, and the total market value of all these contracts was approximately US$12 trillion.

In the cryptocurrency market, centralized derivatives trading has long become the main source of income for various exchanges. We have heard many stories of cryptocurrency contract trading that became rich overnight, and we also know that many of them have broken their homes and died because of liquidation. The tragedy of the world, we all understand that the only thing that can steadily realize profit is the trading venue that provides these trading tools and collects processing fees.

The decentralized finance (DeFi), which is in the imitation stage, aims to allow developers to rebuild these financial tools in a decentralized environment through smart contracts, which may eliminate some of the drawbacks of centralized platforms, such as: custody, Opaque, easy to insert pins, etc. Of course, the ultimate goal of developers is naturally to compete for this hugely profitable market.

In this article, you will learn:

1. Common financial derivatives instruments;
2. A brief history of centralized crypto derivatives;
3. Investment institutions rush to deploy DeFi derivatives applications;
4. Comparison of common DeFi derivative applications
   1. Synthetix
   2. dydx
   3. DerivaDEX
   4. UMA
   5. Perpetual Protocol
   6. Hegic
   7. opyn
   8. Serum
   9. Futureswap
5. Potential risks faced by DeFi derivatives agreements
6. Conclusion

Common financial derivatives instruments

In finance, a derivative instrument is a contract whose value comes from the performance of the underlying entity. The contract stipulates the specific conditions for both parties to conduct the transaction. These conditions include:

1. Scheduled time period;
2. The result value of the entity and the definition of the basic variable;
3. Contract obligations and notional amounts;

The entities defined by derivatives contracts can be cryptocurrencies, commodities, stocks, bonds, interest rates and currencies. In order to understand the true utility of financial derivatives, we need to study different types of contracts. We can make several classifications here. First, We can divide derivatives trading into two markets:

1. Over-the-counter transactions (OTC): The parties directly and privately sign these contracts, and the underlying assets are not in any exchange. For example, investment banks usually use OTC derivatives.
2. Exchange trading: As the name suggests, these derivatives are traded on the exchange, and the contract terms are predetermined and public.

Now, let us understand the common types of financial derivative contracts, including:

1. CDO: Debt-backed securities (CDO) is one of the causes of the 2008 financial crisis, so it is also a notorious type of financial derivatives;
2. Credit default swap (CDS): CDS allows investors to exchange their assets or debts for another asset or debt of similar value;
3. Forward contract (Forward): an over-the-counter financial derivative instrument that can be used to buy or sell assets at a predetermined value on a specific date in the future;
4. Contracts for Difference (CFD): CFDs enable traders to buy and sell a certain number of asset units through leverage based on the price fluctuations of an asset;
5. Future: Buy or sell an asset at a predetermined price on a certain date in the future;
6. Option: Buy or sell assets at a predetermined price on or before a certain date in the future;
7. Perpetual Future Contract: Perpetual Future Contract is a special kind of futures contract. Unlike traditional futures, this contract has no concept of expiry date;

After briefly understanding the concepts of these types of derivatives, let’s review the brief history of centralized crypto derivatives.

A brief history of centralized crypto derivatives

In the history of the cryptocurrency trading market, derivatives have played an extremely important role. Today we are familiar with OKEX, Huobi, Binance, Bitmex, FTX, Bitfinex and other platforms. Their success has a lot to do with derivatives. Relationship. There are also some derivatives platforms that have disappeared from our sight, such as the early 796 futures exchange, which was very well-known in China.

From the current market performance, perpetual contracts and leveraged tokens have become the most popular crypto derivatives among retail traders.

Investment institutions scramble to deploy DeFi derivatives applications

As the pattern of centralized encryption trading derivatives has been determined, and the gradual rise of decentralized finance (DeFi), investment institutions have gradually set their sights on the field of DeFi derivatives, and many investors believe that DeFi derivatives will It is one of the most important outlets for decentralized finance in the next.

For example, well-known crypto investment institutions Multicoin Capital, Three Arrows Capital, Alameda Research, Polychain Capital, Andreessen Horowitz, Framework, Coinbase ventures, Binance Labs, placeholder, etc., have all deployed DeFi derivatives applications.

In the article “Competition and Trade-offs on the Decentralized BitMEX Track”, Multicoin Capital managing partner TUSHAR JAIN also summarized some of the advantages of DeFi derivatives agreements, such as:

1. There is no centralized exchange operator, so the cost is lower in the long run;
2. No permission required for access;
3. Anti-censorship features, so that no one can close the exchange;
4. There is no counterparty risk, because users hold funds themselves;
5. No withdrawal restrictions or transaction size restrictions;
6. There is no way to unilaterally change the rules of the exchange;
7. Any asset with a public price feed can be traded

So, which DeFi derivative agreements these investment institutions have laid out, we use a picture to show:

In the fourth section, we will learn about these DeFi derivative agreements that are sought after by institutions.

