Derivatives#
The narrative about derivative trading is that the trading volume of derivatives is several times to tens of times that of spot trading, so the potential of this field has not been fully developed. Looking at the derivative trading in traditional financial markets, its scale can reach trillions to tens of trillions. Futures and options trading for cryptocurrencies usually take place on CEX, and some DeFi protocols attempt to implement such functions on the blockchain. In addition, protocols that focus on synthetic assets are also included in this category.
Synthetix - Synthetic Asset Protocol#
Synthetix is a synthetic asset protocol. It can be understood as a protocol similar to Maker - issuing one asset with another asset as collateral, but with more types of assets that can be issued.
The collateral for Synthetix is the protocol token SNX. By collateralizing SNX, various synthetic assets (synths) can be issued, including fiat currencies like sUSD and sEUR, as well as cryptocurrencies like sBTC and sETH. To avoid the problem of insufficient collateral value due to SNX price fluctuations, Synthetix sets a collateralization ratio of up to 750%, which means that up to 100 sUSD can be minted with SNX worth $750.
In addition, Synthetix's collateralization ratio considers all SNX as collateral for all debts, which is different from Maker's approach of establishing collateral debt positions for each address. When you use SNX as collateral to generate synthetic assets, your SNX is calculated as part of the entire SNX for the collateralization ratio. As a result, when the value of synthetic assets increases (i.e., the debt ratio increases), you need to repay more debt to unlock the collateral.
Similar protocols include Mirror, a protocol that uses stablecoins to generate synthetic assets for stocks like Apple and Google. Synthetix itself has also established related protocols such as options trading and asset management based on the basic functionality of synthetic assets.
dYdX - Perpetual Contracts on Layer 2 Networks#
In addition to synthetic assets, some protocols have also implemented functions similar to perpetual contracts in CEX on the blockchain. The dYdX protocol initially had multiple functions such as margin trading, spot trading, perpetual contract trading, and lending. The trading frequency of contract traders is usually high, but due to the high transaction fees on the Ethereum network as a public resource, it is no longer suitable as a place for frequent trading. The dYdX perpetual contract functionality has been moved to the Layer 2 network StarkWare to achieve low transaction fees for frequent trading.
Implementing margin trading on-chain also requires position management and forced liquidation mechanisms. The mechanisms of such protocols are similar, so detailed explanations will not be provided here.