Editors Note: This article is from Trend Fund and is reproduced with permission. Trend Fund is managed by LD Capital. It focuses on investing in the next generation of CEX, DEX and derivatives funds in the trading track. It has a professional trading team to provide complete post-investment services.
Crypto Derivatives Trading: A Huge Competitive Track
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Since the birth of Bitcoin, the entire cryptocurrency market has experienced more than ten years of evolution and development. Generally speaking, cryptocurrency, as a new type of asset, has high volatility compared with various products in the traditional financial industry (such as securities, commodities, foreign exchange, etc.), and is accompanied by extremely high risks. With the gradual improvement and maturity of the cryptocurrency spot market, users demand for cryptocurrency transactions is not limited to simple spot transactions, and major cryptocurrency exchanges have gradually launched various derivative products.
This article will mainly introduce the situation of traditional financial derivatives, so as to elucidate the introduction, function and role of derivatives in the cryptocurrency market, and sort out the current development status of derivatives in the cryptocurrency market, and provide insights into the future development of derivatives in the cryptocurrency market. Trends are summarized.
Basic introduction to derivatives
In the traditional financial world, the trading volume of derivatives is higher than that of the spot market. Taking the foreign exchange market as an example, the turnover of derivatives is three times that of the spot market. In 2019, the annual spot trading volume of cryptocurrencies reached 13.8 trillion US dollars, while the annual derivatives trading volume was only 3 trillion US dollars, and the trading volume of cryptocurrency derivatives was still less than 25% of the spot market. Therefore, we believe that the direction of cryptocurrency derivatives is a very potential development direction.
This article will sort out the derivatives in the traditional financial market and the derivatives in the current encryption market, so as to analyze the development path of derivatives in the encryption market.
(1) Introduction to traditional financial derivatives
Financial derivatives are a general term for a special category of financial instruments bought and sold. The value of this type of derivative depends on changes in the value of its underlying financial assets. Examples include assets (commodities, stocks, or bonds), interest rates, exchange rates, or various indices (stock indices, consumer price indices, and weather indices). The performance of these elements will determine the return rate and return time of a derivative product. The form of the product is a contract signed between the two parties (buyer and seller), and it will be executed in accordance with the contract requirements within the specified time.
The types of derivatives include the following:
1. Forward contracts and futures contracts
Both forward contracts and futures contracts are transaction forms in which both parties agree to buy or sell assets of a certain quantity and quality at a certain price at a certain time in the future. A futures contract is a standardized contract formulated by a futures exchange, which has uniform regulations on the contract expiration date and the type, quantity, and quality of the assets traded. The forward contract is a contract signed by the buyer and the seller according to the special needs of the buyer and the seller, and it is an over-the-counter transaction. Therefore, futures trading is more liquid and forward trading is less liquid.
Contract transactions in the cryptocurrency market evolved from these two types of contracts. Due to the particularity of assets such as cryptocurrencies, cryptocurrency exchanges have made innovations for traditional contract products and derived unique features of the cryptocurrency market. The perpetual contract of , which will be highlighted below.
2. Swap contract
A swap contract is a contract signed by two parties to exchange certain assets in a certain period in the future. More precisely, a swap contract is a contract signed between the parties to exchange cash flows that they believe have equal economic value within a certain period in the future. Swap contracts are generally mainly used for foreign exchange transactions between banks and hedging or arbitrage between companies importing and exporting commodities, so they are not suitable for the cryptocurrency market.
3. Options contract
An options contract is a transaction to buy or sell rights. The option contract stipulates the right to buy and sell a certain type and quantity of original assets at a certain price at a certain time. Options can be divided into call options and put options according to the wishes of the option buyer. Option contracts provide investors with a wider range of investment options, and adapt to the needs of investors with more diverse investment motivations and interests. Generally, they are used as a hedging method to reduce risks for investors.
At present, major exchanges in the cryptocurrency market have gradually launched option contracts, and their trading logic is almost the same as option contracts in the traditional financial industry.
Derivatives transaction targets:
The assets in the traditional financial market are relatively diversified, and the trading targets of derivatives such as stocks, interest rates, exchange rates, commodities, indices, etc. In the cryptocurrency market, the token price is mainly used as the asset target, and individual exchanges will innovate the target of derivative products, which will include some sector indexes, volatility indexes, etc. With the growth of the cryptocurrency market, the subject matter has a tendency to gradually increase.
Derivatives trading place:
There are two main types of derivatives trading venues, on-exchange trading and over-the-counter trading. On-site trading, also known as exchange trading, refers to the way that all supply and demand parties are concentrated on the exchange for bidding transactions. In this trading method, the exchange collects deposits from trading participants, and at the same time is responsible for liquidation and performance guarantee responsibilities. The centralized trading of all traders increases liquidity. Both futures contracts and some standardized option contracts belong to this type of trading. Derivatives trading in the cryptocurrency market is mainly in this way. The exchange can guarantee liquidity and provide users with convenient and fast trading needs.
(2) Introduction to cryptocurrency derivatives
Currently, mainstream derivatives in the cryptocurrency market include: leveraged trading, futures contracts, options contracts and leveraged tokens. Among them, some cryptocurrency exchanges do not classify leveraged trading and leveraged tokens as one of the derivatives, but these two trading methods different from spot trading do bring diversified operations to users, and can reach the requirements of derivatives. Achievable effect.
1- Leverage trading
Leveraged trading is a way of trading assets using funds provided by a third party. Compared with conventional spot transactions, leveraged transactions allow users to obtain more funds, amplify the transaction results, and enable users to obtain greater profits in profitable transactions.
In the traditional financial market, leveraged trading is generally called margin trading, and the borrowed funds are generally provided by stock brokers. However, in the cryptocurrency market, borrowing funds are usually provided by other users on the exchange. Fund providers earn interest by placing assets in the exchange, users who borrow assets through leverage pay leverage interest, and the exchange acts as an intermediary to allocate assets and obtain handling fees from them.
Leveraged trading can be used to open long and short trades. The fact that bulls can borrow stablecoins to buy cryptocurrencies reflects users’ expectations for rising asset prices; while short sellers can borrow cryptocurrencies to sell immediately and buy back the corresponding currency after the market falls, reflecting the opposite situation to bulls. When using leverage to open a long or short position, the traders assets act as collateral for the borrowed funds.