Comparison of common DeFi derivative applications

Synthetix

As the most well-known synthetic asset protocol on the Ethereum platform, Synthetix currently plays the role of a “big brother” in the DeFi derivatives field. According to the design, participants synthesize various synthetic assets (Synths) by staking the original assets of the protocol SNX. This mortgage pool model allows users to directly use smart contracts to perform conversions between Synths without the need for counterparties, which solves the liquidity and slippage problems encountered by DEX.

As a pledger, SNX holders can receive two rewards, 1 is the token reward from the system’s inflationary monetary policy, and 2 is the transaction fee reward from the synthetic asset (Synth) (0.1%-1%, usually 0.3 %).

At present, in addition to using Synthetix.Exchange to trade these synthetic assets (Synths), users can also use another ecological project kwenta to trade. In addition, the asset management agreement dHEDGE based on Synthetix can realize the function of non-custodial hedge funds, which is similar to Synthetix. Formed a very good complementary effect.

As of now, the value of assets locked in the Synthetix agreement is approximately US$720 million.

It is worth mentioning that, starting from the end of June this year, Synthetix also provides a way to play binary options, but there are not too many users using this trading product.

In addition, according to the plan, Synthetix will expand through the Optimistic Rollup Layer 2 network next year and reduce transaction fees. Here, the project also plans to introduce futures, leveraged tokens and other derivatives.

Nevertheless, the current Synthetix also has obvious shortcomings or limitations, such as low capital efficiency, and systemic risks that may be caused by gambling between traders and the system. In addition, because currently Synthetix only supports participants to mortgage their native assets SNX to synthesize Synth, This limits the scale of synthetic assets, which provides some opportunities for other synthetic asset agreements.

dydx

The dydx protocol, which has been favored by Polychain Capital and Andreessen Horowitz, is another DeFi derivative protocol that is very worthy of attention. Although it has not yet issued a token, the value of assets locked on the platform has exceeded 42 million US dollars.

As time goes by, dydx’s product line has become more and more abundant. As of press time, dydx provides four services: spot, leveraged trading (5X), perpetual contract trading (10X), and lending. The overall transaction volume is approximately US$5.779 million, but the supported trading currency is relatively single. Currently, only ETH, BTC, LINK, DAI and USDC are supported.

In terms of user experience, dydx is easy to use. The disadvantage is that it is difficult to start liquidity due to the order book mode adopted. Overall, the current depth of dydx is not very good.

In addition, according to the plan, dydx will use the StarkEx Layer 2 network for expansion through cooperation with StarkWare.

(Note: Since dydx has not yet issued a token, some analysts have speculated that dydx may use an airdrop method similar to Uniswap to airdrop to its users)

DerivaDEX

DerivaDEX, which has received investment from well-known institutions such as Polychain Capital, Coinbase Ventures, and Three Arrows Capital, uses the SGX Trusted Execution Environment (TEE) to achieve an efficient trading engine. According to the plan, DerivaDEX can support perpetual contracts with up to 25 times leverage.

As of now, DerivaDEX has not yet launched the mainnet, and has not issued tokens (all counterfeit tokens currently appearing on the market). Due to the adoption of the order book model, guiding liquidity will be the main problem faced by DerivaDEX. This new method of token distribution is called “insurance mining”, and its specific performance remains to be seen.

UMA

The UMA agreement supported by Coinbase Ventures and placeholder is another noteworthy synthetic asset agreement in the current market. One of the main differences between it and Synthetix is ​​that collateral and debt exposure are isolated in UMA, which reduces The systemic risk is reduced, but the side effect is reduced liquidity.

In addition, UMA does not use an oracle like Chainlink, but uses a crypto-economic game called an invaluable contract. This is a first-of-its-kind mechanism, but it has not yet undergone sufficient testing.

Up to now, the value of assets locked in the UMA agreement is approximately US$40 million.

Perpetual Protocol

Perpetual Protocol (Perpetual Protocol), as its name suggests, is a derivative agreement that focuses on perpetual contract transactions. In theory, it can support perpetual contract transactions for various synthetic assets such as BTC, ETH, gold, and ERC-20 tokens. The protocol uses a new mechanism called vAMM. Unlike traditional AMM, no liquidity provider (LP) is required in this model. Traders can provide liquidity with each other, and the slippage of transactions is Determined by the value of k, which is manually set by the vAMM operator according to the situation.

