Derivatives have always been one of the most important parts of the global financial market. They play an indispensable role in providing investors with diversified income channels and hedging market risks. Their market size is often dozens of times that of the spot market.

In contrast, the market size of cryptocurrency derivatives is still in a very early stage, and most of the market is occupied by centralized exchanges such as Binance and FTX. With the large-scale development of DeFi in recent years and the popularization of market education, it has provided necessary conditions for the development of derivatives in the DeFi field, and has fully demonstrated its own advantages.

6) There is no way to unilaterally change the rules of the exchange;

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01 synthetic assets

Synthetic assets are encrypted assets that are combined and tokenized by one or more assets/derivatives. The early synthetic assets of the DeFi ecosystem are represented by the stable currency DAI and the cross-chain packaging asset WBTC. Synthetic assets such as , precious metals, etc. are also becoming more and more abundant, and have now become an important part of the DeFi ecosystem.

The idea behind synthetic assets is to provide investors and traders with exposure to a wide variety of asset classes without requiring them to hold the underlying asset or trust a custodian.

At present, DeFi users can create any supported synthetic assets as long as they deposit certain collateral through synthetic asset agreements such as Synthetix and UMA, but these assets will not be anchored to real encrypted or physical assets, and their prices are mainly determined by Chainlink Provided by the off-chain oracle machine, if the asset price drops sharply and the loss reaches a certain percentage, the system will liquidate the collateral.

Compared with initial assets, synthetic assets have the advantage of magnifying the composability of assets on the chain, and at the same time build a bridge for the DeFi ecosystem that can lead to the traditional financial market with a scale of tens of billions, enriching the investment choices of DeFi users.

On the one hand, synthetic assets can lower the threshold for DeFi users to invest in some real-world assets. For example, US stocks, gold and other assets often require users to submit complex audit materials to open an account, especially for foreign investors. DeFi synthetic assets allow users to simply Invest and trade the aforementioned real-world assets conveniently and optimize your investment portfolio.

On the other hand, more and more DeFi projects have begun to use synthetic assets to establish business models to meet the needs of users for diversified risk hedging and increase returns. For example, the tokens launched by UMA to track the volatility of Ethereum, call option tokens, and The ETH double-leveraged token launched by Charm can help users hedge risks or increase leverage to meet more diversified needs of users.

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1）Synthetix

Synthetix is ​​currently the most well-known synthetic asset protocol in the Ethereum DeFi ecosystem. It was originally a DAI-like stable currency project Havven.

Synthetix mainly has two products, one is Synthetix.Exchange for trading synthetic assets, and the other is DApp Mintr that allows SNX holders to mint and burn synthetic assets. Synthetix currently supports asset types such as synthetic fiat currencies, cryptocurrencies (long and short), and commodities, and plans to support synthetic stocks, futures, leverage and other products in the future.

Synthetix synthetic assets are mortgaged by the Synthetix token SNX, with a mortgage rate of 750%. When users lock SNX in a smart contract, synthetic assets can be issued and SNX can be redeemed by destroying synthetic assets.

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2）UMA

UMA is an open-source infrastructure for deploying and executing synthetic assets on Ethereum, enabling developers to quickly and easily build synthetic tokens that track any price.

One of the key differences between UMA and Synthetix is ​​that collateral and debt exposures are segregated in UMA, whereas they are aggregated across all LPs in Synthetix, which reduces the liquidity of individual synthetic asset markets, but also reduces user risk.

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3）Mirror

Mirror is a synthetic asset protocol based on the Terra ecology. Users can mint and trade stocks, futures, exchange funds and other assets through synthetic tokens. The main product is US stock synthetic assets, helping DeFi users to invest in various US stock assets with a low threshold , has achieved rapid development with this product since the beginning of this year, and the current total lock-up volume has reached 1.65 billion US dollars, which is the same as Synthetix.

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02 options

An option is a right, which means that the option buyer has the right to buy or sell a certain amount of underlying assets at an agreed price within an agreed time. In the traditional financial field, options are divided into commodity options and financial options, which are widely used in hedging and hedging risks to resist the risks of falling prices of underlying assets and rising prices of assets purchased in the future. They play a role in the world economy. play an important role.