At present, the leverage provided by mainstream exchanges is 2-10 times. The so-called leverage refers to the ratio of borrowed funds to margin. For example, to open a 5x leverage ratio for a transaction of 50,000 U.S. dollars, the user needs to pledge a deposit of 10,000 U.S. dollars. When the users opening direction is opposite to the market trend and the market fluctuates violently, and the total assets of the users margin account are lower than the minimum margin requirement for leveraged trading, the exchange will force the sale of the users mortgaged assets to close the position.
Due to the risk of liquidation in margin trading, individual exchanges provide users with cross-margin and isolated-margin functions. Cross-margin leverage is a leveraged transaction that supports all trading pairs in the account, and the assets in the account are mutually guaranteed and shared. Once a liquidation occurs, all assets under the account will be liquidated. Isolated margin means that each trading pair in each account has an independent position, and the risk of each isolated account does not affect each other. Once a liquidation occurs, it will not affect other isolated margin accounts.
Generally speaking, the isolated margin function has a stronger awareness of the risk management and control of the users overall position, and can isolate the risks of different assets from each other, but requires the user to always pay attention to the margin situation of different loan assets. The cross-margin leverage function is conducive to the risk management and control of a single asset. Compared with the isolated margin, the centralized sharing of margin can better buffer the liquidation of a single currency, but the extreme market price of a certain asset may cause all All positions are closed.
2- Futures contract
As an earlier derivative product launched in the cryptocurrency market, futures contracts are currently the derivatives with the highest trading volume. There are two types of futures contracts in the cryptocurrency market: delivery contracts and perpetual contracts.
Delivery contracts are a type of crypto asset derivatives. Users can choose to buy long or sell short contracts by judging the ups and downs to obtain income from the rise/fall of digital asset prices. The delivery contracts of mainstream cryptocurrency exchanges generally use the spread delivery model. When the contract expires, the exchange will close all open contract orders. Only individual exchanges such as Bakkt support the physical delivery of cryptocurrency contracts.
At present, the delivery time of the delivery contract in the cryptocurrency market is divided into the current week, the next week, and the quarter, and a certain multiple of leverage can be added. At present, mainstream exchanges support leverage up to 125 times. In a market with violent market fluctuations, the risk of liquidation is high.
A perpetual contract is an innovative derivative that is similar to a delivery contract. It’s just that the perpetual contract has no delivery date, and users can hold it forever. In order to ensure the long-term convergence between the price of the perpetual contract and the price of the spot underlying, the exchange will basically use the method of funding rate.
The funding rate refers to the settlement of funds between all long and short positions in the perpetual contract market, and is settled every 8 hours. The funding rate determines who pays and who gets paid; if the rate is positive, longs pay funds to shorts; if negative, shorts pay funds to longs. Think of this as a fee for the trader to hold the contract position, or a refund. This mechanism can balance the demand of buyers and sellers for the perpetual contract, so that the price of the perpetual contract is basically consistent with the price of the underlying asset.
Almost all mainstream cryptocurrency exchanges have supported perpetual contracts, with a leverage of up to 125 times. Perpetual contracts are also the most popular derivatives in the market today.
3-Forward contract and reverse contract
In the cryptocurrency market, forward contracts are also called stable currency contracts, that is, stable currency (USDT) is used as a margin in the contract. Inverse contracts are also called currency-based contracts, which use currencies as contract margins for corresponding trading pairs.
Derivatives in the traditional financial market are generally forward contracts that use cash to settle, while reverse contracts are innovations in the cryptocurrency market, using cryptocurrencies (BTC, ETH, etc.) Greatly increased the demand for cryptocurrencies in the secondary market, driving market liquidity.
At the same time, the derivatives market of cryptocurrencies has its special features. Since the price fluctuations in the cryptocurrency market are very large, it is very easy to lead to a short position.
Next, this article will introduce what is a position break and how to solve it. Liquidation means that after the liquidation of the users contract, the position cannot be liquidated due to liquidity, that is, there is no counterparty in the trading market to match the order. Generally speaking, in this case, the exchange will take over the users remaining positions, which will cause the exchange to receive losses. Major exchanges (such as Binance, Huobi, OKex, etc.) will set up a risk guarantee fund. The risk guarantee fund is designed to compensate for the loss caused by the users contract asset margin being lower than 0. The additional fees paid by non-bankrupt forced liquidation users will be Injected into the risk protection fund. The main purpose of the risk protection fund is to reduce the possibility that users cannot be liquidated.
When the risk guarantee fund cannot take over the position of the cabin user, there are currently two mainstream solutions in the cryptocurrency exchange. (1) Distribution of liquidated positions: When performing profit and loss settlement on the delivery day, the exchange will consolidate and count the liquidated positions generated by the liquidation orders of all contracts, and share all profits of all profitable users; (2) Automatically reduce positions: The exchange will close positions based on user priority. The priority order is calculated based on the users profit and leverage ratio. Generally, users with more profit and higher leverage ratio will be liquidated first. The above two schemes achieve the balance of the systems profit and loss by reducing the profit part of the contract profit party. The profit-loss allocation mechanism will apportion all profit-making users, while the automatic position reduction is for the most profitable users. Cryptocurrency exchanges generally launch multiple delivery contracts with different delivery times to meet the needs of most users, and this will also divert users funds, resulting in poor liquidity for individual delivery contracts. On the other hand, the liquidity of perpetual contracts is relatively good, and the order depth is almost close to that of spot commodities, so the phenomenon of short positions mostly occurs in delivery contracts.
4- Option contracts
Currently, option contracts in the cryptocurrency market are mainly divided into two types, one is the T-type quotation option contract based on the Deribit exchange, and the other is the innovative option contract based on the cryptocurrency market launched by Binance.
(1) T-quote option
The T-quote option contract in the cryptocurrency market is almost the same as the option contract in the traditional financial market. They are all European options and can only be exercised on the expiration date. The exchange acts as a securities broker and provides users with a T-shaped quotation table, which contains transaction information such as the subject matter of the option contract, expiration date, exercise price, and buying and selling price. Users can be both option buyers and option sellers.
