Super Dialogue | Deribit vs FinNexus: Whose Market Will Option Derivatives Be in the Future?

In the past two months, the open interest contracts of mainstream currency options such as BTC and ETH have hit record highs one after another, which makes people lament the speed of growth of this emerging derivative product. Of course, more people’s questions are still focused on, “I know that options can be used to hedge risks and arbitrage, but is its gameplay suitable for me? What should I do if the threshold is high? How to choose a trading platform?” and so on.

In order to help you clarify these issues, we invited Liu Xiaotong, the head of the China region of Deribit, the largest exchange in the option derivatives field, and Yang Tao, the co-founder of FinNexus, a decentralized derivatives platform that has emerged with the DeFi boom. Through a peak dialogue, a better interpretation of options as a species

During the dialogue, Liu Xiaotong said that the option market has developed rapidly in the past one or two years. This year alone, the number of open contracts in the market has been six times that of the beginning of the year, but it is still not as large as the spot market. According to the comparison and estimation of the traditional market, there should be several times the room for growth

As a pioneer in option derivatives founded in 2016, Deribit currently occupies more than 80% of the market share. In the future, Liu Xiaotong said that Deribit will maintain its competitive advantage through innovative products, increased system performance, and reduced latency.

In the past year, we have also seen a number of spot and futures majors such as Binance and OKEx making efforts in option products. Whether there will be another fight like the "contract war" is still unknown.

Compared with these "latecomers", FinNexus seems to be a bit lucky, choosing to start from the earlier decentralized option derivatives track with more room for development.

In response to the poor liquidity of decentralized option products and the "unlimited potential loss" of option sellers, FinNexus has prepared the second version of the product. By establishing a margin pool model, participants in the pool will automatically become collective sellers of options and share liquidity. The collective risk of all options opened by the pool, and share the benefits; at the same time, the one-to-one counterparty is also removed, and the aggregation pool is used as a unified counterparty, which largely solves the liquidity problem.

In order to mobilize the enthusiasm of initial users to participate, FinNexus will also integrate the current popular mining mechanism in the DeFi field into the pool contract to give sufficient incentives to users.

The idea of ​​FinNexus has yet to be verified. But there is no doubt that the market’s understanding and use of option products is still in its infancy, and we may see the outbreak of option derivatives in the future.

01 The Evolution and Trend of Option Derivatives

OdailyQ1: Let the two bosses briefly introduce themselves and the main business of the company. If you have some latest data, you can share them.

Liu Xiaotong:Deribit provides BTC, ETH futures and options trading.

Futures support up to 100 times leverage, and there are expiry contracts and perpetual contracts; according to the exercise time, options include day, next day, current week, next week, current month, next month, quarter, second quarter, and half a year, which are currently covered The most comprehensive option exchange, and the option exchange with the best depth in the market.

Yang Tao:FinNexus is currently focusing on the decentralized derivatives track. We launched a version of decentralized options products in July, and have opened more than 40 options so far.

The problem of liquidity due to decentralized options is difficult to solve. We are about to launch the second version of options based on the margin pool model. In essence, the buyer of the option and the margin pool are betting against each other. The one-to-one counterparty is removed, and an aggregated pool is used as a unified counterparty. In this way It can solve the liquidity problem to a large extent.

At present, we have also broken into the top 40 on the Uniswap leaderboard. It can be said that FinNexus is already very leading in the decentralized derivatives track. Of course, compared with centralized options like Deribit, we still have a lot of work to do, regardless of users or products.

OdailyQ2: As the earliest and largest centralized options exchange, Deribit would like to ask you to talk about the market share of this track? What kind of development process has it roughly gone through, and what gratifying breakthroughs/leapfrogs do you think it is achieving recently?

Liu Xiaotong:It is not yet known how much potential the option track has in the field of digital currency. Although the number of open contracts in the market is six times that of the beginning of the year, it is still not as large as the spot market. According to the comparison and estimation of the traditional market, there should be several times the room for growth.

The Deribit derivatives exchange was launched in the summer of 2016. It was co-founded by two brothers, John Jansen and Marius Jansen. The older brother John is currently the CEO of Deribit.

