Being sought after by VC, what happened to decentralized encrypted derivatives?
Original title: "DeFi Study Notes 丨 Being sought after by VC, what happened to decentralized encryption derivatives?" "
Original Source: Babbitt
As the most complex and mature financial market One of the tools, the magic of derivatives is undoubtedly huge. Its high leverage and other characteristics have attracted a large number of risk-seeking traders who pursue high returns. According to data from the Bank for International Settlements (BIS), in the first half of 2019, derivatives The total outstanding amount of contracts is about $640 trillion, and the total market value of all these contracts is about $12 trillion.
In the cryptocurrency market, centralized derivatives trading has already become the main source of income for various exchanges. In the circle of contract trading stories, we also know that there are many tragedies in the world due to liquidation and ruined families. We also understand that the trading venues that provide these trading tools and charge fees from them are the ones that can achieve stable profits.
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, This may be able to eliminate some disadvantages of centralized platforms, such as: hosting, opacity, easy pin insertion, 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 tools;
2. A brief history of centralized encrypted derivatives;
3. Investment institutions scrambling to deploy defi derivatives applications;
4. Common Comparison of defi derivative applications
-Synthetix
-dydx
-DerivaDEX
p> -UMA
-Perpetual Protocol
-Hegic
-opyn
-Serum
-Futureswap
5. Potential risks faced by DeFi derivatives agreements
6. Conclusion
1. Common financial derivatives instruments
In finance, a derivative instrument is a contract whose value is derived from the performance of the underlying entity. The contract stipulates the specific conditions for the transaction between the two parties, these conditions include:
predetermined time period;
Entity result value and underlying variable
Contractual obligations and notional amounts;
The entity defined by the derivatives instrument contract can be cryptocurrency, commodity, stock, bond , 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 transactions into two markets:
< p>Over-the-counter (OTC): These contracts are signed directly and privately by the parties, and the underlying assets are not on any exchange, such as investment banks usually using over-the-counter derivatives.
Exchange Traded: As the name suggests, these derivatives are traded on an exchange, and the terms of the contract are predetermined and public.
Now, let's take a look at the common types of financial derivatives contracts, including:
2. Credit default swap (CDS): CDS allows investors to exchange their assets or liabilities for another asset or liability of similar value;
3. Forward contract (Forward): an over-the-counter financial derivative instrument, which can be used to buy or sell assets at a pre-agreed value on a specific date in the future;
< /p>
4. Contract for difference (CFD): The contract for difference enables traders to buy and sell a certain number of asset units through leverage according to the price fluctuation of an asset;
5. Futures: Buy or sell an asset at a predetermined price on a certain date in the future;
6. Options (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) : The perpetual contract is a special futures contract. Unlike traditional futures, this contract has no concept of expiration date;
In a simple understanding of these After the concept of derivatives types, let's review the brief history of centralized crypto derivatives.
Second, a brief history of centralized encryption 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. There are also some derivatives platforms that have disappeared from our sight, such as the 796 Futures Exchange, which was very well-known in China in the early days.
From the current market performance, perpetual contracts and leveraged tokens have become the most popular among retail traders Crypto Derivatives.
3. Investment institutions scramble to deploy Defi derivatives applications
As the pattern of centralized encrypted trading derivatives has been established, 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 It will be one of the most important outlets for decentralized finance in the future.
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. The application of Defi derivatives has been laid out.
In "Decentralized BitMEX Competition In the article "Competition and Trade-offs of Dao", TUSHAR JAIN, the managing partner of Multicoin Capital, also summarized some advantages of the Defi derivatives agreement, such as:
1. There is no centralized exchange operator, so fees are lower in the long run;
2. Access is permissionless;
3. Anti-censorship features, so that no one can close the exchange;
4. No counterparty risk, because users
5. No withdrawal limit or transaction size limit;
6. There is no way to unilaterally change the rules of the exchange;
7. Any asset with a public price feed can be traded
These investment institutions, which Defi derivatives agreements have they laid out? Let's use a picture to show them:
In the fourth section, let's get to know these defi derivatives agreements that are sought after by institutions one by one.