For example, in the field of cryptocurrency, if investors have bought ETH, they want to enjoy the benefits of holding ETH rising, but do not want to bear the loss of ETH falling, they can buy ETH put options to hedge the spot risk. If ETH falls, you can exercise the option and sell ETH at the execution price to avoid the risk of spot decline. Or sell the ETH put option, the price of ETH will fall, the price of the put option will rise, and the spread income of the option will make up for the loss of holding the spot, so as to hedge the loss of buying the spot.

Of course, option products are also highly speculative, and users can take advantage of their implied volatility for speculative arbitrage.

Since 2018, HBO's three centralized exchanges have gradually introduced the simple option model, but the decentralized option project did not start until the DeFi sector became popular last year. At present, it is mainly divided into standardized options similar to traditional financial markets, such as opyn, siren, etc.; and simplified version of option trading, which can create an option only by selecting the direction, quantity, strike price, and holding time. This type of option item There are: hegic, charm, FinNexus, etc., making it easier for users in the cryptocurrency field to use option tools.

At present, the main players in the field of DeFi options include Opyn, Hegic, Charm, Opium, Primitive, etc. On May 13th, Paradigm research partner Dave White and FTX co-founder SBF jointly issued a paper proposing the eternal option, which is equivalent to the perpetual contract in the options market, providing traders with long-term option exposure, and may have the opportunity to become an option market the next explosive point.

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1）Opyn

Opyn is a decentralized options protocol based on Ethereum, which will be launched on the mainnet in June 2020. Opyn option products are T-type quotation options similar to options in the traditional financial field. Options can only be purchased or sold according to a fixed delivery time and strike price.

Opyn liquidity is provided by Uniswap-based AMMs. Different liquidity pools maintain specific option trading pairs. These liquidity pools are mainly managed and operated by the Opyn team. The current lock-up amount is 33 million US dollars.

The opyn v2 version includes improved margin utilization, currency options that are automatically exercised at maturity, multiplier-free call options, cash-settled European options, allowing yielding assets (such as cToken, aToken, yToken) to be used as collateral and Earning yield, collateral-free lightning option minting, operator functionality (allowing users to delegate control of their vaults to third-party smart contracts), settlement of option prices using oracles, and more.

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2）Hegic

Unlike Opyn, Hegic's decentralized options trading aims to simplify options trading and lower the barriers to entry for ordinary investors. Hegic currently only supports WBTC and ETH targets, and trades American options, which traders can exercise at any time before the expiration date.

On Hegic, you only need to select the underlying asset, contract direction, position size, strike price, and expiration date to create a call option. After the selection is completed, Hegic will display the premium that needs to be paid and the profit and loss balance of the transaction point.

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3）Charm

Charm, a decentralized options protocol based on Ethereum, launched its mainnet in January this year. In March, Charm just completed a seed round of financing invested by Divergence Ventures, DeFiance Capital, and Delphi Ventures. Charm offers cash-settled European-style options.

Compared with other option projects, charm is special in its liquidity solution, which introduces the prediction market AMM to create liquidity. The liquidity maintenance of the system does not require users to contribute option assets for trading. This liquidity model can be regarded as a bonding curve. Through the mechanism of this curve, different option tokens are generated, and their prices are determined through multivariate functions.

The sum of the prices of the aforementioned liquidity mechanisms is within a small range, that is to say, users who provide liquidity will suffer smaller losses in the worst case. This poses less risk to liquidity providers than options traded through AMMs on markets such as Uniswap.

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03 Interest rate derivatives

Interest rate derivatives have been the direction of many discussions in the DeFi industry this year. It is mainly to develop different types of derivative products based on the interest rate of encrypted assets to meet the different needs of DeFi users for deterministic returns.

Generally speaking, interest rate derivatives refer to derivative products based on interest rates, which are usually used as hedging tools by institutional investors, banks, companies and individuals to protect themselves from changes in market interest rates. Since the volatility of lending interest rates often brings additional risks to investors, and most investors have low risk appetite, the interest rate derivatives market in the traditional financial market has become the largest derivatives market.