(2) Simplified version of new options
The second type of options product is a simplified version of new options (also known as short-term options) launched by exchanges such as Binance and Gate.io. Compared with the complex T-shaped quotation table of traditional options, this type of option product simplifies the trading process to enhance the trading experience. Users only need to choose the option expiration time and purchase quantity to buy options, and the exercise price when placing an order is provided by the exchange in real time. According to the product characteristics of different exchanges, it can be divided into two types: European options and American options. Compared with traditional options, its expiration time range is shorter, ranging from 5 minutes to 1 day. Users can only play options contracts with the exchange as option buyers.
This type of simple version of the new option has the following characteristics:
• High liquidity. Generally speaking, standard option contracts have multiple expiration dates and exercise price options, and there are two options for buyers and sellers. The diversified product structure will also disperse the liquidity of each option contract. The seller of the simple version of the new option is the exchange, which can provide liquidity at any time, so users do not have to worry about the lack of counterparties due to lack of liquidity.
• The operation is simple and easy to use, and the user experience is more friendly to novices. Option is essentially a complex derivative. For an in-depth understanding of option contracts, it is necessary to master the complex nonlinear relationship between the five Greek letters, and the learning cost and threshold are relatively high. The simple version of the new option has become an extremely simple derivative tool after being packaged by the exchange, which can be understood as the users expected guess on the short-term price of the cryptocurrency asset.
• Options have shorter expiration dates. The expiration date of the simplified version of the new option ranges from 5 minutes to 1 day, which is far from the month or even a quarter of the traditional option contract. The main users of short-term options are more speculators, who make short-term guesses on asset targets or guesses, and gambling means more.
• Intrinsic value is opaque. The short-term options packaged by the exchange will not provide users with important data on options such as potential volatility, Delta, and trading volume, and users cannot calculate the true intrinsic value of options. The exchange can sell options at a high premium to obtain high profits. The users counterparty exchange has a natural advantage in having a large amount of real-time data on the underlying options. The table is reversed to hedge the risk of being a seller. Therefore, users, as the option counterparty of the exchange, need to bear higher risks, even if the price of the option is unreasonable, they cannot learn from it.
5- Leveraged Tokens
A leveraged token is essentially a token with a leverage function, designed to provide leverage multiples of the underlying asset. Unlike leveraged trading, users do not need any collateral and maintenance margin, nor do they need to worry about the risk of being liquidated. Behind each leveraged token is a basket of underlying positions.
Depending on the product, the real target leverage behind the leveraged token is also different. The leveraged token maintains the target leverage by increasing or decreasing the positions held by the underlying assets through the exchanges position adjustment mechanism. From a functional point of view, the role of leveraged tokens is similar to that of ETFs (Exchange Traded Funds) in the traditional financial field. For example, the leveraged tokens BTCUP and BTCDOWN issued by Binance. BTCUP can realize leverage multiple income when the price of BTC rises. On the contrary, BTCDOWN can realize leveraged income when the price of BTC falls. The package of assets corresponding to BTCUP leveraged tokens is 123,456.78 BTCUSDT perpetual contracts. The target leverage ratio for Binance Leveraged Tokens will remain between 1.5x and 3x.
Although leveraged tokens do not require cumbersome operations like ordinary cryptocurrencies, the mechanism is more complicated and not suitable for novices to participate. There is no liquidation situation for leveraged tokens, but compared with holding spot, long-term holdings of leveraged tokens will be affected by daily rebalancing and daily management fees, and assets will gradually be worn out by handling fees. Therefore, in the short-term unilateral market, leveraged tokens will give full play to their advantages. Leveraged tokens will automatically use floating profits to increase the underlying asset positions, so that the actual leverage ratio exceeds the original leverage ratio to achieve more returns.
According to data from CryptoCompare, in May 2020, derivatives trading volumes across all trading platforms rose sharply, with total trading volume hitting an all-time high of $602 billion (an increase of 32%). In June 2020, compared to May, the trading volume of derivatives on all platforms decreased, and the trading volume of derivatives for the whole month was 393 billion US dollars (down 35.7%). Despite the drop in volume, derivatives traded at an all-time high (37%) as a share of all trades. In the later period, the trading volume of the entire derivatives industry still has a lot of room for development. Tokeninsight predicts that the trading volume of cryptocurrency derivatives in 2020 will reach more than twice the spot trading volume.
Among the different types of derivatives, we believe that options currently have a lot of room for development. There is not much difference between the trading volume of futures and options in the traditional market. At present, the average daily trading volume of the top three digital currency futures exchanges (Huobi, OKEx, Binance) in June is 10.5 billion US dollars, while the Deribit option is 830 million US dollars (according to CryptoCompare, accounting for about 90% of the total option transactions) , so we conservatively predict that options will have nearly 10 times the growth potential.
In addition to options, OTC derivatives are another development opportunity. At the end of 2017, the nominal principal of the global over-the-counter derivatives market was 532 trillion U.S. dollars, while the position of the on-exchange derivatives market in the same period was 81 trillion U.S. dollars, with a ratio of about 7:1. We can clearly see through the data It can be seen that the transaction volume of OTC derivatives is much larger than that of on-exchange derivatives transactions.
Crypto over-the-counter trading currently accounts for around 60% to 65% of crypto market activity. Some OTC desks offer a number of bespoke derivative products for clients with large transaction needs, which may include options, swaps, forwards and contracts for difference. Compared with the data of the traditional financial market, we believe that there is still a lot of room for future growth in the OTC transactions of cryptocurrencies.
From the perspective of the development of the derivatives market, 2018 is the year when derivatives began to take off. The average daily trading volume of BitMEX’s BTC perpetual contracts increased by nearly 10 times compared with the previous year, reaching the level of 200 million US dollars. The reason is that the market was sluggish in 2018, and participants urgently needed a financial tool for hedging or speculative shorting. Therefore, we believe that the take-off of cryptocurrency derivatives in 2018 mainly came from the need for shorting.