Fourth, the comparison of common defi derivative applications
4.1 Synthetix
As the most well-known synthetic asset protocol on the Ethereum platform, Synthetix is currently in the field of defi derivatives Temporarily playing the role of "first brother", according to the design, participants synthesize various synthetic assets (Synths) through the pledge agreement's native asset SNX. This mortgage pool model allows users to directly use smart contracts to perform conversions between Synths, while There is no need for a counterparty, which solves the liquidity and slippage issues encountered by DEXs.
As a staker, SNX holders can receive two rewards, 1 is tokens from the system inflationary monetary policy Rewards, 2 are transaction fee rewards (0.1%-1%, typically 0.3%) from synthetic assets (Synth).
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, based on Synthetix The asset management protocol dHEDGE can realize non-custodial hedge fund functions, which forms a good complement to Synthetix.
As of now, the value of assets locked in the Synthetix protocol is approximately $720 million.
It is worth mentioning that since the end of June this year, Synthetix also provides binary options, but using this There are not many users of trading products.
In addition, according to the plan, Synthetix will achieve expansion through the optimistic rollup layer-2 network next year and reduce transaction fees. Here, the project also plans to introduce futures, Derivatives such as leveraged tokens are played.
However, the current Synthetix also has obvious defects or limitations, such as low capital efficiency, systemic risks that may be caused by traders and the system betting, In addition, since Synthetix currently only supports participants to mortgage the original asset SNX to synthesize Synth, this limits the scale of synthetic assets, which provides some opportunities for other synthetic asset protocols.
4.2 dydx
The dydx protocol that has been favored by Polychain Capital and Andreessen Horowitz is another defi derivatives protocol that deserves attention. Tokens have not yet been issued, but the platform has locked assets worth more than $42 million.
With the passage of time, dydx's product line has become more and more abundant. As of press time, dydx provides spot and leveraged transactions (5X), perpetual contract trading (10X), and lending services, the total transaction volume within 24 hours is about 5.779 million US dollars, but the transaction currency it supports is relatively single, currently only supports ETH, BTC, LINK, DAI, and USDC.
In terms of user experience, dydx is easy to use, but the disadvantage is that it is difficult to start liquidity due to the order book model , overall, the current depth on dydx is not very good.
In addition, according to the plan, dydx will cooperate with StarkWare to use the StarkEx layer-2 network for expansion.
(Note: Since dydx has not yet issued tokens, some analysts speculate that dydx may adopt Uniswap-like airdrop to its users)
4 .3 DerivaDEX
Acquired Polychain Capital, Coinbase Ventures, Three Arrows Capital and other well-known DerivaDEX invested by institutions utilizes the SGX Trusted Execution Environment (TEE) to achieve an efficient trading engine. According to the plan, DerivaDEX can support perpetual contracts with a maximum leverage of 25 times.
As of now, DerivaDEX has not been launched on the main network, nor has it issued tokens (the tokens currently on the market are all counterfeit tokens) , due to the adoption of the order book model, guiding liquidity will be the main problem facing DerivaDEX, and a new token distribution method it adopts is called "insurance mining", and its specific performance remains to be seen .
4.4 UMA
The UMA protocol, supported by Coinbase Ventures and placeholder, is another noteworthy synthetic asset protocol in the current market. One of the main differences between UMAs is that collateral and debt exposures are siled in UMAs, which reduces systemic risk but has the side effect of reducing liquidity.
In addition, UMA does not use an oracle like Chainlink, but uses an encrypted economy called priceless contracts game, which is a first-of-its-kind mechanic that hasn't been tested enough.
As of now, the value of assets locked in the UMA protocol is approximately $40 million.
4.5 Perpetual Protocol
Perpetual Protocol (Perpetual Protocol), as its name implies, is a derivatives protocol that focuses on perpetual contract transactions. Supports perpetual contract transactions of various synthetic assets such as BTC, ETH, gold, and ERC-20 tokens. The protocol adopts a new mechanism called vAMM. Unlike traditional AMMs, no liquidity is required in this model Provider (LP), traders can provide liquidity to each other, and the slippage of the transaction is determined by the k value, which is manually set by the vAMM operator according to the situation.
According to the plan, the Perpetual Protocol (Perpetual Protocol) will launch the xDAI sidechain in the next few weeks, which means that the protocol The transaction can save expensive gas fees, but from the recent test experience, the slippage of the Perpetual Protocol (Perpetual Protocol) is still relatively large, and it can be observed after its mainnet is launched.
