Alex Lielacher
Last updated: | 7 min read
Decentralized derivatives are a new way for traders to trade crypto assets without directly holding them.
Read on to learn what decentralized crypto derivatives are and where you can trade them.
What Are Decentralized Crypto Derivatives?
In the world of traditional finance, a derivative is an investment contract that derives its value from an underlying asset, enabling investors to hold or trade assets without having to own them directly.
Derivatives allow investors to hedge positions, speculate on market movements, transfer risk to other parties, and take leveraged positions.
Decentralized derivatives, or DeFi derivatives, are blockchain-native derivatives contracts that use smart contracts to automate the terms of contracts, thereby removing the need for brokers. Settlement happens automatically on-chain when the contract terms have been fulfilled.
Decentralized derivatives value often track crypto markets, though, in some cases, you will find that they also track traditional assets like fiat and commodities. Several decentralized derivative protocols allow you to create synthetic assets, whose value is tied to underlying physical assets.
Furthermore, many crypto exchanges offering decentralized derivatives allow traders to use leverage. Leverage is a way for derivative traders to increase their potential gains (while the risk may also increase) by investing a small amount of capital upfront.
In other words, if you speculate the price of a specific cryptocurrency will rise, instead of buying a certain amount of cryptocurrency at the current market price – commonly called spot buying – you can leverage up a smaller amount using derivatives to potentially record higher profits.
Best Decentralized Derivatives Trading Protocols
The total value locked in the decentralized derivatives market is currently around $27 billion. Let’s take a look at the decentralized derivatives exchanges where most of this value is held and transferred.
dYdX
dYdX is a decentralized crypto derivative protocol that offers multiple margin trading and perpetual contracts for traders.
The bulk of dYdX’s crypto margin trading products is based on the Ethereum blockchain. The protocol has also incorporated a layer-2 scaling solution that is based on Starkwire’s StarkEx scalability engine. The scaling solution allows dYdX users to enjoy low-cost as well as instant transactions on the protocol.
The native token of the dYdX exchange is DYDX. This is an ERC-20 governance token that allows you to participate in the dYdX governance process as well as receive discounts on trading fees when using the platform. DYDX token holders are allowed to propose protocol changes and earn a profit through staking.
The protocol supports derivative trading on leverage and enables users to allocate funds in their trading accounts. Presently, dYdX offers a maximum of 25x leverage on synthetic assets with no expiry date.
As of 28, October 2022, the total value locked (TVL) of DYDX in Ethereum-based smart contracts is worth $384 million.
Hegic
Hegic is an on-chain options trading protocol on the Ethereum blockchain focused on simplifying complex financial instruments.
Hegic offers hedge contracts and Ethereum-based liquidity pools. A hedge contract is an on-chain, option-like contract that enables holders to trade an asset at a certain price and obligates sellers to buy or sell an asset at a certain period.
According to its site, users of Hegic have traded over 11,000 options contracts worth +$1.2 billion in total cumulative volume in the past two years.
The Hegic protocol has its ERC-20 native utility token known as HEGIC. The token is used to distribute settlement fees to token holders as well as quarterly disbursem*nts of transaction fees accrued by the platform. HEGIC holders can also participate in the governance of the Hegic protocol and get a discount when purchasing contracts.
The Hegic protocol is unique in the sense that its ETH pool is non-custodial, and the liquidity providers can earn rewards in ETH. All the ETH deposited in the pool is used to sell ETH call options. Holders of these call options can exchange their DAI tokens for ETH at the strike price after expiry. Hegic’s DAI pool is for DAI liquidity providers and is used to sell ETH put options.
As of 28, October 2022, the total value locked (TVL) of HEGIC tokens on Arbitrum’s layer-2 solution is $1.4 million.
Lyra
Lyra protocol is an option automated market maker (AMM) that enables traders to trade cryptocurrency options against a pool of liquidity.
Lyra is based on Ethereum’s layer-2 solution Optimism and operates as a decentralized options exchange that gives traders access to these types of crypto markets, thereby offering them low fees and almost instant transactions.
LYRA is the native token for the Lyra protocol and, as described in LEAP-26, is designed to reward protocol users and long-term Lyra loyalists with governance tokens. Staking LYRA provides you with several incentives, including staking rewards, vault rewards, trading rebates, and LYRA/ETH liquidity pool rewards. The Lyra protocol is governed by an autonomous council enabled by the LYRA token.
