After experiencing decentralized derivatives trading, we have something to say
Author | Qin Xiaofeng
Editor | Lu Xiaoming
Produced | Odaily
Author | Qin Xiaofeng
Editor | Lu Xiaoming
Produced | Odaily
In addition to traditional centralized exchanges, some decentralized exchanges (DEX) have also opened derivatives transactions one after another, including DYDX, DUO Network, and DEW.
The biggest difference between the so-called decentralized exchanges and centralized exchanges is that asset custody, transaction matching, and asset liquidation are all carried out on the blockchain and realized through open source smart contracts. During the entire transaction process, the private key is always in the hands of the user, and the funds are not controlled by the exchange.
However, after experiencing the above three decentralized exchanges, we found that there are still many insurmountable problems in the derivatives transactions in these DEXs.
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Compared with centralized exchanges, decentralized derivatives trading does have certain advantages.
In addition, prices are open and transparent. Taking DEW as an example, its BTC price is anchored to BitStamp, Coinbase, and Bitfinex; even the simple DUO DEX, its price is also anchored to four exchanges.
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(DEW screenshot)
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(DUO DEX screenshot)
In addition, when users trade on DEX, they can also interact with other traders, which is also a major feature.
First of all, this type of platform has a high threshold for users and is not suitable for novice users.
In terms of operation, these trading platforms all require certain Internet skills (scientific * learning * Internet access) without exception; in addition, the language barrier virtually sets a big barrier for most users; Frequent authorization to the Metamask wallet, and pop-up windows that continue to pop up also affect the transaction experience.
Secondly, these trading platforms have also adopted relevant restrictive measures, such as DEW's KYC verification and binding email addresses, and transactions cannot be carried out without relevant operations.
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Furthermore, in terms of transaction depth, compared to the depth of centralized exchanges, the depth of DEX is almost negligible. Taking DEW as an example, its 24-hour BTC futures trading volume is about 90,000 contracts, while OKEx's trading volume in the same period is as high as 16.86 million contracts, which is quite different.
This also means that it is difficult for contracts on DEX to digest the contract orders of giant whales, making prices more prone to violent fluctuations.
Finally, the most important point is that every operation on the chain needs to consume Gas fees. Even a little leek like me spent 0.04 ETH during the experience, which is indeed a bit expensive. The centralized exchange does not need to spend these additional fees.
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Decentralized Derivatives Exchange Experience
Compared with the original spot that can only be long, many exchanges use futures contracts, borrowing coins, etc. to allow users to short and make profits. The currency circle also invented perpetual contracts, that is, futures contracts that do not need to be delivered.
1.DYDX
These mechanisms also provide leverage (Leverage), that is, the multiples of funds leveraged by margin. We often hear 5 times leverage and 10 times leverage, which means that with 1 yuan as a deposit, you can leverage 5 yuan or 10 yuan of funds. Margin refers to the number of chips available to traders, which is used to cover floating losses.
Generally speaking, the higher the leverage ratio, the less margin is required (that is, the less capital is occupied), and the closer to the liquidation line; on the contrary, the more margin is required, but the liquidation space will be larger.Whether to use leverage and how much leverage actually depends on many factors-how you judge risk, your time period, the amount of capital you need to invest, and so on.）。
Since it is a DEX, all transactions must be carried out on the chain. The common practice is to re-register the address on the chain or link the wallet. Currently, DYDX only supports Metamask wallets (
Click to get the Metamask tutorial
Before making a transaction, the user must transfer the tokens in the wallet address to the DYDX address; currently only three tokens (ETH, DAI, USDC) are supported as deposits; and, due to the high transfer fee (up to 0.005 ETH) , so the wallet must leave enough gas fees to make the transfer successful.
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(The transfer fee is too high, and the remaining GAS is insufficient, resulting in the inability to transfer)
To be precise, what DYDX does is a "leveraged loan transaction", not a futures contract.
In other words, the reason why users can increase leverage on the platform is because they use the deposit to borrow money. The short-selling principle is to borrow a certain currency, sell it, buy it back after its price falls, and return it. The profit it obtains = the difference between high selling and low buying - interest.
When users transfer assets to DYDX to lend to others, they can earn income; users can also use the assets in their wallets to borrow from DYDX. For example, some users want to use USDC as a deposit, but they only have ETH in their wallets, so they can mortgage ETH to obtain USDC.