However, at present, the income mechanisms of DeFi lending agreements and income aggregators are almost all floating income, and related interest rate derivative products are not rich, which is not conducive to investors' effective risk control. Therefore, as more and more traditional funds with low risk appetite enter the market, fixed interest rates and their derivatives markets will be more favored by these funds.

At present, a number of fixed-rate agreements have emerged in the DeFi market, providing users with fixed-rate loan products in the form of zero-coupon bonds. After users deposit assets, no matter how the market interest rate changes, they can be based on their original settings at the end of the contract. Interest rates to obtain income, such as Notional Finance, Yield Protocol, Mainframe, 88mph, etc.

At the same time, interest rate derivative products have emerged one after another. For example, interest rate agreements based on risk classification, represented by BarnBridge and Saffron, allow users to choose different income products according to their own risk preferences, including fixed-income priority products and higher interest rate fluctuations. Subsequent products.

These products do not provide lending functions themselves, and rely on other DeFi protocols to generate income from assets. However, since the integrated DeFi protocols provide floating interest rates, it is inevitable that profits will be lower than expected. The solutions for such protocols are mostly Divide income and risk, let high-risk investors replace low-risk investors to take risks, and then guarantee fixed income.

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1）BarnBridge

BarnBridge is a hierarchical derivatives protocol that went live at the end of 2020, using fixed rates of return and volatility to tokenize product risk. The project deposits user assets into various agreements to obtain income, and then classifies them into two types of income derivatives, which are priority and inferior products, allowing users to choose different income products according to their risk preferences.

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2）Swivel Finance

Swivel Finance (formerly known as DefiHedge) is a fixed-rate derivatives agreement. Users only need to mortgage 100% of similar assets (rather than the common mortgage rate greater than 100%) to carry out loans and transactions. There is no liquidation risk and no dependence on price predictions At the same time, it supports users to do long interest rates with an implied leverage ratio of 10 to 100 times. In December last year, it received US$1.15 million in financing from Multicoin Capital, DeFiance Capital and other institutions.

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3）Element Finance

Element Finance aims to provide users with high fixed rate income while maximizing capital efficiency. Its users can purchase BTC, ETH and USDC at a discounted price without locking in a fixed period, so that they can easily trade between discounted assets and any other underlying assets at any time Make an exchange. In April of this year, the project received $4.4 million in financing from institutions such as a16z and Placeholder.

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04 Prediction market

The prediction market is one of the earliest application scenarios in the Ethereum ecosystem, and it ushered in explosive growth in the US election last year, becoming an important part of DeFi derivatives.

The prediction market is a contract created based on events with definite results in the future. It can be understood as a combination of a lottery market and a questionnaire, with the purpose of discovering the results that the market believes. It allows anyone to bet on future events and use the odds of those bets as a trusted neutral source of predicted probabilities for those events.

In addition, the prediction market is equivalent to a widely distributed questionnaire, which reflects people's attitudes towards the event, and can be used as a basis for improving governance or making decisions. For example, will the ETH price surpass $10,000 on December 25, or will Atlético Madrid become the 2021 La Liga champions.

Take the event "Will the price of ETH exceed $10,000 on July 1st?" as an example. This event provides users with two investment options: YES or NO. The prices of the two can be regarded as the probability that the market may realize the event. , and the sum of the two is fixed at $1. If users think that the market price deviates from the actual probability, for example, the probability that the ETH price will exceed $10,000 on July 1 is higher than the 19% represented by the YES price, they can choose to buy the corresponding option and benefit from it.

The speculative nature of the prediction market also determines its hedging nature, which can be used to hedge risks and derivative effects. Still taking the event "Will the price of ETH exceed $10,000 on July 1?" as an example, if you hold ETH spot in the real world, you can buy "NO" to hedge against the risk of ETH price decline.

Compared with the prediction market of the centralized platform, the prediction market in the DeFi field has the characteristics of being non-tamperable, open and transparent, and the cost is low, which eliminates the danger of the counterparty, and traders do not need to worry about the platform getting in the way.