• Introduction of current mainstream derivatives exchanges
Since the development of the cryptocurrency market, derivatives have become one of the indispensable financial tools in the market. The development and innovation of cryptocurrency derivatives has played a role in promoting the entire market, and its main functions are as follows:
(1) Hedging:
Hedging is when investors use derivative products to protect their portfolios. Use the profits obtained from derivatives to make up for the losses in the spot market, or use the appreciation of the spot market to offset the losses caused by derivatives, so as to reduce the risk. For example, a large number of bitcoin miners are worried about the future decline of bitcoin prices after obtaining mining income, so they use the short-selling mechanism of cryptocurrency derivatives to short derivatives equivalent to the expected income to lock in the income in advance. For institutional investors, reverse operations using derivatives such as options and futures contracts can play a role in risk hedging for investment funds and improve asset risk management and control awareness.
(2) Speculation:
Cryptocurrency derivatives provide retail investors with a variety of speculative means, providing high-leverage futures contracts allows users with small funds to gain higher returns with a small amount of money. But it comes with higher risks. High leverage means that slight fluctuations in asset prices can blow up users capital positions. For most exchanges, cryptocurrency derivatives, especially futures contracts that support high leverage, have become one of the main tools to attract users. Most novice users open positions with 100-fold contracts on exchanges, which is tantamount to gambling, while professional quantitative trading teams can take advantage of market fluctuations for strategic trading speculation, such as grid trading.
(3) Value Discovery:
In the cryptocurrency derivatives market, if the transaction volume and user base are large enough, derivatives will have value discovery for asset targets. The price in derivatives often reflects market users judgment on the future trend of the asset target, which has certain reference significance for the future value outlook of the spot, and can even predict the future price of the spot market from a certain aspect.
(4) Increase the liquidity of spot transactions:
At present, the derivatives provided by most mainstream exchanges are inverse contracts, that is, encrypted currency assets are required as margins, and users who trade derivatives need to hold a certain amount of encrypted currency to open a position. In the case of violent market fluctuations, users need to continue to buy cryptocurrencies in the spot market as margin to cover their positions. On the other hand, cryptocurrency assets that are profitable through derivatives trading also need to be traded in the spot market for withdrawal. Therefore, the linkage between the derivatives market and the spot market is high, and the sharp increase in the trading volume of the derivatives market will also lead to an increase in the liquidity of the spot market.
After a period of development, a number of cryptocurrency exchanges have demonstrated their rapidly growing market share relying on their technological advantages, market promotion, or the number of users of the original spot exchange.
At present, most of the top spot exchanges provide trading modules of derivatives exchanges, so users can directly trade derivatives on centralized spot exchanges; at the same time, there are also some centralized derivatives transactions that focus on derivatives transactions Exchanges (eg Bybit, BitMEX).
According to the data of coinkecgo on April 20th, the current ranking of global encrypted derivatives exchanges is as follows:
（1）Bybit
We will focus on analyzing several of these excellent derivatives exchanges and analyze the reasons for their success.
TokenInsight classified three large-scale futures exchanges, Bybit, FTX and BitMEX, based on the criteria that the total turnover in 2020 exceeded $300B and mainly provided futures contract transactions.
Large-scale futures exchanges focus on digital asset derivatives trading tracks based on futures and options. From the perspective of product composition, the trading volume of large-scale futures exchanges mainly comes from perpetual contracts. From the perspective of market share, due to the impact of regulatory events, BitMEX performed relatively poorly in Q4. Among the large futures exchanges, Bybit achieved substantial growth in Q4, with an average daily trading volume of $3.18B, surpassing BitMEX ($2.64B) in one fell swoop, ranking first among large futures exchanges in terms of futures trading volume; and in April 2021, The average daily trading volume of Bybit even reached $4B.
Bybit is a cryptocurrency exchange for derivatives and contracts. Different from OKExs comprehensive trading products, Bybit only focuses on this kind of trading products. This unknown derivatives exchange in China has its most important bitcoin perpetual contract ranked third among CoinGeckos bitcoin perpetual contracts. It has been deeply involved in overseas markets, and its recent average daily trading volume has exceeded $4B. With such a large transaction volume, from the perspective of technical stability, Bybit’s matching system and liquidation mechanism have not had any problems. Under such a market, it is by no means an easy task.
The perpetual contract currently launched by Bybit is actually a unique type of trading product in the cryptocurrency field, which is similar to the concept of contract for difference (CFD) in the traditional financial industry. This is a high-leverage, high-fee, high-risk trading product. Users can use this tool to obtain ultra-high capital utilization, but at the same time they also bear corresponding high risks. Taking Bybits 100 times leverage as an example, users only need to deposit 0.1 BTC as a deposit, and then they can submit an order with a maximum value of nearly 10 BTC, which instantly improves the utilization rate of funds.
In terms of the design of the perpetual contract product itself, because BitMEX has the most liquidity and the largest trading ecosystem in the cryptocurrency field, Bybit also uses a reverse contract design similar to BitMEX. For any former BitMEX user, It is very convenient to be familiar with this set of interaction and ordering methods, and even the rate calculation method is the same, reducing the learning cost of users. And OKExs perpetual contract is completely their own set of interactions and experiences. Users who are used to BitMEX are likely to spend time learning how OKEx operates.
（2）FTX
In addition, the two features of index calculation and trading depth are also worthy of professional traders attention. The 15% price plunge that Deribit encountered on November 1 was caused by the downtime of Coinbase, the data source of its index price, and Bybit avoided this situation because its index price also added an additional double protection mechanism : Eliminate wrong price data sources and reduce the weight of data sources with high price deviation. These two mechanisms will ensure that Bybit is more stable than other index calculation methods. The depth is actually easy to compare. CoinGecko shows that Bybits Spread (buy-ask spread) is the highest level of 0.01%.
In May 2019, FTX was officially established, focusing on derivatives transactions. The original intention of SBF, a trader, to build FTX is also very simple. The current derivatives trading platforms on the market have many pain points, which are not innovative and friendly enough. The average daily trading volume of FTX in Q1 2020 was $0.84B, while the average daily trading volume in Q4 reached $1.76B, an increase of 109.5% compared to Q1.
