Warren Buffett described derivatives as “financial weapons of mass destruction”. From the tulip futures to the various derivatives traded on the Chicago Stock Exchange, from a contract signed by wheat farmers to the complex OTC trading of exotic options, derivatives have played a major role in the financial world since the very beginning. According to the statistics provided by investing, the size of the derivatives market is growing at an exponential rate. Today, the annual trading volume of derivatives has amounted to over $700 trillion (nominal value). What is even more stunning is that this figure exceeds the total GDP of all countries in the world over the past 20 years. The trading volume recorded by the stock market, on the other hand, stood at $56 trillion, and that of the bond market was $119 trillion.
When these figures are examined within the context of DeFi, you will see that the market of decentralized derivatives remains a blue ocean.
Looking back at how the DeFi market evolved, we can tell that the number of DeFi users has grown exponentially since the beginning of 2020. In 2021, the year marked by the DeFi boom, plenty of outstanding projects were launched, and the satisfying product experiences, as well as the development of AMM, attracted droves of investors to DeFi. According to data analysis conducted by Dune, the number of DeFi users has kept growing in 2022, and the growth trend is likely to continue.
According to Coingecko, the top 10 CEXes recorded $36,586,809,509 in spot trading and $111,156,878,961 in futures trading within the past 24 hours. During the same period, the 24-hour trading volume of the top ten DEXes stood at $9,881,939,284, while decentralized derivatives trading platforms led by dydx registered about $15,202,983,513.85 in trading volume.
In the legacy financial system, the ratio of derivatives trading volume to spot trading volume is about 4. The ratio recorded by crypto CEXes stands at roughly 3 according to the sample data, and the figure on DEXes is merely 1.5, which is even lower.
When the statistics are compared, we can tell that the derivatives trading volume has at least doubled. The increase in the number of DeFi users and the expansion of the decentralized derivatives market is still trends in DeFi. So far this year, the decentralized derivatives market has indeed seen substantial growth. The launch of dydx’s product, in particular, is a watershed in terms of both the speed and scale of such growth. According to data available on its official website, dydx has registered a trading volume of $9.8 billion since it kicked off trade-driven mining in August 2021. Many expect dydx to trigger the explosive growth of futures DEXes and even the entire market of decentralized derivatives. The DEX uses the order book model and works with professional market makers, and LPs provide a proportion of the market-making funds.
In addition to dydx, Perpetual is also a major challenger. Unlike dydx, PERP uses a pricing method called vAMM and offers permanent futures. So far, it has introduced two versions of products. In V1, PERP separated pricing from settlement and eliminated market makers, which created a simple market structure that allows long traders and short traders to directly face each other. PERP V2 was deployed on Uniswap V3 and introduced to market makers. V2 features market-making through the aggregated liquidity method of Uniswap V3 and enables a permissionless market-making mechanism.
According to data from the blockcrypto, the PERP protocol beat its rivals in 2021. However, since it launched trade-driven mining in August 2021, dydx has become the largest DEX in terms of trading volume.
Both dydx and Perpetual work with the futures market, while the crypto community could also explore many other kinds of derivatives in traditional finance. The entire market of decentralized derivatives has seen the massive emergence of promising projects, spanning derivatives strategy, the Greek letters, exotic options, and other types of investments. Next, we will introduce several unique derivatives projects that haven’t issued any tokens.
VOLARE is a Layer 2-enabled DeFi protocol for exotic options. It is backed by a group of quantitative traders from Wall Street who have been working on the pricing and trading of derivatives for years. These professionals have brought some complex, premium derivative products from traditional finance to blockchain finance. For instance, they will launch a series of volatility products, including volatility futures, the volatility index (VIX), and volatility algorithm tools, to help traders build personalized strategies. VOLARE will also focus on the conventional strategies for trading options, covering classic strategies such as straddle, strangle, call/put spread, ratio spread, calendar spread, etc. Meanwhile, the pricing function is more justified through VOLARE’s data analysis and the vAMM model. The protocol also features the calculation of the collateralization ratio through the implied volatility and CEX-like experiences enabled by the order book model. Moreover, on VOLARE, prices are updated every few seconds thanks to built-in computing tools, which minimizes the impact of latency. In the last, NFT technology is adopted to allow users to trade options. Additionally, the project is built on Arbitrum, which reduces ETH gas fees.
Though its platform-based token (Volare) has not yet been issued, the protocol has already put into place sound mechanisms for destruction, repurchase, and fee-sharing to keep the token price stable. Volare has completed a seed round financing led by DCG, with involvement from Genesis, QCP, ViaBTC Capital, etc. Exotic options are the core advantage of the protocol, which filled a vacancy in DeFi. Despite uncertain future growth, Volare has taken up a major branch of this category and introduced more diversity to DeFi derivatives, which marks a key step towards decentralized finance.
Friktion is a full-stack portfolio management solution built on Solana. Driven by individuals, DAOs, and traditional financial institutions, it offers risk-management strategies with permissionless access and risk-adjusted returns. On Friktion, both investors with lower risk tolerance and LP providers can serve as liquidity providers of strategy pools. They inject liquidity into a pool by providing their assets to share the fees generated by investors with higher risk tolerance or institutional hedging clients. Quantitative investors can choose the matching pool to arbitrage or hedge according to their established strategies. Friktion now offers two primary strategies: covered call and cash secured put, including trading pairs such as LUNA/BTC/ETH/SOL/mSOL. Its TVL is now close to $100 million, and the APY goes from 17% (BTC) to 90% (MNGO). Find out more at: https://docs.friktion.fi/product-overview/supported-assets
In early 2022, Friktion announced a $5.5 million fundraising with involvement from Jump Capital, DeFiance Capital, Pillar, Libertus Capital, Delphi Ventures, Sino Global Capital, Tribe Capital, Castle Island Ventures, Dialetic, Petrock Capital, and Solana Capital.
Aperture is a cross-chain marketplace for investment strategies. With investments from users, the platform will identify the best cross-chain solution to help users swap assets from one chain to another when investing or trading, thereby enabling one-click cross-chain investment. Through such a one-stop solution, you can swap tokens across different chains and make investments without the need to operate multiple wallets. Now, you can invest ETH in Aperture, and more mainstream EVM-compatible chains and public chains such as Solana and Polygon will also be available on the platform.
Endorsed by well-known institutions like ParaFi Capital, Arrington Capital, Divergence Ventures, and ViaBTC Capital, the project has received personal investment from the founder and CEO of Terra and partners of Dragonfly. During the initial stage, Aperture will focus on Terra’s Mirror ecosystem. Right now, it earns revenue by implementing quantitative hedging strategies in the Terra ecosystem based on Delta-Neutral. Members of the core Aperture team come from well-known tech companies in the San Francisco Bay Area. Dedicated to technology, most of them are great developers from strong academic backgrounds. As the Terra ecosystem flourishes, we believe that Aperture will also do well.
Derivatives have become an indispensable part of the growth of DeFi. In a time when decentralized derivatives have not been extensively adopted and when conventional financial institutions are flocking into the market, we still have great expectations for the success of these projects — we expect the derivatives market to flourish amidst the next DeFi boom.