As early as 2014, his younger brother Marius had the idea of ​​establishing an options exchange. On the one hand, Marius was one of the first batch of Bitcoin investors, and had the need to hedge risks; on the other hand, there was no options trading in the encryption market at that time, and derivatives were still blank. Marius felt that the options exchange had great prospects for development, so he found A brother who has a professional background in options (John used to be an options market maker on the Dutch exchange). After two years of planning, Deribit was finally launched.

In its early days, Deribit will be headquartered in Amsterdam. In 2018, the European Union passed the "Anti-Money Laundering No. 5 Order", which has stricter KYC certification requirements for trading platforms. However, Deribit did not have a fiat currency deposit channel (OTC) at that time, and did not want strict KYC to reduce users' willingness to trade, so it eventually moved its operating headquarters to Panama City (implementing lightweight KYC), leaving only the product technology department in Amsterdam.

After 4 years of development, there are currently more than 30 Deribit global teams. Among them, 5 members of the Asian market team are distributed in Beijing, Shanghai, Hangzhou, Shenzhen, and Guangzhou, and the service scope covers mainland China, Hong Kong, Macao and Taiwan.

Deribit is currently focusing a lot of energy on improving its product strength and professionalism. For example, the market maker protection program, and Bitcoin's vix perpetual contract, I believe it will bring some new things to the market.

OdailyQ3: I also want to ask FinNexus about similar questions. Can you introduce the relative advantages and development of decentralized options?

Yang Tao:At present, there are two models of decentralized options. One is that our first version of the model is similar to OPYN, which tokenizes the option product itself. Basically, it only moves the process of opening options and exercising rights into the contract. The existence of a counterparty also requires the support of an order book (of course, OPYN provides liquidity through Uniswap). Compared with centralized options, this model has no obvious advantages and has many disadvantages.

The second is our upcoming margin pool-based model, which eliminates the counterparty, and the liquidity is unlimited within the funds allowed by the margin pool. This can largely solve the liquidity problem of options, especially long-tail options with large price deviations.

OdailyQ4: What is the customer profile of centralized and decentralized options exchanges? The centralized options exchange was born earlier and is more mature. Relatively speaking, the concept and experience of the decentralized options exchange have been updated. Do you know that some users will migrate from the centralized to the decentralized derivatives platform?

Liu Xiaotong:For professional option traders, what they care about is not whether the platform is decentralized, but the depth of the market, whether the maturity date is rich enough, whether the strike price is high enough, and most importantly—whether the principal is safe (no will be stolen). Deribit is currently able to better meet the needs of customers in the above aspects, and the market share of more than 80% is the best proof.

Yang Tao:The buyers and sellers of options are relatively professional investors or investment institutions. In the final development of derivatives, regardless of centralization or decentralization, it is not the number of users that wins, but the scale of funds. The reason why users choose decentralization must be that decentralization has obvious advantages. AMM mechanisms like Uniswap have greatly changed the transaction mode, and a large number of users will migrate. But in any case, neither centralization nor decentralization can completely replace each other. Both of them have positive effects on the market, and it is difficult to change the market share advantage of centralization in the short term.

OdailyQ5: Since the beginning of this year, cryptocurrency option derivatives have gradually become "inclusive". Before, options belonged more to institutional users, but this year I saw a lot of applications that package binary options into wealth management products. I don't know what you two saw. How, what changes will happen to option products if this continues? Will traffic products (such as wallets, financial service providers, etc.) replace exchanges as the direct entrance to the C side?

Liu Xiaotong:I personally don't think options are particularly suitable for "novice" investors, because it is a complicated tool, as if you would not give a gun to a three-year-old.

In the traditional market, options have a high threshold, such as A50 options, you must have certain trading experience, and at the same time have an asset requirement of more than 500,000 RMB. At Deribit, although our threshold is not so high, we are almost consistent with the traditional professional options market (US stocks, 50etf, etc.) in terms of the appearance and core of our products. Many "novel" users feel dizzy when they see it. For that. If they don't study and understand options in depth before they start trading, they are likely to lose everything in one fell swoop. That's why we established Derry University, we want traders who are actually trading options to know what they are doing.

On the other hand, the "inclusiveization" you mentioned is actually some wealth management products synthesized by options, which is actually very common in traditional markets. This is a good thing for "novice" who don't understand options to participate and enjoy the dividends brought by the tool of options. However, it is also recommended that users fully understand the professional background of the financial management team before making a decision. After all, option trading is not an easy task.

