Pantera Partners: Imagination room for DeFi derivatives trades

Synthetic Derivatives  "

Paul Veradittakit Founding Partner at Pantera Capital

Lu Jiangfei, Chain Wen

In just over a year, Defi has begun to "hack" many of the core use cases of traditional financial systems. Some of Defi's core infrastructure modules -- for example, lending protocols and decentralized spot trading platforms -- have found product/market fit. But there are still many essential elements of traditional finance that have not yet been upended.

Derivatives could be the next financial Lego block to be disrupted by DEFI. Why? Let's talk numbers: In 2019, spot trading (stocks, bonds, commodities, etc.) accounted for only 30 percent of total financial sector trading volume; The remaining 70% comes from futures and options. Whichever way you analyze it, the conclusion is clear: there is a lot of demand for derivatives in financial markets.

It is still early days for digital asset derivatives, but nevertheless we are seeing an uptrend in the digital asset derivatives market. In December 2020, the average daily trading volume of crypto asset derivatives exceeded $1.3 trillion, accounting for more than half of the market capitalization of the entire cryptocurrency industry. In addition, the trading volume of digital asset derivatives has reached 55%, surpassing the spot market.

So where are digital asset derivatives traded these days

Currently, the vast majority of crypto derivatives are traded through centralized trading platforms such as Binance, OKEx and others. Centralized trading platforms are favored by derivatives traders because of the following three advantages:

Able to accumulate large amounts of liquidity;

Providing reasonably competitive interest rates;

It can effectively attract large financial institutions.

Credit: The Block

But now, slowly, things seem to be changing. As we know, in the early stages of digital currency development, the vast majority of digital currency transactions were conducted within centralized trading platforms such as Coinbase or Binance, due to advantages such as user friendliness and low transaction fees. But over time, decentralized trading platforms such as Uniswap or 0x have emerged that offer value to users in ways that centralized trading platforms simply cannot. For example:

Provide a wider range of trading pairs in greater numbers;

To provide higher liquidity, etc.

Nearly 15 per cent of spot transactions are now done on decentralized trading platforms, a remarkable achievement for the entire digital currency ecosystem -- but really, it's just getting started.

Credit: The Block

We believe something similar will happen in the derivatives market.

Centralised trading platforms have many limitations. In the recent market volatility, the impact of these restrictions has been fully visible, including:

There are opaque, behind-the-scenes mechanisms that, in the case of forced liquidation, can be controversial.

Relying more on institutional trust, some traders who bought long-term derivatives for fear that the issuer would go bust would be shut out.

Operations are very inefficient, privacy Settings are complex, and new trade pairs are added very slowly.

There are regulatory risks that could affect transaction accessibility. For example, the UK Financial Conduct Authority (FCA) recently stated that Binance Markets, Binance's UK holding company, is not allowed to conduct any FCA-regulated financial business in the UK, nor to provide loans to individual customers.

At the same time, as decentralized derivatives trading platforms mature, we believe these "new" trading platforms can offer even more superior products and services, just as they do in the spot market. Indeed, the question is no longer whether decentralization will come, but when.

SynFutures: Anything. Anytime.

Pantera Capital is part of A $14 million Series A funding round for Synfutures, A decentralized derivatives trading platform that is capitalizing on the current market development opportunity. In addition, the Synfutures team launched a Closed Alpha version of the platform in June, making it available on the Ethereum mainnet and on Polygon.

In short, SynFutures is "the Uniswap of futures contracts" : with a few clicks, users can easily list their own futures contracts, which allow any pair to be traded, and they can buy the derivatives contracts they want without licensing. SynFutures has three core goals:

Make it accessible to anyone;

Highly decentralized;

Compatible with as many trading pairs as possible.

Currently, the protocol is built on Ethereum and Polygon, a two-tier scaling solution designed to minimize transaction costs.

Source: SynFutures

Without a doubt, Synthetix is the best known derivatives liquidity protocol in the current synthetic derivatives space, but we believe that Synfutures has the potential to surpass Synthetix in many ways, such as:

1. SynFutures supports a wider range of trading pairs

If you want to launch a new asset in Synthetix, you have to follow a lengthy governance process that can sometimes take months to get the asset online (Dogecoin is a good example). Synfutures, by contrast, allows users to directly choose any pair they like and buy them immediately (as long as the asset is in the ChainPnK price predictor or in the Uniswap or Sushiswap liquidity pools).

2. SynFutures does not have a zero slip "trap"

Synthetix's "zero slippage" promise looks good on the face of it, but in reality, users are still exposed to unlimited downside risk -- any sharp fluctuations in the price of Synthetix's native token SNX can lead to unexpected losses for traders, whether they are long or short. Synfutures, by contrast, mechanically avoids these pitfalls and is more in line with the basic logic of financial markets.

3. SynFutures is more capital efficient

Synthetix has a mortgage rate of 450%, which can lead to under-utilisation of assets. In contrast, Synfutures allows users to invest 100% of their capital and make markets with a single token (currently supported by USDT, USDC, DAI, ETH).

How does an Automatic Market Maker (AMM) work

What makes Synfutures unique is their SAMM -- the industry's first synthetic asset automated market maker. Here's a short explanation of how it works:

SynFutures' synthetic asset automated market maker (SAMM) can have a liquidity provider (LP) offer one of the assets in a trading pair (such as a stablecoin), and the smart contract will then automatically synthesize another asset in the pool. For example, if you choose to deposit a stablecoin (such as a USDT) into the ETH/USDT pool, you can use the USDT to provide the full amount, rather than raising each equivalent token.

50% of the value of the user's deposit will be kept in the USDT and the other 50% will be used as margin to represent the synthetic 1X long futures contract of the ETH so that the user can gain exposure to the derivative position.

When a long position is created, SAMM automatically creates an equal number of short positions for the user, and the long and short positions cancel each other out so that the user adds liquidity to the pool without adding any additional risk.

In fact, futures contracts have two core elements:

Base Asset

Quote Asset

Interestingly, Synfutures allow liquidity providers (LP) the option to provide unilateral liquidity; In other words, they can choose to offer any one (or both) of the assets in the trading pair. When LPs provide liquidity, SAMM essentially "becomes" a market participant, with its own margin account. Of course, if you are not familiar with this mechanism, you can think of it as a liquidity provider "pquidity provision" to a typical AMM pool, only the liquidity provider must also ensure that the pool's margin requirements are met.

In addition, SynFutures has a unique set of clearing mechanisms. Unlike in Maker, a decentralized derivatives protocol, where insufficient collateral on an account automatically triggers liquidation, Synfutures offers accounts that do not meet margin requirements. Synfutures enforce the reduction (and offsetting) of their positions -- a "happy medium" for derivatives trading that minimises the systemic risk of an agreement while simplifying the clearing process.

Development Roadmap

Synfutures V1, which will be available on the mainnet later in July, will support:

Fixed margin futures

Leveraged deals

Futures liquidity pool for all ChainPNK backed assets

Futures liquidity pools for Uniswap and Sushiswap assets

Looking ahead, SynFutures has a number of exciting new products on the horizon, including:

Index futures, such as speculation on the future difficulty of mining bitcoin.

Shared margin futures, including sustainable futures and decentralized basis trading.

Cross Margin Futures provides an "automatic hedging" solution against volatile losses.

Source: SynFutures

We believe that derivatives will become an important part of the DEFI ecosystem, just as it was in the traditional financial system. Only good, decentralized protocols that can replace centralized products can seize this huge opportunity.

It's still early days for SynFutures, of course, but we believe they've created a differentiated product for a broader market and are excited to be moving forward with them.

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