Of course, for FTX and the entire cryptocurrency market, the innovation of equity token is more important and attracts more attention. Combining cryptocurrencies and stocks, the previous attempt was the currency market BISS, but the platform came to an end due to various reasons such as regulation. FTXs equity token allows qualified traders to trade stocks of companies such as Tesla 365 days a year, 7×24 hours, breaking the restrictions of the stock market. Moreover, the equity certificate is backed by the stock of the regulated brokerage at a ratio of 1:1, allowing traders to obtain all the economic benefits of holding the stock itself.
Of course, as a derivatives platform, in addition to spot trading of stocks, FTX has also added futures trading of corresponding products, and allows users to trade with a leverage ratio of up to 101 times. The success of the equity certificate has given FTX a taste of the sweetness, and it has also allowed them to dig deeper into this product-further launching Pre-IPO products. Before Airbnbs IPO, FTX launched the Airbnb IPO pre-sale contract (Pre-IPO Airbnb Contracts), a derivative contract; in anticipation of Coinbases upcoming IPO, FTX launched the Coinbase IPO pre-sale contract trading market.
The innovative product of equity token is like a sharp dagger, which opened a hole in the derivatives trading market, allowing the cryptocurrency market to see the strength and innovation of FTX.
Grayscale introduced cryptocurrencies to the stock market, and FTX introduced stocks to cryptocurrencies. In addition to providing users in the cryptocurrency field with a channel to invest in stocks, the attempt of FTX equity token is a big step forward for asset digitization.
Although FTX has been established for less than two years, it has already built its ecology in two dimensions of centralization and decentralization, and it has been quite effective: in the centralized world, based on FTX, it occupies the market share through innovative and differentiated products. At the same time, focus on compliance and launch the US compliance division FTX.US; in the decentralized world, deploy the decentralized trading platform Serum based on the Solana public chain, AMM agreement Raydium, prime broker agreement Oxygen, etc., perfect DeFi ecological universe.
At the same time, FTX also acquired mobile news and portfolio tracking APP Blockfolio at a sky-high price of US$150 million to acquire more retail investors. To some extent, this is similar to Binances acquisition of CoinMarketCap.
（3）BitMEX
It can be seen that, relying on SBFs personal influence, relying on innovative products, increasingly perfect ecology, and circle-level connections and breakthroughs, FTX has achieved a comprehensive explosion since 2020. According to FTX official data, in 2020, FTXs transaction volume will rise in a blowout, with a total transaction volume of more than 385 billion US dollars, and an average daily transaction volume of 1.06 billion US dollars, an increase of more than 1,000% compared to 2019; the number of new users on the platform exceeds 100,000 , Compared with 2019, the growth has also exceeded 800%. Since entering 2021, FTX has reached a higher level, and the current average daily trading volume has exceeded 7.9 billion US dollars.
BitMEX is the oldest cryptocurrency derivatives exchange, on which you can trade Bitcoin and other digital currency contracts with up to 100 times leverage. The platform was founded in early 2014. It took the founders a total of eleven months to build the exchange, which was officially launched on November 24, 2014.
BitMEX is the first cryptocurrency exchange to list perpetual contracts. At that time, there were very few derivatives in the cryptocurrency market. The perpetual contract launched by BitMEX met the market demand well and quickly developed in the cryptocurrency market. Today, as mainstream exchanges such as Binance, Huobi, and OKEx have launched perpetual contracts, and trading varieties have expanded from BTC and ETH to other cryptocurrencies, the challenges BitMEX is facing are becoming increasingly severe.
On April 17 this year, the daily trading volume of the platform exceeded US$9 billion, one of the highest daily trading volumes in the history of the platform. BitMEX stated that in the past 365 days, the total transaction volume of the platform has exceeded 1 trillion US dollars, and January and February this year are also the months with the largest monthly transaction volume in the platforms history. BitMEX said it reached this milestone because of a user verification program launched in December that gave BitMEX the largest verified user base among cryptocurrency derivatives exchanges, generating a total of $335 billion in trading volume since the program ended.
Although BitMEX has made a major breakthrough in performance, it is also facing very big challenges. On the one hand, there are challenges from competitors, whether it is a professional derivatives investment exchange such as Bybit, FTX, or a comprehensive mainstream exchange Binance, Huobi, etc. Another aspect is the risk from regulation.
At the same time, BitMEX is constantly polishing its products to enhance its user-friendliness and range of services. On March 18, the cryptocurrency derivatives exchange BitMEX announced that it will support the deposit function of Bitcoin Bech32 (native segregated witness) addresses, which can reduce users transfer fees. Bech32 addresses offer many advantages over previous addresses, including increased ability to detect and correct errors, and lower overall transaction fees. In March this year, BitMEX launched dual-currency perpetual contracts in batches for six currencies, ADA (Cardano), DOT (Polkadot), EOS, YFI (yearn.finance), UNI (Uniswap) and XLM (Stellar Lumens). greatly enriched the scope of its services.
secondary title
3. Introduction to emerging trading projects of derivatives
As the price of Bitcoin and the market value of the cryptocurrency circle continue to expand, the track of derivatives trading is also getting more and more attention. In addition to the many successful professional derivatives exchanges mentioned above, many emerging projects have also emerged.
Among them, futures trading platforms include dYdX, perpetual, Injective, etc.; options trading includes Opyn1, Hegic, and Deribit, etc.; let’s introduce these DeFi derivatives projects according to several technical paths:
Technical Path 1: Order Book Trading Paradigm
（1）dYdX
Items in this technology path are traded based on the traditional order book trading paradigm. However, because the performance of most public chains cannot support order book transactions, some technical compromises are generally required.
Founded in 2017, dYdX is a product of the same period as MakerDao, Aave and other leading DeFi protocols. At the end of 2017, it received investment from Chris Dixon of A16Z, Olaf Carlson-Wee of Polychain Capital, Brian Armstrong of Coinbase and others.
dYdX is one of the few decentralized exchanges that insist on using the order book model. It adopts off-chain order books and on-chain settlement transactions. It is also one of the few DeFi protocols that have been in operation for several years. Projects that have not yet launched governance tokens . dYdX also includes three functions: lending, leveraged trading, and perpetual contracts. Margin trading has its own lending function. The funds deposited by users automatically form a fund pool. If there are insufficient funds during the transaction, they will be automatically borrowed and interest will be paid. It should be noted that currently dYdX’s leveraged trading is only friendly to users of large-amount transactions. If a single order is less than 20ETH, you can only choose to take the order, and you need to pay a higher order taker fee for small orders to make up for the gas cost.