Yang Tao:Binary options are actually very different from traditional options. Traditional option models can be configured with different strategies, and binary options are closer to buying size. From the perspective of decentralized options, putting professional options issuance and pricing into the contract is actually lowering the threshold from the perspective of the seller. The margin pool model we launched, ordinary users only need to judge the basic risk-benefit ratio. It's totally possible to participate.

The entrance advantage of the exchange in the short term is still difficult to shake. OTC, user habits, asset richness, liquidity, etc. are the thresholds of the exchange, but the birth of the decentralized exchange under the AMM mechanism has already impacted the exchange. Market share, in fact, this is a process of decentralization from chain to asset. With the deepening of this process, the depth and breadth of asset decentralization are increasing, and the threshold for users to directly operate is also rising. Therefore, aggregation Providers of convenient services such as DeFi may develop into DeFi's "brokers". In this process, if the exchange transforms and follows up in time, there are still advantages. It's just that in the face of vested interests, it is difficult for someone to kill himself.

02 CeFi&DeFi peak dialogue

FinNexus asked Deribit: Your firm currently has good liquidity, but you must have faced problems in the early days. I would like to ask how you solved it?

Liu Xiaotong:Indeed, the Deribit options market was not very liquid at the beginning. When it was first launched in 2016, there were few users.

I think there are two main reasons. The first is that the overall market participants were generally non-financial background players at that time. Everyone didn’t know about options at all. At that time, even futures were far less popular than they are now. The second reason is that Bitcoin itself is too volatile, and it is difficult for option market makers to quote. As the market continues to grow and more "regular troops" enter the market, the option market has only begun to develop slowly.

Deribit asked FinNexus: A few days ago, a decentralized options exchange was attacked. I would like to ask whether security will become a bottleneck for the development of decentralized options exchanges in addition to the obvious user experience problems. For example, when the capital pool grows to a certain extent, it may attract more hackers, and it is open source code, and security cannot be guaranteed, which will become a problem. Of course, larger investors will also consider this issue.

Yang Tao:Contract security is indeed one of the biggest challenges to Defi. The approach of FinNexus is to achieve three-level guarantee technically, and to reserve a sum of insurance money in business for the final cover in case of special circumstances.

Let me talk about the technology in detail. Our product design will try to leave as much redundancy as possible, and make relative cuts between different processes, so as to ensure that even if there is a problem, it will not affect the overall situation. Secondly, we are constantly testing and reviewing the code, try our best to produce excellent products, and then hand them over to third-party contract audit agencies for auditing. For example, we have introduced some protective mechanisms to prevent the occurrence of Flash Loan attacks. Increase the attack cost of hackers.

FinNexus asked Deribit: In centralized spot exchanges, the market rankings are always changing according to the trend, and some even quit the stage because they couldn’t keep up with the trend. I would like to ask Deribit after so long and so many competitors, why is it strong? What about Hengqiang? Do you think it is possible to replicate this rule in decentralized options exchanges?

Liu Xiaotong:We don't actually have many competitors, and for a long time, we were the only option. Competitors that are really more threatening have only appeared in the last one or two years, so it is still too early to answer this question. Of course, we are also doing our best to maintain the position of market leader. For example, more investment in product research and development just mentioned, more increase in system performance, reduction of delay, and so on.

Deribit asked FinNexus: Among the many decentralized derivatives exchanges, what do you think are the advantages of FinNexus, and where is your next focus?

Yang Tao:Our advantage lies in our leading product design. There are currently many decentralized options, but they are all just getting started. Our current product design is still ahead of other projects around the world. We first do a good job in options, users, and capital scale, and expand other derivatives on the premise of these foundations.

03 User practical questions

OdailyQ10: For example, futures can be promoted by posting yields, analysts giving lectures, holding contract competitions, etc. I want to ask options products to be "popular" and become a must-have for more traders. What good user education is there? means?

Liu Xiaotong:This issue has been mentioned just now, I don’t think that “novice” users need to use options directly, if you don’t know anything about this tool, it is very likely that you will use it before you have tasted the benefits of the tool Injured by it. What we at Derry University are doing is to make novice users professional. Only professionals can control the advanced tool of options.