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1）PolyMarket

Polymarket is a prediction market project built on the Ethereum Matic sidechain, where users can place bets on hot topics in the world, such as the US election, COVID-19, cryptocurrency prices, and more.

Polymarket was launched in June 2020 and received US$4 million in financing in October of the same year, led by Polychain Capital. Other investors include well-known investment institutions 1confirmation, ParaFi, and former Coinbase CTO Balaji Srinivasan, Aave founder Stani Kulechov, and Synthetix founder Kain Warwick and other well-known crypto investors.

Compared with other prediction market projects, Polymarket has two main features. First, the project adopts Matic Network, the second-layer solution of Ethereum. The user's transaction behavior does not need to be confirmed by the Ethereum main network, which avoids defects such as excessive handling fees and long time consumption. It can be quickly completed on the Matic side chain. Within 20-60S.

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2）Augur

Augur is a decentralized prediction market platform built on the Ethereum platform. It was launched in June 2015. Vitalik, the founder of Ethereum, is also an advisor to the project.

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3）Omen

Omen is a fully decentralized prediction market platform built on the Gnosis conditional token framework and launched on July 2, 2020. Like Augur, anyone on Omen can create a predictive project based on any question and bet on a specific outcome. Any user can create a prediction market on Omen with only the predicted event, outcome, time node, classification, funds for creating the market, and arbitrators.

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05 Perpetual contracts

Contract products are derivative products that appeared earlier in the encryption market, and are currently the derivatives with the highest trading volume. Different from spot trading, futures contracts are two-way leveraged products, which can profit from the price drop of the underlying asset, and its leverage attribute amplifies trading risks and profits, and can hedge the risks of spot positions and spot goods to be received in the future.

Centralized exchanges such as BitMEX, Binance, and FTX are currently the main players in contract products in the encrypted market, and they have obtained a lot of traffic and profits from them. However, due to the opacity of the clearing mechanism of the centralized exchanges, transactions are often impossible under extreme market conditions, and the phenomenon of pin insertion There are many problems, such as excessive fees, decentralized contract products have become the choice of more and more contract users.

At present, most of the contract products in the DeFi market are perpetual contracts. Well-known players include dYdX, Perpetual protocol, MCDEX, Injective Protocol, DerivaDEX, Futureswap, etc.

Compared with centralized exchanges, the main problems of DeFi contract products are insufficient liquidity and high gas fees. Transaction volume is not high.

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1）dYdX

Founded in 2017, dYdX is the decentralized contract trading platform with the largest trading volume on Ethereum. Currently, it mainly provides lending, spot, leveraged and perpetual contract transactions. It has successively received multiple rounds of investment from institutions such as a16zA and PolychainCoinbase.

dYdX is one of the few decentralized derivatives exchanges that sticks to the order book model. In April of this year, dYdX officially launched the Layer 2 solution based on StarkEx. After depositing assets, users can conduct any contract transactions without gas fees. Recently, the speed of launching new trading pairs has also been greatly accelerated.

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2）MCDEX

MCDEX was launched in April last year. It adopts a transaction model driven by a hybrid order book and AMM, providing traders with a hybrid transaction model of off-chain order book and AMM on the chain to meet the needs of different traders and solve the lack of flow of AMM in the early stage of the project sex issue.

On May 12, MCDEX announced that its V3 version will be deployed to the Arbitrum mainnet on May 28. Previously, MCDEX released its V3 white paper, pointing out that users can create any contract without permission, and plans to increase support for contract markets such as stocks and commodities.

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3）Perpetual protocol

Perpetual Protocol is a perpetual contract agreement that is located on both the Ethereum mainnet and xDai. It supports the perpetual contracts of various synthetic assets such as BTC, ETH, gold, crude oil, etc., and uses Chainlink once an hour to feed prices to minimize oracles. usage rate. Perpetual Protocol is the first protocol to introduce AMM into derivatives trading, thus attracting many DeFi enthusiasts.

Even more innovative, unlike traditional AMMs, the protocol employs a new liquidity solution called vAMM. The vAMM model does not require a liquidity provider (LP), traders can provide liquidity to each other, and the slippage of the transaction is determined by the k value, which is manually set by the vAMM operator according to the situation.