（2）Injective
Currently, dYdX’s perpetual contracts are running simultaneously on Layer 1 and Layer 2. Layer 2 adopts StarkWare’s second-layer solution and has started mainnet testing. Users can register with their own email addresses and Ethereum addresses. It is very possible to use it now to get airdrop rewards when dYdX issues coins. Over the past 3 months, funds locked in dYdX have risen from $45 million to $220 million.
Injective Protocol is one of the first batch of projects incubated by Binance Lab, and it is also listed on Binance through Launchpad. The Injective protocol consists of three parts: the Injective chain built on Cosmos, as an Ethereum Layer 2 side chain solution, can extend Ethereum transactions to the Injective chain; the Injective derivatives trading protocol, users can build their own derivatives transactions; The Injective trading platform adopts the order book mode to match transactions, and the orders are stored on the chain and maintained by nodes. In addition to normal transactions, Injective also optimizes the transaction experience and uses a delayed random function to prevent front-running transactions. The Injective chain based on Cosmos can pass through IBC to products of other chains.
（3）YFX
Since Uniswap turned the liquidity pool-based AMM trading paradigm into the most mainstream liquidity provision mechanism for DeFi projects, the main problem with order book-based DeFi derivatives transactions is the lack of a mechanism like a liquidity pool for community participation Liquidity provision. In addition, DeFi derivatives projects based on order books are mainly deployed on their own layer2, because the composability with other DeFi projects is also a problem.
YFX is a cross-chain decentralized perpetual contract trading platform based on ETH (Layer2), BSC, Heco, Tron, OEC, Polkadot, providing perpetual contract trading services up to 100 times the value of BTC, ETH and other assets. YFX innovatively uses the QIC-AMM market maker pool trading mechanism with high liquidity and low slippage to provide users with a smooth and safe trading experience. YFX has successfully supported Layer 2 perpetual contract trading services, which integrates the Cefi-style leverage expected by perpetual contract traders and the liquidity and simplicity of the AMM of the Defi system, and will become the basic financial facility in the Defi field in the future.
YFXs first QIC-AMM (Quoted Index Price and Constant Integral Based Automated Market Maker) is an automatic market maker trading protocol based on index price quotations and dynamic depth of constant points. Under the agreement, the centralized index price is quoted, and traders refer to this price to directly quote and complete the long-short transaction with the automatic market maker. The transaction depth is related to the liquidity of the market makers capital pool.
In fact, after in-depth research and practice by the YFX team, it was discovered that the AMM mechanism used in the pricing mechanism of financial derivatives has loopholes, which will cause risk-free arbitrage for smart investors in the market, resulting in irreversible risks in the system. The QIC-AMM mechanism will capture the spot prices of multiple centralized transactions to form an index price. When the user places an order, the user only needs to enter the opening cost, leverage and direction, and the system will freeze the users opening cost. The system will use the index price at this time as the basis, together with the opening information and the opening deposit, to upload to the chain, because it takes time to upload to the chain. During this period of time, due to market fluctuations, the price will have a certain deviation. Users can customize the range of tolerance deviation , when the on-chain price is within this range, the market maker will freeze a certain amount of margin from the available balance of the fund pool, which will be frozen together with the users opening cost to form a long-short position and a smart contract.
Compared with the order-driven quotation system adopted by centralized exchanges, YFX draws on the financial model of traditional financial derivatives, that is, the market maker system in the traditional financial market, where market makers provide investors with bilateral quotations for buying and selling for directional transactions , guide the transaction price to change through the update of quotation.
（4）Opyn
YFX also has a unique anti-breakthrough setting. The automatic market maker forms a smart contract with the users order through the QIC-AMM mechanism to be uploaded to the chain. This not only ensures the safety of funds of users and market makers, but also ensures that the system will not be overwhelmed. In YFX, users and market makers have different leverage ratios. Through system configuration, once the index price breaks through the forced liquidation price of one party, the super manager of the smart contract will force the liquidation of the position, and the user will stop the liquidation Or stop loss and liquidation by market makers. If there is congestion on the blockchain and forced liquidation cannot be carried out, after the blockchain network returns to normal, the system will still settle according to the forced liquidation price of a certain party, so as to avoid the occurrence of liquidation in the entire system.
Opyn is a decentralized options trading platform built on Ethereum, which enables users to avoid the risk of currency price fluctuations. Paradigm, Dragonfly, 1kx, DTC Capital, and the founders of Synthetix and Aave all participated in the investment of the project. Opyn is built using the Convexity Protocol, which allows users to create put and call options. Users can only buy and sell options with a given product, delivery time, and strike price.
The options sold in Opyn are European-style options, which can only be delivered when they expire. The products are priced in USDC. The option seller must pledge 100% of the margin to deal with market risks. The option seller will obtain the corresponding oToken and sell it. For example, if you currently want to sell 1 WETH of a put option with a settlement price of 1800 USDC and a delivery date of March 12, you need to mortgage 1800 USDC to generate 1 oWETHP, and you will get an option fee of 171 USDC after selling. If the price of WETH is below 1800 USDC after the option expires, the user who holds the corresponding oToken can exercise the option and obtain the difference between the price of 1800 USDC and the price of ETH.
Technical path two: vAMM
（5）Perpetual
This technology path is mainly inspired by Uniswaps AMM, using a virtual AMM (virtual AMM) as its price generation mechanism.
Perpetual Protocol, formerly known as Strike Protocol, is an automated market maker AMM and supports a decentralized perpetual contract trading protocol for each asset. Its decentralized perpetual contract has properties including 20 times long-short leverage ratio, non-custodial, trust-free, anti-censorship, guaranteed liquidity through AMM, support for blockchain assets and off-chain assets such as gold and crude oil. Minimize oracle usage by using an hourly Chainlink price feed.
Its team is located in Taiwan, and its co-founders are Feng Yanwen and Shao-Kang Lee. Feng Yanwen previously served as the co-founder and CEO of Decore, and participated in the founding of Cinch Network, Cubie Messenger, Gamelet and Willmobile (a mobile financial service application in Taiwan, which was later acquired by Systex). Shao-Kang Lee previously founded the app POPAPP, which was acquired by Marvel in 2016.