Yang Tao:In my opinion, there is no shortcut to educating users, especially financial products. It's hard work, but as a trailblazer you have to do it.

In addition, the growth of a market requires the unremitting efforts of practitioners. Cryptocurrency options are still in a blue ocean with great potential for development. Regardless of whether it is a centralized or decentralized platform, they all undertake a heavy task of market cultivation. So at present, there is more cooperation between platforms than competition. How to learn from each other and jointly educate the market well and make the market bigger is the first priority.

OdailyQ11: As far as I know, options trading platforms often talk about their own advantages by saying "no liquidation and unlimited profits", but I think there should also be their own limitations. One of them is the high operating threshold. The two can talk about it Are there any other problems with options (for example, one has unlimited losses)? and is there any solution.

Liu Xiaotong:Although the buyer of the option will not liquidate his position, if the market does not fluctuate greatly, even if you buy it right (for example, you bought a call option, but it did not rise as sharply), you will still lose the premium. As a seller of options, if he does not do a good job of hedging and the market fluctuates violently, he will be liquidated. So that's why I don't recommend "novice" users to use options. If this tool is used well, it can bring you good returns and has properties that other tools can't match, but the premise is that you have to fully understand it.

Yang Tao:This involves the contractual nature of options and the matching of risks and benefits between buyers and sellers. The option buyer usually thinks that the potential profit is unlimited, but the loss is limited, and the premium is the most lost; while the seller is the opposite, the maximum profit is to earn the premium, but the potential loss is unlimited. Although it is good to say so, theoretically speaking, whether an option can reasonably reflect market conditions and whether it can be priced fairly is the essence. It does not necessarily mean that the risk of the seller is higher than that of the buyer.

At present, there are indeed certain operating thresholds for option sellers with "unlimited potential losses". In traditional financial markets, option sellers are usually relatively professional investors who hedge risks through relatively complex financial instruments. But at present, in the field of encrypted digital currency, limited by the types and depth of tools, it is not realistic for general users to be able to achieve effective hedging, which also makes it difficult for the market to attract more participants challenged.

FinNexus hopes to realize automatic risk diversification for users by adopting the liquidity pool model itself and with the help of smart contracts. Through the establishment of the liquidity pool, in fact, the participants in the pool themselves automatically become the collective sellers of options, and everyone will jointly bear the collective risk of all options opened by the liquidity pool and share the benefits. The liquidity pool is used as the collateral/margin pool of the option itself, and the buyer of the option can rely on this to open customized options, such as different underlying objects (we will first launch BTC and ETH options, and later it will be expanded according to the size of the pool. other cryptocurrencies, fiat currencies, bulk commodities, stocks and even indices), call and put options with different strike prices and different durations. In this way, the types of options opened by the option pool as collateral will also be rich enough and risky will be more fully dispersed. The larger the pool and the more users, the more obvious this effect will be.

Therefore, for the problem of income and risk, FinNexus' solution lies in the liquidity pool model of decentralized options itself, which we also call MASP (multi-asset single-pool) model.

In order to mobilize the enthusiasm of initial platform users, FinNexus will also integrate the mining mechanism into the pool contract to give sufficient incentives to users. Our FNX token allocation model also fully takes this into consideration, and will reserve 70% of the total tokens for user incentives and prepare for the establishment of the future decentralized autonomous organization DAO.

OdailyQ12: I would like to know what steps must I go through to trade on Deribit or FinNexus?

Liu Xiaotong:Go to asia.deribit.com (Asia special line) to open an account, complete KYC, recharge BTC or ETH, and you can trade. But as I said before, it is best to have a comprehensive understanding of options first. You can follow our official account "Deribit De Rui's Trading Class" to get more dry knowledge about options.

Yang Tao:Since FinNexus is a decentralized model, it must first have a decentralized wallet. From a more secure perspective, hardware wallets are necessary. Currently, there are common methods in this Defi industry. The rest is relatively simple. For the buyer, choose the exercise date, the exercise price, call or put, and the system will automatically match the price. If the price is considered appropriate, it can be purchased directly. For the seller, it only needs to connect the wallet and the contract through the UI to complete operations such as entering the liquidity pool, exiting the liquidity pool, and receiving benefits. Generally speaking, for users, the threshold is wallet operation and understanding of option usage strategies.