A Beginner’s Guide to Decentralized Crypto Derivatives
Decentralized derivatives emerged from the rapidly growing DeFi market to enable hedging of crypto-assets and speculation in a decentralized manner.
Read on to learn what decentralized crypto derivatives are, the different types of decentralized derivatives available today, and where you can trade them.
What are decentralized derivatives?
Decentralized crypto derivatives are financial instruments traded on decentralized trading venues that derive their value from underlying assets, which in this case are cryptocurrencies.
Owning or trading in a decentralized crypto derivative allows you to interact with the asset without having to own it. For example, if you had a bitcoin derivative contract, the price would be derived from the price of bitcoin at the time of purchase. But when you buy the derivative contract, you don’t actually own bitcoin, just a representation of it.
The most common type of decentralized derivative is a futures contract, which is an agreement to buy or sell an asset at a predetermined price on a specific date in the future. Other types of decentralized derivatives include options and structured products.
Decentralized derivatives are traded on decentralized exchanges (DEX), peer-to-peer platforms that allow users to buy and sell crypto assets without the need for a central authority. DEXs are powered by smart contracts, which are self-executing software that enforces the terms of an agreement between two parties.
The benefits of decentralized derivatives include increased security, transparency and trustless trading. Because DEXs are powered by smart contracts, they can also offer increased security compared to centralized exchanges, which are vulnerable to hacks, theft and bankruptcies.
DEXs also offer increased transparency because all trades are publicly recorded on the blockchain. Finally, DEXs allow for trustless trading, meaning users do not need to rely on a third party to facilitate their trades.
How do decentralized derivatives differ from traditional centralized derivatives?
Decentralized derivatives are financial instruments traded on decentralized exchanges (DEXs). DEXs are peer-to-peer (P2P) exchanges that allow users to trade directly with each other, without the need for a centralized third party. This means that there is no single point of failure or control, and no central entity that can manipulate the market.
Traditional centralized derivatives, on the other hand, are traded on centralized trading platforms, which are operated by a central authority that manages the order book as well as funds held by traders on the platform.
Decentralized crypto derivatives have several advantages over traditional centralized derivatives. First, they are much more accessible, since anyone with an internet connection and a crypto wallet can trade them. In addition, they are generally less expensive to trade, as there are no middlemen or brokerage fees involved. Finally, they are – in theory – more resistant to manipulation and fraud, as there is no central control point.
Types of decentralized derivatives available today
There are several decentralized derivatives available for you to trade today. Let’s take a look at the most popular ones.
perpetual
One of the most common types of decentralized derivatives is the perpetual contract. It is similar to a traditional futures contract, but has no expiration date.
The most popular perpetual contract trading platforms, such as dYdX, normally support major cryptocurrencies such as BTC, ETH and USDC. In most cases, you must first deposit security into a smart contract. The collateral will be used to cover your position if the price of the underlying asset moves against you.
Once you have deposited your collateral, you can choose how much leverage you want to use. The higher the leverage, the higher the potential profit (or loss) from your trade.
For example, if you use 10x leverage and the price of BTC increases by 1%, your position will increase in value by 10%. However, if the price of BTC falls by 1%, your position will lose 10% of its value.
Leverage is a double-edged sword. While it can amplify your profits, it can also amplify your losses. Therefore, it is important to only use as much leverage as you are comfortable with.
Alternatives
Options are a type of derivative that gives the holder the right, not the obligation, to buy or sell an underlying asset at a specified price by a specified date. One of the most famous options trading platforms is Lyra. Lyra is an Automated Market Maker (AMM) built on top of Ethereum.
Options are available for many types of assets and have multiple uses. They can be used as insurance against price fluctuations in an underlying asset or simply as speculation in future prices. In the cryptocurrency industry, options are typically used as a way to hedge against price fluctuations or to speculate on the future price of an underlying cryptocurrency asset.
For example, if you own bitcoin (BTC) and are worried that the price will fall, you can buy a put option to hedge your risk by buying the right to sell bitcoin at a certain price (known as buying a “put” ).
Options are available on a handful of decentralized derivatives exchanges, allowing traders to hedge their positions.
Synthetic assets
Decentralized synthetic assets are digital assets that are backed by the underlying security. Some of the most popular platforms that offer synthetic asset trading include Synthetix and Mirror.