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06 Insurance

Insurance is one of the most important derivatives directions in the global financial market. It socializes the cost of experiencing catastrophic events, so that individuals/institutions can bear potential risks.

In the field of DeFi, due to the continuous emergence of new projects and the laxness of many developers, there are frequent incidents of DeFi projects being attacked and causing users to suffer stage losses. In particular, the recent increase in DeFi security incidents is likely to affect more and more traditional funds. Entering the DeFi market creates barriers.

Therefore, insurance is particularly important to the DeFi market. As the insurance field matures and institutional players join in, insurance may become one of the biggest pillars of DeFi.

At the current stage, DeFi insurance is still in the early stage of development, and the assets covered by the insurance policy are only less than 1% of the total lock-up value (TVL), and most mainstream DeFi projects have not yet purchased insurance. To a certain extent, this listing is due to the difficulty in judging some compensation scenarios, and the capital is still not enough to compensate for the scale of funds of mainstream DeFi projects.

With the introduction of more and more DeFi insurance agreements, the underwriting scenarios covered by various insurance projects are becoming more and more abundant, the pledge pool funds are gradually expanding, and the product forms are becoming more and more diversified.

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1）Nexus

Nexus Mutual is currently the largest insurance project in the encryption market, founded by Hugh Karp, the former chief financial officer of the Munich Re Insurance Company in the United Kingdom. It provides two types of insurance, one is mainly for DeFi protocols that host user funds, because these protocols may be hacked due to smart contract errors, such as Uniswap, MakerDAO, Aave, Synthetix, and YearnFinance; the other is for centralized exchanges Insurance against stolen funds or suspension of withdrawals, such as Binance, Coinbase, Kraken, Gemini, and lending firms BlockFi, Nexo, and Celcius, among others.

As of April, the platform supports 32 smart contracts on Ethereum, covering 74 trading pairs. The three projects with the largest insured amount are Curve, Yearn.Finance and Syntheix. Compared with the huge locked-up funds of USD 6.8 billion on Ethereum DeFi, NexusMutual's insurance scale is relatively limited. Since its operation in May 2019, the platform has accepted 14 claims with a claim amount of USD 2,410,499 (1351 ETH + 129,660 DAI).

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2）Cover

Cover was incubated by Yearn Finance. Compared with Nexus, Cover's projects can be established faster without having to pass tedious risk assessments. This is because each risk is isolated and contained in a single pool, unlike in NXM where claims from any single agreement can erode the capital pool.

The Cover protocol decided to only set the payment ratio to 36%. Insurance buyers should be aware that buying insurance from the Cover protocol does not guarantee full compensation, and the way it determines the claim amount is more similar to a prediction market.

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3）Unslashed 

Unslashed is a new type of insurance agreement that provides investors with a bucket-like risk sharing model. The policyholder can start and end the policy at any time on Unslashed, and the insurance premium is calculated in real time; the LP provider receives the premium payment in real time, and at the same time, the liquidity of the funds will not be completely locked and can be withdrawn at any time.

Unslashed Finance hopes to improve capital utilization by providing structured insurance products. Each Bucket contains multiple Pools. Users can choose Buckets with different risk characteristics, including exchanges, smart contract hacking, stable currency price fluctuations, and oracle machines Price feed errors, etc.

Unslashed announced the mainnet launch in January this year, and its first product is called Spartan Bucket, which covers 24 different risks. Since then, Unslashed has successively announced cooperation with multiple DeFi projects such as Lido Finance, Enzyme, Kyber Network, and Perpetual Protocol, and the total lock-up volume has reached 100 million US dollars.

Although this article introduces many derivatives projects according to the track, more and more derivatives projects are now expanding their business boundaries, involving contracts, options, insurance and other derivatives, and developing into comprehensive derivatives agreements.

Today, as composable infrastructure, these DeFi derivatives protocols have been embedded in a large number of DeFi projects, amplifying the network effect of the DeFi ecosystem and further enhancing the imagination of DeFi development.