Perpetual agreement token PERP holders can pledge their tokens in the Staking pool and receive service fee rewards and Staking incentives.
4.6 Hegic
Different from other DeFi derivatives mentioned in this article, Hegic is not endorsed by well-known investment institutions. Introduced by Andre Cronje, the founder of yEarn, it has quickly become one of the hottest derivatives protocols at the moment.
Hegic uses the AMM model to solve the liquidity problem of options. Anyone can provide funds to the liquidity pool and automatically Sell 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 option purchases. However, option products are relatively far away from retail investors and are more suitable for professional investors.
As of now, Hegic's lock-up funds are about 70 million US dollars, and it is in a clear leading position in the field of option derivatives.
4.7 opyn
opyn is an earlier established defi options protocol, which uses the Convexity protocol to allow users to create put and call options, Users can buy their option tokens (oTokens) to hedge against DeFi risks, and also deposit collateral in the vault to mint and sell oTokens to earn rewards.
As of now, the locked-up assets of opyn are about 2.6 million US dollars, which is slightly lower than that of Hegic, which has been growing rapidly recently. It's a bit "shabby", but this has something to do with it not yet issuing its own tokens.
Overall, opyn is another option protocol worthy of attention, but compared to perpetual contracts and futures, the development of the encrypted options market still takes longer time.
In addition, although opyn has passed the security audit of OpenZepplin, it has already had a security incident in August this year, resulting in a loss of nearly 400,000 US dollars.
4.8 Serum
Compared with other Ethereum-based defi derivatives protocols, Serum is built on the Solana blockchain, which brings While scaling advantages and cost advantages, it also eliminates the composability advantages of the Ethereum platform, which is similar to building real estate into a remote area.
In spite of this, the progress of Serum’s derivatives is still relatively slow. Currently, it only provides Swap transaction services, including lending , Margin transactions/contracts can only be realized in the third stage.
Other ethereum-based defi derivatives protocols can achieve expansion 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 increase its competitive chips.
4.9 Futureswap
Futureswap is another defi derivatives agreement that has been placed with high hopes, and has also been approved by well-known institutions such as Three Arrows Capital and Framework Support, in April this year, Framework announced the launch of the Ethereum mainnet, but after a short run of 3 days, the official suddenly announced the suspension, on the grounds that "the user transaction volume of the alpha version grew too fast", and after that, Futureswap has not yet made any progress on it No disclosure has been made. On November 14th, according to his team member Derek in discord, the article will be updated to explain the specific mechanism of its large-amount perpetual contract transactions without slippage.
V. Potential risks faced by DeFi derivatives agreements
Like any DeFi protocol, DeFi derivatives protocols will face potential risks of contract loopholes and composability risks. In addition, DeFi derivatives protocols are more Vulnerable to oracle machine manipulation attacks. For example, after the recent abnormal price of DAI on the Coinbase Pro platform, Compound, which used the platform’s oracle machine to feed prices, liquidated nearly $100 million worth of collateral, which sounded the bell for the derivatives protocol. alarm bell.
At present, most DeFi derivatives agreements only rely on Chainlink to feed prices. It may not be enough. In the future, it will become very necessary for DeFi derivatives agreements to use a comprehensive price quoted by multiple oracle machines.
In addition, because the contracts of DeFi derivatives protocols are more complex, there may be unknown attack vector risks, and as time goes by and the industry With the expansion of scale, these problems may be exposed one by one.
6. Conclusion
By reviewing traditional cryptocurrencies From the development history of the circle, we can find that the development of derivatives trading started relatively slowly compared with spot trading, and as the market enters a highly volatile bull market cycle, derivatives will gradually keep up with the pace of spot trading, and finally occupy a dominant position.
So far, spot DEX exchanges represented by Uniswap have been able to compete with spot trading platforms such as Coinbase, but in the field of derivatives trading, there is still no Which DeFi protocol can pose a sufficient threat to centralized derivatives platforms such as Binance and Bitmex, but it also means that each protocol has a great opportunity.
Maybe in the next 1-2 years, in these derived In the product agreement, 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 issues well, while perpetual contracts and leveraged token products , may be a very important part of it.
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