The most common type of synthetic asset is a stablecoin, which is a digital asset pegged to the US dollar (or another fiat currency). There are also synthetic assets that are linked to other cryptocurrencies, commodities and even indices.
Synthetic assets have many advantages over traditional assets. First, they are much more accessible since they can be bought and sold on decentralized trading platforms. They are also usually more divisible, meaning you can buy and sell fractional amounts. And since they are digital, they can be easily transferred and stored without the need for a third-party custodian.
However, synthetic assets also come with risks. For example, if the underlying security falls in value, the value of the synthetic asset will also fall. And because they are not regulated like traditional financial instruments, they do not have the same rights as financial securities.
Structured products
Structured products are a type of derivative that can be used to trade a range of assets. A popular example where you can trade decentralized structured products is Ribbon, which is a decentralized derivatives trading platform that allows users to trade a variety of structured digital assets on the Ethereum blockchain.
The Ribbon platform enables users to create and trade customized derivative contracts. These contracts are called “bonds” and they represent a bundle of underlying assets. For example, a Ribbon contract can represent a basket of cryptocurrencies or a portfolio of stocks.
Ribbon contracts are traded on the Ribbon decentralized exchange (DEX), which is built on the 0x protocol. The 0x protocol is an open source standard that enables decentralized exchanges to operate on the Ethereum blockchain.
The biggest advantage of using structured products like Ribbon is that they can be customized to meet the specific needs of traders. For example, a trader can create a Ribbon contract that tracks the price of bitcoin, ether and litecoin against the US dollar. This will allow the trader to take advantage of price movements in any of these three cryptocurrencies without having to own them directly.
Another advantage of structured products is that they can be traded on decentralized exchanges such as Ribbon DEX. This means that trades can be executed without the need for a third-party custodian, such as a broker or stock exchange.
Top Decentralized Trading Platforms for Crypto Derivatives
Let’s take a look at three of the most popular decentralized derivatives trading platforms and what they offer.
dYdX
If you are looking for a decentralized platform to trade crypto derivatives, dYdX is a popular option. At dYdX you can trade a variety of different derivative contracts, including futures, options and perpetual contracts. It stands as one of the largest decentralized exchanges based on trading volume and market share.
dYdX uses smart contracts to enforce the terms of each derivative contract, which helps ensure that trades are executed smoothly and correctly.
Synthetics
Synthetics is a decentralized synthetic asset platform built on the Ethereum blockchain. It allows users to trade a wide range of synthetic assets, including cryptocurrencies, commodities and fiat currencies.
According to DeFi Pulse, Synthetix currently stands as the most dominant decentralized derivatives platform, responsible for 98% of the value locked in DeFi derivatives.
The platform uses a system of smart contracts to secure synthetic assets and provide liquidity. The platform has been operating since 2018 and currently has over $380 million in total value locked (TVL).
Synthetix is an attractive option for traders looking for a decentralized platform with a large selection of assets and good liquidity. The platform has some risks associated with it, such as the potential for hackers to exploit flaws in a price oracle.
Lyra
Another decentralized derivatives platform that stands out is Lyra. Lyra is a decentralized options exchange built on Ethereum. It is designed to offer low fees and fast transaction speeds. It offers a variety of features that make it ideal for both beginners and experienced traders.
Lyra allows traders to buy and sell options in a decentralized manner. The protocol also hedges the risk incurred by liquidity providers and encourages more people to participate in trading on this protocol. One of the most notable features of Lyra is its user interface. The platform is designed with simplicity in mind and is very easy to use. Even if you’ve never shopped before, you should be able to pick it up quickly.
Another great feature of Lyra is that it supports a wide range of assets. In addition to bitcoin, you can also trade altcoins, tokens and other digital assets.
Risk Warning: Crypto derivatives are riskier than buying crypto directly!
Cryptoderivatives are complex financial instruments traded by sophisticated investors. They are generally riskier than buying crypto directly and can be very volatile.
Before trading crypto derivatives, you should carefully consider your investment objectives, experience level and risk appetite. You should also be aware of the potential for loss, as you may lose all or part of your investment.
If you are thinking of trading crypto derivatives, make sure you understand the risks involved and consult with a financial advisor if necessary.