The income and loan interest rate are as follows:
ETH (annualized rate of return 0.1%; annualized lending rate 1.12%);
DAI (annualized rate of return 12.06%; annualized lending rate 18.24%);
USDC (annualized rate of return 6.46%; annualized lending rate 11.31%).
In other words, the user's leveraged transaction income must be able to cover the borrowing cost, otherwise he will face losses.
When conducting leveraged trading, users can choose to trade in full or isolated positions.
The so-called cross-margin margin means that all funds in the account are used as margin to calculate profit and loss as a whole; isolated margin means that all funds are divided into small parts, and each part calculates profit and loss separately.
For example, if there is $100 in Xiao Ming's account:
If you choose cross-margin and do 2 times leverage; if the price rises or falls by 50%, Xiao Ming's profit and loss will reach 100 US dollars.
If you choose isolated margin, each position is 50 US dollars, which is also 2 times leverage, and the price rises and falls by 50%, Xiao Ming's profit and loss will reach 50 US dollars.
In other words, under the same leverage ratio, the profit and loss of the isolated margin is smaller than that of the cross margin.
However, in most cases, investors tend to choose the isolated margin mode and increase the leverage multiple in order to bear smaller losses (only part of the positions lost) and obtain higher returns.
2.DUO DEX
In DYDX, the trading direction can be long (buy ETH) or short (sell ETH), and the maximum leverage is 4 times; when trading, each transaction will consume GAS on the chain, generally 0.002 ETH (center Exchanges do not consume on-chain GAS).
It is worth noting that since it is a loan, the pledge rate (the ratio of the collateral value to the borrowed value) must be maintained higher than 115%, otherwise the system will trigger a forced liquidation (that is, the liquidation line is 115%).
During the experience, because I chose to go long, I found that the income could not offset the borrowed DAI cost after closing the position. There is no way but to continue selling ETH to repay the debt.
However, I saw a strong copycat style. The web design is fairly rustic, with a simple transaction page. Even though there is an operation guide on the top, after clicking, it shows an error and does not work at all.
Like the previous DYDX, DUO DEX only supports Metamask wallets.
The strange thing is that even if the page is designed, you can trade directly through the wallet address (left side of the screen). But after clicking, nothing happens.
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(Official website screenshot)
Therefore, as a last resort, users must transfer funds to this exchange address and convert them into WETH for transactions.
In DUO DEX, you cannot directly choose to buy (long) and sell (short), but you need to buy two tokens to realize the contract transaction. One is called SETH (short eth), which is used to short Ethereum; the other is called LETH (Long ETH), which is used to do long Ethereum. The income of these two currencies determines the ultimate income of investors.
3.DEW
Different from DYDX, DUO DEX is actually a futures contract, so the delivery date is set, with a maximum of 7 days and a maximum leverage of 10 times.
Futures contract trading is different from the aforementioned leveraged loan trading, not because it is not a spot but a contract. A futures contract is when buyers and sellers agree to trade a currency at a specific price after a specified period of time. Shorting often means that you are buying the right to purchase commodities and become the buyer of the contract; doing long is the opposite. When the time is up, the transaction is executed, which is called delivery.
Contract trading also provides leverage, but there is no need to pay interest, and the margin only needs to cover floating losses. DUO DEX currently only supports ETH/USD trading pairs, and only supports ETH as margin; while DYDX can use currency-based ETH as margin, or stable coins (DAI, USDC) as margin.
DEW ("D Network" for short) is a decentralized securities trading platform that can trade various securities such as currencies, stocks, futures, and forecast contracts. It was born in 2017.
If the first two exchanges are not user-friendly enough, then DEW is much more friendly.
The first is the language. The operating language of the first two is English, which can only be translated with the help of web pages, which is difficult; DEW has its own Chinese language setting.
DEW provides perpetual contract transactions, that is, the contract transactions without delivery mentioned above. This model first appeared on the exchange BitMex, does not need to hold spot, provides 100 times leverage, and does not require delivery. This mechanism uses the funding rate to adjust the long-short power, and the strong side needs to pay the weak side. When interest rates are positive, longs pay shorts and vice versa.
（KYC）
However, after the experience, I feel that DEW still looks like a centralized exchange.