In August 2020, Perpetual received investment from Alameda Research, Three Arrows Capital, CMS Holdings, Multicoin Capital, Zee Prime Capital, Binance Labs and other institutions. It is built on xDai (Ethereum side chain), a contract exchange driven by a virtual market maker (vAMM), and initially only supports USDC as collateral. vAMM also relies on the constant product formula to determine prices. Before users use it, they need to deposit USDC into the smart contract that stores real assets. When trading, virtual assets are minted in vAMM. If you use 100 USDC to open a long position with 10 leverage, you will mint 1000 vUSDC and put it into vAMM, but vAMM does not store real assets, it is just for the convenience of liquidation.
The vAMM model is highly dependent on artificially setting the parameters of the virtual liquidity pool because its liquidity pool is virtual. For example, the parameter K of Perpetual represents the liquidity size of the virtual liquidity pool. If K is too small, it will bring a large slippage to the transaction. If K is too large, the price generated by the internal CPMM mechanism will respond too slowly to the external price. Because the setting of K value is difficult to grasp, it will bring certain hidden dangers to the project.
Technical Path Three: Based on Liquidity Pool
（6）Deri Protocol
The derivatives trading method based on the liquidity pool is essentially the same logic as Uniswaps spot trading based on the liquidity pool, which allows the liquidity pool to play the role of the users counterparty in the transaction process.
Deri Protocol is a decentralized derivatives trading protocol developed by DeFi Factory. The Deri protocol provides a decentralized way for users to accurately and efficiently trade risk exposure.
The working mechanism of the Deri protocol is similar to that of Uniswap, which makes the liquidity pool the counterparty of the trader. The difference is that Uniswaps liquidity pool for spot transactions needs to hold a pair of tokens for traders to exchange, while Deris liquidity pool, as the counterparty of derivatives, only needs to hold the standard currency of the derivatives. As the counterparty of the spot transaction, Uniswaps role in the transaction is: the liquidity pool has two currencies, A and B, and is ready to transfer back a certain amount of B based on the CPMM algorithm according to the amount transferred to A (or B) by the user. (or A) to the user. As the counterparty of derivatives transactions, Deris role in the transaction is to be ready to establish corresponding short (or long) positions as the counterparty according to the needs of users to establish long (or short) positions. The traders opening price is the oracle quote at the time of the transaction, so there is no slippage. Since the long and short sides of external traders may be unbalanced, the liquidity pool may take market risks due to holding net positions. Deri balances the long and short sides through the mechanism of funding rate. The existence of the funding rate mechanism will allow arbitrageurs to play the role of a minority party in the transaction out of the motivation of earning the funding rate, thereby balancing the long and short sides, so that the net position of the liquidity pool (and market risk) can be used for trend at 0.
As a solution for decentralized derivatives, the Deri protocol has all the following characteristics:
•True DeFi: Different from most order book-based solutions, the core transaction logic of the Deri protocol is completely completed on the chain.
•True derivatives: The economic significance of derivatives is to allow users to trade risk factors accurately and with high capital efficiency. Deris trading position is calculated by the mark price updated by oracle to ensure that the position PnL accurately tracks the change of the underlying price; implements margin trading, provides internal leverage, and has high capital efficiency provided by leverage;
•Composability: positions are tokenized into non-fungible tokens (NFT), users can easily hold and transfer position tokens in their own wallets, and can also easily import position tokens into other DeFi projects as their foundational components to meet their financial needs (i.e. as LEGO modules for their own projects);
• Openness: In theory, Deri can start a liquidity pool with any trading object as the target based on any standard currency (but usually a stable currency). The Deri protocol does not mandate that users use any specific own chips. According to the trading range supported by its oracle mechanism, Deris trading range can be expanded to any trading target that oracle can support. For example, Deri has already supported the trading of COIN perpetual futures on the BSC chain.
•Three chains, one ecosystem: Currently, the Deri protocol is deployed on the three public chains of Ethereum, BSC, and HECO, and its official cross-chain bridge unifies the three chains under the same ecosystem.
（7）Hegic
• V1 of the Deri protocol is currently online, and the team is developing Deri V2. The V2 version of Deri will bring ultimate capital efficiency to the field of DeFi derivatives trading.
Hegic solves the liquidity problem of option products through a liquidity pool. Although it does not have well-known institutional investors, it is also popular because of the promotion of YFI founder Andre Cronje. Andre once tweeted that the YFI machine gun pool is a single-currency non-destructive mining strategy, which is not conducive to the capital pools income. In the future, Hegics option strategy will be considered to help YFI obtain more income.
（8）dFuture
Currently, only BTC and ETH options are included in Hegic. Users can provide funds in Hegic to form a liquidity pool, and these funds will be used to automatically sell call and put options and become the counterparty of the buyer. Therefore, providing liquidity in Hegic will bear the risk of selling options and also enjoy the benefits of selling options.
dFuture is a decentralized derivatives trading protocol developed by Mix Labs, a subsidiary of MIX Group. It adopts the QCAMM market maker protocol and has the characteristics of zero slippage, high transaction depth, and zero free loss. dFuture is a point-to-pool trading futures Dex with liquidity provided by LP, and it is in the subdivision track of the Dex track AMM futures Dex track. The advantage of the point-to-pool form is that traders can achieve nearly unlimited liquidity when trading within the capacity of the pool. At the same time, LPs are not required to conduct professional market making, and market making can be done simply by providing liquidity.
The pricing method of dFuture is oracle pricing. It uses the QCAMM mechanism for pricing, and obtains prices from multiple data sources such as Uniswap, Chainlink, Wootrade (ie Wooracle), and then obtains a weighted average price for quotation. In order to prevent oracle failures, dFuture has designed a variety of rules to deal with various oracle failures, and in extreme cases, transactions will be suspended. The advantage of the QCAMM pricing method is that users can directly trade according to the quotation without slippage; at the same time, since the QCAMM mechanism is settled in a single currency, for example, USDT is currently used to do long/long short BTC, ETH and other assets, so there is no free loss . The price of realizing the advantages of point-to-pool and QCAMM is that dFuture has a limit on the total open positions of all users, and its naked positions cannot exceed the pledged amount of the LP pool. After reaching the limit, the naked position direction cannot continue to trade. At the same time, dFutures constant sum formula design makes the long and short positions on the market as close as possible to each other.
