Can decentralized derivatives successfully start the second half of DeFi?

Original title: "Can decentralized derivatives successfully open the second half of DeFi?" "

Original source: Babbitt

DeFi is very important, but we have only glimpsed the holy grail corner of .

DeFi - the narrow meaning of decentralized finance, is "using a decentralized network to transform traditional financial products into a Intermediary-free, trustless, and transparent protocols.” We believe that the more ambitious vision of DeFi is to achieve "global market access", that is, to allow everyone in the world with Internet access to openly hold or trade any financial asset.

Can decentralized derivatives successfully start the second half of DeFi? From the recent explosive growth of the DeFi market, we can see some remarkable characteristics. From DEX, stable currency, leveraged lending, synthetic assets to emerging insurance products. With liquidity mining gaining momentum, DeFi is turning traditional financial products into protocols 100x faster than we’ve seen in the past. We have also seen that more complex principles and structured financial instruments have begun to infiltrate the DeFi market. However, due to the lack of some basic products and services, the current DeFi is incomplete as a "decentralized financial market".

Similar to the development of traditional financial products, the current prosperity of the DeFi market is a typical expansion based on "debt to debt" , including the well-known overcollateralization rate and the most common multi-layer nested assets in liquidity mining. In such a market, we can only rely on overcollateralization to avoid the subject's credit evaluation. Mortgage bonds, however, are by their nature the least information-sensitive products in the financial markets.

During the DeFi boom in the past few months, the basic assets supporting liquidity mining can be roughly divided into three categories: transaction fees, loan spread income, and staking governance tokens. We have seen that when the gains (or "productivity") of the underlying assets are not durable enough to support a credit boom, there will be a risk rebound similar to a traditional "financial crisis". Therefore, if the DeFi industry is to strive for real development, rich and solid underlying assets are still the most important cornerstone.

Whether it is the traditional financial market or the DeFi market, the demand for "SAFU" assets and liquidity is long-lasting and stable. In the traditional financial market, on the one hand, we see a large number of monetary assets collateralized by short-term debt, long-term debt based on sovereign credit, quasi-money created by repurchase or asset securitization, or assets such as MBS and ABS. But on the other hand, on this basis, a large-scale financial derivative product with rich instruments has been formed, which plays the role of risk management, asset pricing and enhancing market liquidity, forming a systematic financial market as a whole.

Whether we expect the DeFi market to eliminate the CeFi (centralized finance) market, or the integration of these two parallel fields, DeFi users will The needs for “SAFU” assets, liquidity, and risk pricing are equally urgent. We don’t expect DeFi to generate absolutely risk-free assets, but expect to generate alternatives such as asset securities through derivatives agreements, as close to risk-free assets, and so on.

In the current DeFi market, we can see that there are assets pegged to fiat currency, such as USDC and collateralized debt positions "DAI ”—as a near-risk-free asset. But we still long for a more comprehensive yield and volatility structure. However, the market still lacks the necessary financial instruments and pricing mechanisms. In the process of mapping traditional financial market products, it is inevitable to break through the challenge of building a comprehensive decentralized financial derivative product.

DeFi lacks derivatives, the market is always immature

< p>We have been highly focused on synthetic assets, and similar to financial asset positions, some synthetic assets have performed well as tokenized versions of financial derivatives. At the same time, we are looking forward to the native decentralized derivatives protocol, supporting DeFi with structured "SAFU" assets, trading and hedging risk/volatility tools, and improving DeFi with richer risk management and liquidity enhancement tools field.

The concept of financial derivatives is actually quite extensive, from swaps and forwards to futures and options. The underlying assets include interest rates, equity, foreign exchange, commodities and other asset products. They are widely used to balance position risk, liquidity, hedging, leverage and other portfolio and liquidity management needs. According to the statistics of the Bank for International Settlements (BIS), the scale of the global financial derivatives market is beyond imagination; its scale can reach more than 10 times the global GDP and continue to maintain a rapid growth level.

< blockquote>(Purpose of derivatives transactions by end users)

(Changes in product use in the past year)

We are firmly bullish on the decentralized derivatives industry - not only from a short-term business perspective, decentralized derivatives protocols can benefit from centralized derivatives giants such as BitMEX, OKEX, and Deribit Share a part of the profits; more importantly, from the perspective of creating long-term value, the decentralized derivatives market has great potential and is at the core of the entire DeFi ecosystem. This will be the most difficult industry to overcome and the most difficult to perfect in the DeFi industry, but it is also the most profitable piece of the puzzle.

The vigorous development of decentralized derivatives protocols will break down the islands of DeFi protocols; the combination of DeFi Lego can produce more promising Chance.

(Top DeFi Derivatives Protocol)

We think several trends that are about to happen are:

1. The combination of derivatives agreements will create financial products with rich risk and return

Decentralized derivatives protocols can enrich the basic financial product structure of the DeFi world. More standardized investment and wealth management products based on these agreements will emerge to meet the investment needs of users. At the same time, by combining derivatives agreements, customized products or strategies that better meet specific risk and profit structure requirements can be developed.

For example:

< p>MCDEX plans to launch structured products based on decentralized perpetual swaps, allowing users to obtain benefits through leveraged transactions.

FinNexus Option Protocol plans to launch an option trading strategy to help liquidity providers hedge against impermanent losses in the process of AMM market making ;

The advent of IRS (Interest Rate Swap) agreements (like Horizon.Finance) can be combined with options/futures agreements to Replicate the classic OBPI (Option-Based Portfolio Insurance) to provide fixed-income enhanced products for the DeFi market.

These mappings to traditional financial markets will provide the DeFi world with richer asset classes, making the current volatile DeFi world The yield curve is more stable.

2. The specialization and complexity of decentralized financial derivatives will redefine the business model of asset management

Traditional financial markets generally face issues such as trust challenges and moral hazard of investment managers. With the non-custodial characteristics of DeFi and the emergence of decentralized financial derivatives, the business model of traditional financial institutions with asset managers and third-party custodians will undergo revolutionary changes.

In the short term, the DeFi smart pool that now plays the role of "investment manager" will face the challenge of homogenization and lower expected return , they will soon start competing with each other in product design capabilities.

Smart pools that are limited to the strategy of "digging, withdrawing and selling" for ordinary liquidity mining will soon lose their market competitiveness. We can see the emergence of smart pools like DFI.Money and SashimiSwap, and other communities are already discussing richer investment strategies, and plan to launch strategies based on financial derivatives to provide users with a richer risk-return matrix.

In the long run, the enrichment of financial products and the improvement of market depth in the DeFi market will further increase the demand for professional investment consulting and services demand. Decentralized active asset management protocols and investment advisory protocols, such as dHedge and Set Protocol, will have a lot of potential to grow.

Just mirroring the financial products of the traditional financial market in a decentralized way is not the real meaning of DeFi and decentralized protocols. The development of a decentralized derivatives protocol will be unprecedented, redefining the very nature of asset management. For nearly a hundred years, the existing business model has not been challenged. Through DeFi, our ambition can be realized: "Everyone in the world with Internet access can openly hold or trade any financial asset or transaction."

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