Welcome to our in-depth exploration of the world of DeFi derivatives in the ever-evolving crypto landscape. With the rise of decentralized finance (DeFi), traders are turning their attention towards decentralized solutions for trading derivatives. In this guide, we'll delve into the intricacies of DeFi derivatives, the crucial role they play in the crypto market, and the potential they hold for revolutionizing the world of finance.
With the Ftx collapse, 2022 has shown all the limits of the centralised exchanges and for this reason, traders have lost trust in these brokers. Now, they are looking for decentralised solutions for trading derivatives.
Before its collapse, Ftx alone had more than 10 billion dollars in volumes every day of its derivative instruments. Now, part of those volumes have been moved to decentralised solutions that today have reached 3.5% of the total crypto derivatives volume.
What we will see during this article:
- What are derivative instruments
- What is needed to bring derivatives into the DeFi
- What it means to analyse volumes
- The most important derivatives platforms today
- The future of the DeFi derivatives markets
What are derivative instruments
Let’s start this deep dive by explaining what derivative instruments are and why traders need them.
A derivative is defined as such when its value is influenced by another instrument from which it is derived. These instruments can be linked to an infinite number of underlyings, such as shares, indices, currencies, interest rates, commodities, etc.
There are three main uses of derivative instruments; hedging, speculation (with the use of leverage) and arbitrage; they are mainly done with futures, forwards, options and swaps.
Definition of all the main derivative instruments:
Forward and futures contracts are derivatives arrangements that involve two parties who agree to buy or sell a specific asset at a set price by a certain date in the future.
Futures: In this case, these contracts are standardised contracts that trade on stock exchanges. The most common are perpetual futures. During this article we will analyse the most important decentralised applications (dApps) in this category.
Forwards: These are the same as futures, but they are concluded outside regulated markets (over-the-counter).
Options: An options contract offers the buyer the opportunity to buy or sell (depending on the type of contract they hold) the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they decide against it. Today, the options market in DeFi is still small compared to the futures market.
Swaps: A swap is a contract in which the two parties, A and B, agree to exchange sums of money (typically the difference between them) according to the terms of the contract itself. A swap becomes a Hedging swap when it is used to protect against the volatility of a specific asset over time by securing a predetermined price and paying a premium for this service. Currently, Metalswap is the first-ever dApp that offers Decentralized Hedging Swaps on digital assets. If you want to learn more about our dApp, we recommend reading this article [link: Hedging Swap] which explains the functionality of the Hedging Swap that MetalSwap is bringing to the world of DeFi.
What is needed
To bring derivatives into the DeFi, there are three main requirements:
- Smart contracts, like any decentralised application.
- Oracles, to be able to receive real-time information of the price variation of the underlying assets.
- Tokenization: making the derivative a blockchain-compatible, fungible and programmable token. Derivatives in token form on the blockchain are called synthetic assets.
What it means to analyse volumes
The goal of this article is to analyse the size of the derivatives market within the DeFi. Analysing volume refers to determining the amount of money that is traded daily within this category of financial instrument. Understanding volume trends can provide insight into the most significant protocols, as well as the overall sentiment of the market.
The most important decentralised platforms today
The most popular derivative instrument in the DeFi space is the perpetual futures. In the past years, Perpetual Protocol was the dApp that generated the highest volume of trades. Currently, the market, which moves an average of 3 billion dollars per day, is dominated by two main protocols, DyDx and Gmx.
According to the Coingecko list, the top decentralised exchange for volume of derivatives is DyDx. This decentralised exchange has an average of 1 billion dollars of volume every day over the last three months and reached peaks of even more than 7 billion dollars on highly volatile days. As previously mentioned, this is currently the most widely used protocol, with over 100,000 users in the last week.
Total Users DyDx
Another important Dex for the derivatives markets is GMX. According to this report on Dune, in January 2023, Gmx reached a volume of 5.82 billion dollars. It is the leader in perpetual instruments in the crypto market and has an average daily open interest of 150 million dollars over the past two months. In the last 7 days this dApp gained an average of 364,000 dollars every day in fees.
Total margin Volume and Fees Gmx by Dune
Synthetix is another important dApp in the derivatives DeFi market. It provides decentralised perpetual futures through its system for creating synthetic assets. This dApp has a Total Value Locked (TVL) of over 420 million dollars and an average 7-day fee income of 32,047 dollars. The volume of all traders in January 2023 is estimated to be over 14 billion dollars, with more than 50% of that volume attributed to perpetual instruments.
Now let’s talk about the options market. The protocol Ribbon Finance is currently the one that captures the most volume. This category of derivatives is less widely used by traders, which is why the volume is much lower compared to perpetual volumes. The TVL of this dApp is over 75 million dollars and the average weekly revenue for the last week is around 33,000 dollars. The total notional volume of options sold is over 12 billion dollars, with an average 7-day volume of 50 million dollars in January 2023.
Protocol Revenue Ribbon Finance
The futures of the DeFi Derivatives markets - four trends
- Since the Ftx collapse, traders have lost trust in these centralised brokers. We believe that some of the volumes previously captured by centralised exchanges will shift to the decentralised world.
- During the last bull market, we observed an explosion of usage of derivatives protocols, despite them not being fully equipped to handle the high volume. This year is expected to be the year of building and preparing for the next surge in volume of these types of protocols.
- The growing use of derivatives is a natural progression as the market continues to expand and mature.
- After the recent explosion of perpetual protocols, MetalSwap is bringing the Hedging Swap to the decentralised world for the first time. As a pioneer in this revolution, MetalSwap will be well-positioned to capture a significant share of the future derivatives DeFi market.
We hope you enjoyed this deep dive into the world of DeFi derivatives in the crypto space. As the market continues to expand and mature, it's essential to stay up-to-date on the latest trends and developments. To stay informed and receive the latest news about MetalSwap, be sure to follow our Telegram news channel. Join us in the exciting journey of DeFi!
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With MetalSwap we enable hedging swap transactions through the use of Smart Contracts, AMM style.