In addition, dFuture is provided with liquidity by LP (liquidity provider), which needs to bear the risk as the counterparty of the trader, and also obtains the service fee / platform currency DFT income. dFuture has set up a risk protection fund as a buffer when risks occur. The risk protection fund will first bear the risk, and then the pre-set algorithm will carry out post-production processing of losses such as loss distribution, and finally, LP will bear the limited risk.
（9）Lever Network
dFuture was launched on February 8, 2021, and there are currently more than 40,000 interactive wallets. One month after its online operation, it has achieved a total of 40 million USDT total lock-up volume (TVL) per day, 280 million USDT contract transaction volume per day, and more than 30,000 contract interaction addresses. The decentralized futures track is on the eve of explosion as a whole, and dFuture has a unique QCAMM mechanism, which has the potential to compete. Compared with Ethereum, both Heco and BSC have faster block generation speed and shorter confirmation time. dFuture can quickly update the platform price and effectively avoid front-running attacks; the gas fees of Heco and BSC are much lower than that of Ethereum Square, allowing traders to open positions on the dFuture platform at a lower cost; at the same time, both Heco and BSC have a large number of high-quality trading users, and dFuture is currently the only DeFi derivatives exchange based on QCAMM. BSC users bring a smoother trading experience and a better user experience. dFuture cooperates with Heco and BSC to continuously launch DFT flash swap, open the liquidity trading pool, open the mining function of the second pool, and the LP Token mortgage mining function, so that the cumulative return rate of USDT liquidity mining on these two chains, LP The annualized return rates of Token mining are stable at around 150% and 500% respectively. The only thing that needs to be observed is whether it can continue to exert its strength in the future based on the ecological realization of Binance and Huobi.
Lever Network is a decentralized leverage trading platform. It aims to allow users to mortgage, borrow, and leverage transactions in one go, and to go long or short any underlying asset:
• For depositors, any idle assets (including pledge certificates you have obtained from other lending agreements) can be deposited into Lever to obtain interest or mortgage loans to obtain higher interest and liquidity mining income (native LEV tokens).
• For traders, Levers fund pool currently provides up to 3 times leverage to open positions, and users can freely choose to go long or short. To this end, Lever cleverly used the automatic market maker (AMM) of DEX such as Uniswap and Sushiswap with the largest trading liquidity in DeFi to provide sufficient liquidity, and established the largest trading liquidity in the entire DeFi industry for traders. The leveraged trading platform meets the trading volume needs of traders at different levels.
The prospect that users can easily leverage their available assets on the Lever platform to earn more profits is based on the following three characteristics and advantages of Lever products:
• Sufficient trading liquidity: Lever innovatively introduces external automatic market makers such as UniSwap, Sushiswap, and Pancakeswap to ensure that the platform has sufficient trading liquidity. Traders can choose the size of long or short positions at will. In addition to the common WBTC and ETH, Lever also supports other common ERC20 token assets such as AAVE, SNX, UNI, etc. and other long-tail assets.
• Extremely high capital utilization rate: Lever provides direct loan usage scenarios and leveraged transaction services, greatly increasing the frequency and amount of borrowing, and then pushing up deposit rates through a higher asset utilization rate, increasing the motivation and willingness of depositors, Thus entering a positive cycle. In addition, the tradable and transferable pledge certificates aToken, cToken, etc. that users obtain through pledge assets through lending agreements such as AAVE and Compound can be mortgaged on Lever to obtain interest. These pledged assets can also be used as collateral for leveraged transactions.
• Compared with leveraged trading products provided by centralized exchanges, Lever naturally has the advantages of being fair, transparent, secure, and user data is completely controlled by users to avoid privacy leakage. Compared with the well-known decentralized derivatives trading protocol dYdX in the market, Levers product design ideas are completely different: as an earlier DeFi product, dYdX has accumulated a certain amount of trading liquidity through its self-built order book, but Lever embraces the current DEX Concentrating on the Matthew effect of the AMM model, its trading liquidity comes from integrating all large DEXs in the market.
secondary title
1、Vega
https://www.chainnews.com/articles/079600263888.htm
4. Investment targets related to derivatives
Vega, a decentralized derivatives trading protocol, raised $5 million in financing from VC institutions and traditional trading platforms, including Arrington Capital, Coinbase Ventures, and Cumberland DRW.
The round, led by Arrington Capital and Cumberland DRW, will support Vegas mission to democratize the derivatives market by enabling anyone to create and launch a derivatives market, while solving some of the pain points that plague decentralized systems and prevent their widespread development and challenge. By eliminating the centralized gatekeeper, Vega can achieve instant settlement (less than 1 second), eliminate conflicts of interest in the market, reduce transaction costs, and achieve the throughput necessary for bulk derivatives transactions (up to 10,000 TPS)
2. Risk-graded derivatives protocol BarnBridge
BarnBridge is a hierarchical derivatives protocol that uses fixed yields and volatility to mark product risks. Products include:
Smart Yield Bond, a fixed-rate and floating-rate product guaranteed by DeFi revenue;
3、Paradigm
Derivative Smart Alpha Bond Smart Alpha Bond that can hedge any ERC20 token market price fluctuations.
Paradigm, a cryptocurrency institutional-grade trading communications platform, has announced the launch of Multi-Dealer RFQ, further expanding the capabilities of its flagship Request for Quote (RFQ) system. Paradigms newly launched multiple entrustment system can quote anonymously and obtain the best price among multiple dealers quotations without manual intensive bilateral negotiations. Paradigm said it already has a global network of more than 270 counterparties, including hedge funds, over-the-counter trading desks, lenders, structured product issuers, market makers and family offices, and its daily business volume is currently Already accounts for around 20-30% of global cryptocurrency options traffic. Paradigm co-founder Anand Gomes told Lianwen that due to the strong demand for options before the US presidential election, the platform hit a record high of US$286 million in single-day trading volume on October 30.