The platform has two main types of user categories: liquidity providers and options traders. Liquidity providers deposit the sUSD stablecoin into an asset-specific market maker vault (MMVs), and this liquidity is used to create buy and sell options markets for the asset that the vault is based on.
As of 28, October 2022, the total value locked (TVL) of LYRA tokens on Optimism is $15.62 million.
Synthetix
Synthetix is a derivatives liquidity protocol that currently accounts for over 60 percent of the total value locked in synthetic DeFi assets, according to DefiLlama.
Synthetix allows you to create and access synthetic assets that expose you to tokenized real-world assets on the Ethereum blockchain. The protocol was initially headed by a non-profit foundation, but this setup was discarded in June 2020. Today, Synthetix is controlled by three different DAOs.
The native token of the Synthetix protocol is SNX. To collateralize an asset on Synthetix, you need to buy SNX tokens, which, once locked in a smart contract, can be used to generate synths. The value of SNX locked will need to remain at par or above 750% of the value of the respective synth created according to protocol rules.
Synthetix allows users to trade any synths with little to no slippage and offers liquidity for several assets. Synthetix users can also stake SNX tokens and gain additional benefits, such as earning a portion of network trading fees and newly minted SNX tokens.
As of 28, October 2022, the total value locked (TVL) of SNX tokens in Ethereum smart contracts is worth $272.13 million.
GMX
GMX is a decentralized perpetual exchange that enables you to trade several crypto assets with up to 30x leverage directly from your wallet.
The exchange aggregates different price feeds to determine when liquidations are supposed to happen, thereby attempting to keep a trader’s position safe from temporary wicks.
GMX is the native utility and governance token of the GMX protocol. GMX token holders get up to 30 percent of the protocol’s generated fees. On the other hand, GLP is the liquidity provider token. Up to 70 percent of the platform’s fees are accrued and go to GLP token holders.
GMX supports low swap fees and zero-price impact trades. Trading on the platform is supported by a multi-asset pool that involves market making, asset rebalancing, leverage trading, and more. In return for providing liquidity to the platform, liquidity providers earn fees from their activities. Dynamic pricing on the platform is supported by decentralized oracles, along with TWAP pricing from leading decentralized exchanges.
As of 28, October 2022, the total value locked (TVL) of GMX tokens on Ethereum’s second-layer solution Arbitrum is $407 million.
Ribbon Finance
Ribbon uses derivatives like options to generate risk-adjusted yields. Essentially, users just deposit their assets, and smart contracts handle the rest.
The Ribbon protocol is based on the Ethereum blockchain but is also available on Solana and Avalanche. It enables developers to design arbitrarily structured products through a combination of decentralized derivatives. These structured products use several types of derivatives to achieve some specific risk-reward outcomes, such as enhancing yields, speculating on market volatility, and more.
The Ribbon protocol is managed by the Ribbon DAO. RBN is the native governance token of the Ribbon protocol. RBN can also be used to boost rewards for staked vault tokens as well as earn holders a share of protocol revenue.
The Ribbon protocol makes it easy to participate in robust high-yield strategies by simplifying them into one-click deposit vaults and providing a clear user interface. This helps users understand how their profits fluctuate based on prevailing market conditions.
As of 28, October 2022, the total value locked (TVL) of RBN in Ethereum smart contracts is $76.23 million.
UMA
UMA is a decentralized Ethereum-based protocol that aims to make financial markets universally accessible, censorship-free, as well as unrestrained by any pre-existing social and financial capital. That way, UMA is highly aligned with Ethereum’s objectives. UMA offers an optimistic oracle that provides data to smart contracts using a “verification mechanism” to submit accurate feeds.
The UMA protocol has a governance token known as UMA that is used to contribute to voting on proposals, price requests, and dispute resolution.
UMA’s oracle system provides data for several projects, including a cross-chain bridge, insurance protocols, prediction markets, and custom derivatives. UMA’s oracle also supports Outcome Finance, a DAO tooling platform that supports KPI Options, Success Tokens, and Optimistic governance.
As of 28, October 2022, the total value locked (TVL) of UMA tokens in Ethereum smart contracts is $11.58 million.
