The market for decentralized derivatives and perpetual protocols on DeFi has reached a new high in total locked-in value (TVL) of nearly $4 billion, reflecting the growing interest and adoption of these instruments. In this article, we will explore how these instruments work and which are the leading platforms in this space.
Defillama. Top 10 Derivative Protocols and their total TVL.
Derivatives are financial instruments whose value is derived from the price of an underlying asset. In the context of DeFi, derivatives can be based on cryptocurrencies, tokens, indices or even other derivatives. The most common types of derivatives at DeFi include futures, options and synthetics.
Perpetual contracts are a type of derivative that has no expiration date, unlike traditional futures contracts. This allows traders to hold their positions indefinitely, as long as they meet margin requirements. The perpetual protocols at DeFi allow users to trade these contracts in a decentralized manner, eliminating the need for a centralized intermediary.
Leveraged trading on DeFi is facilitated through the use of derivative protocols that allow users to take positions larger than their actual balances by using loans provided by the platform. This mechanism works as follows:
Traders must deposit an amount of collateral on the platform to open a leveraged position. This collateral acts as security for the loan received, and its value must be maintained above a certain threshold to avoid liquidations. If the value of the collateral falls below this threshold due to adverse market movements, the position may be automatically liquidated to cover the loan.
Smart contracts automate and execute transactions according to predefined conditions. For example, a smart contract can ensure that a position is automatically liquidated if the value of the collateral falls below the required level. This eliminates the need for intermediaries and reduces counterparty risks.
To ensure accurate position valuation and risk management, perpetual protocols rely on oracles. Oracles are services that provide real-time price data to smart contracts, ensuring that transactions are executed with accurate and up-to-date market information.
Decentralized governance allows users to participate in decision-making on the evolution of the protocol. Through governance tokens, users can vote on proposals to improve the platform, adjust risk parameters and develop new functionality. This ensures that the platform evolves in a way that benefits the user community.
DYDX
dYdX is one of the most prominent platforms in DeFi's derivatives trading space. It offers a variety of products, including perpetual contracts with leverage up to 25x. The platform uses an order book and scalability solution based on StarkWare technology to provide a fast and cost-effective trading experience.
GMX is a decentralized derivatives trading platform that has been noted for its permissionless exchange model and ease of use. It allows users to trade with leverage and offers unique features such as swaps and perpetual futures trading options. The platform uses a shared liquidity model, which facilitates faster and more efficient order execution.
Synthetix is a synthetic asset protocol that allows users to create and trade a wide range of derivatives, including perpetual contracts. Through its staking mechanism and liquidity model, Synthetix offers exposure to assets ranging from cryptocurrencies to commodities and currencies.
Jupiter is a DeFi platform that operates exclusively on the Solana blockchain, specializing in offering the best swap rates and optimal routes for swaps. It uses a liquidity aggregator that allows users to find the most efficient and economical trading routes within the Solana ecosystem. The platform focuses on providing a seamless user experience and advanced tools for leveraged trading, including real-time charting and detailed market analysis.
Hyperliquid offers a high-performance derivatives platform with a focus on transaction speed and efficiency. It uses state-of-the-art technology to ensure that transactions are executed quickly, even in highly volatile conditions. Hyperliquid also provides robust risk management tools and support for a wide variety of derivative assets.
Synthetix Financial System Design Summary
Decentralized exchanges (DEX) for derivatives operate on a blockchain that records all transactions and contract executions immutably. This ensures transparency and eliminates the need for intermediaries. DEXs such as dYdX and Jupiter allow users to transact directly with each other using smart contracts that automate and execute contract terms without the need for trust between the parties.
Smart contracts are critical for decentralized derivatives, as they automatically execute and settle transactions when predefined conditions are met. These contracts rely on oracles for accurate price data, which is crucial for maintaining the integrity and accuracy of transactions.
Many decentralized derivative protocols use decentralized governance models where users can participate in decision making through native tokens. This includes voting on protocol enhancements and other important changes, which democratizes control over the platform.
GMX
Decentralized futures contracts allow traders to benefit from future price movements of underlying assets. These contracts can be perpetual, with no expiration date, which makes them more flexible and accessible.
Decentralized option contracts allow holders to buy or sell an underlying asset at a specific price before a certain date, providing an effective tool for hedging and speculation.
Synthetic assets are digital representations of real assets, allowing users to gain exposure to a variety of assets without needing to own them directly. These assets replicate the value and some characteristics of the underlying assets, using blockchain technology to ensure transparency and global accessibility.
Leading platforms such as dYdX, GMX and Synthetix are at the forefront of innovations in synthetic asset trading, providing powerful tools for traders to trade with leverage in a decentralized manner. However, it is crucial that users understand the risks and operate with caution in this dynamic environment.
One thing to note is the trend of such platforms towards interoperability and integration between different DeFi protocols, allowing greater flexibility and choice for users. This interconnectedness not only improves liquidity but also offers new opportunities for more sophisticated trading strategies, such as cross-platform arbitrage. As blockchain technology evolves, these integrations are expected to become more seamless and robust, further expanding the DeFi ecosystem.