According to the plan, the Perpetual Protocol (Perpetual Protocol) will be launched on the xDAI sidechain in the next few weeks, which means that the transaction of the protocol can save expensive gas fees. However, from the recent test experience, the Perpetual Protocol (Perpetual Protocol) Protocol)’s slippage is still relatively large, and can be observed after its mainnet goes online.

Holders of perpetual agreement token PERP can pledge their tokens in the staking pool and receive commission rewards and staking incentives.

Hegic

Unlike the other DeFi derivatives mentioned in this article, Hegic is not endorsed by well-known investment institutions. As an option agreement, it has quickly become one of the hottest derivatives agreements at the moment under the recommendation of yEarn founder Andre Cronje.

Hegic uses the AMM model to solve the liquidity problem of options. Anyone can provide funds to the liquidity pool and automatically sell them as call and put options, and form a counterparty with the buyer of the option. One of the more obvious advantages of Hegic is that it simplifies the complexity of buying options. Nevertheless, option products are relatively far apart from each other and are more suitable for professional investors.

Up to now, Hegic’s locked-up capital is approximately US$70 million, and it has a clear leading position in the field of options derivatives.

opyn

opyn is an earlier established DeFi option protocol. It is constructed using the Convexity protocol to allow users to create put and call options. Users can purchase their option tokens (oToken) to hedge against DeFi risks, or store collateral in In the vault, oToken can be minted and sold to obtain rewards.

As of now, opyn has locked up assets of approximately US$2.6 million, which is a bit “shabby” compared to the recent rapid growth of Hegic, but this has a certain relationship with its not yet issued its own token.

In general, opyn is another option agreement worthy of attention, but compared to perpetual contracts and futures, the development of the crypto option market still takes longer.

In addition, although opyn has passed OpenZepplin’s security audit, it has already experienced a security incident in August this year, causing a loss of nearly 400,000 US dollars.

Serum

Compared with other Ethereum-based DeFi derivative protocols, Serum is built on the Solana blockchain, which brings expansion advantages and cost advantages to it, while also eliminating the composability advantages of the Ethereum platform, which is similar to Construct real estate in a remote area.

Nevertheless, Serum’s derivatives development is relatively slow. At present, it only provides swap transaction services, and it includes lending and margin trading/contracts, which can only be realized in the third stage.

Other Ethereum-based DeFi derivative agreements can be expanded through the rollup Layer 2 network, which will bring greater competitive pressure to Serum. The potential advantage of Serum lies in the FTX team and Alameda Research behind it, which may be able to increase its competitive bargaining chip.

Futureswap

Futureswap is another DeFi derivative protocol that has been high hopes, and it has also been supported by well-known institutions such as Three Arrows Capital and Framework. In April this year, Framework announced the launch of the Ethereum mainnet. After a short period of operation for 3 days, the official Suddenly announced the suspension on the grounds that “the user transaction volume of the alpha version has grown too fast”. After that, Futureswap has not disclosed any progress on its progress. On November 14, according to its team member Derek in discord, it will update The article explains the specific mechanism of its large perpetual contract transactions without slippage.

Potential risks faced by DeFi derivatives agreements

Like any DeFi agreement, DeFi derivative agreements face potential contract vulnerability risks and composability risks. In addition, DeFi derivative agreements are more susceptible to oracle manipulation attacks due to their higher leverage. For example, the recent abnormal price of DAI on the Coinbase Pro platform caused Compound, which used the platform’s oracle to feed prices, to liquidate nearly $100 million in collateral, which sounded the alarm for the derivatives agreement.

At present, most DeFi derivatives agreements only rely on Chainlink to feed prices. Such security guarantees may not be enough for the huge decentralized derivatives market in the future. In the future, DeFi derivatives agreements will use multiple oracles. The comprehensive price of the quotation will become necessary.

In addition, due to the more complex contracts of DeFi derivatives agreements, there may be risks of unknown attack vectors. Over time and the expansion of the industry, these problems may be exposed one by one.

Conclusion

By reviewing the development history of the traditional cryptocurrency circle, we can find that the development of derivatives trading is relatively slow compared to spot trading, and as the market enters a highly volatile bull market cycle, derivatives will gradually keep up with the pace of spot trading. Dominate.

Up to now, the spot DEX exchange represented by Uniswap has been able to compete with spot trading platforms such as Coinbase. In the field of derivatives trading, there is still no DeFi protocol that can cause damage to centralized derivatives platforms such as Binance and Bitmex. Enough threat, but it also means that every agreement has a great opportunity.

Perhaps in the next 1-2 years, among these derivative agreements, 1-2 applications with a market value of billions of dollars will be born, and they will be able to solve scalability issues, security issues, and ease of use. Sexual issues, and perpetual contracts and leveraged token products may be a very important part of it.