Over the past year, cryptocurrencies, which have gone through their darkest hour, have fully unleashed their liquidity in various DeFi innovation experiments, becoming the brightest performing emerging field in the entire financial world.
Compared to ‘classical finance’, where the landscape has long been written, the landscape of the rapidly expanding cryptocurrency space is far from clear.
The only thing we can say is that the cryptocurrency spot trading landscape is currently set – whether it is centralized exchanges such as Coinan, Coinbase, OKEx, Firecoin, etc., or decentralized exchanges such as Uniswap, Sushiswap, Curve, etc., the absolute leaders are likely to be competing from here in the future. The absolute leader of the future is likely to come from these exchanges.
And in any mature financial market, the scale of derivatives trading must be much larger than spot trading in the end. It is worth noting that the scale of derivatives trading in the cryptocurrency sector is still much lower than the spot.
So the blue ocean of uncertainty and possibility in the cryptocurrency space is reserved for the derivatives market, which has yet to explode. We will see the derivatives market catch up until it finally leads the entire cryptocurrency market to make a qualitative leap.
This attracts a steady stream of latecomers to enter the cryptocurrency derivatives market, so who is most likely to become the biggest unicorn in the end?
Mapping the entire financial world – redefining cryptocurrency derivatives
While we all know that the volume of derivatives should be larger than spot, when assessing the growth potential of cryptocurrency derivatives, we should not assess them in the traditional financial way – for example, based on the size of spot trading in the cryptocurrency market, multiplied by a number of multiples to deduce what range the size of derivatives should be.
Because cryptocurrency derivatives can bring in traditional financial products (e.g. stocks, bonds, etc.), the valuation of cryptocurrency derivatives should not be limited to benchmarking against native crypto assets, but should go to the entire financial world.
Over the past year, we have very visually seen cryptocurrencies enter the traditional financial markets (most notably the grayscale funds), and the massive new influx of liquidity from the traditional financial world has directly contributed to the unprecedented boom in cryptocurrencies, which has come to be known as the ‘grayscale bull’.
But the impact was even more profound as traditional finance entered the cryptocurrency market – that is, traditional financial products were packaged into cryptocurrency derivatives, which could then be traded 24/7 and the assets could be split in unlimited granularity.
For example, FTX launched the Tesla equity pass-through, which allows more people to invest in Tesla conveniently, so it directly pulled FTX’s user base as well as trading volume to skyrocket.
At this stage, cryptocurrency derivatives have only verified the feasibility in terms of technology and market logic in introducing traditional financial products, and their utility is still far from being fully developed, which is of course where the opportunities in the field of cryptocurrency derivatives lie.
All in all, the imagination of the cryptocurrency derivatives sector lies in the fact that it can map the entire stock market, foreign exchange, bonds, commodities, gold and all other traditional financial markets, forming another mirror world with more financial inclusiveness.
CEX in power – who can dance with risk all the time
Currently cryptocurrency derivatives trading is concentrated in centralized spot exchanges, or more precisely, in the derivatives modules of the head spot exchanges.
For example, Cryptocurrency, Firecoin and OKEx account for more than half of the derivatives trading volume, and it is easy for their users to transfer assets to the derivatives module for trading. m
Of more interest, in fact, are some centralized exchanges that focus on derivatives, such as BitMEX, FTX and Bybit.
Compared to spot trading, derivatives trading is a dance with risk, which means that more complex financial products need to be designed to control financial risk efficiently and precisely at a lower cost.
So in the long run, the decisive factor for the development of derivatives exchanges must be the strength of the derivatives themselves (rather than the user base or brand effect), and then exchanges that focus on derivatives are undoubtedly more professional and exploratory, such as FTX, which is currently growing the most momentum.
The centralized derivatives exchange FTX most attention is the launch of the Tesla equity pass, backed by the brokerage brokers there shares, the issue of 1:1 tokens, then investors can more convenient and uninterrupted trading Tesla shares.
Later on, FTX has launched a series of equity passes of popular companies, and also launched a Pre-IPO product, which packages stocks that are not yet listed into contracts for trading.
FTX, which continues to experiment with various ways to play and break through the circle, plays the role of a catfish in the centralized exchange circuit, and its founder SBF is the top stream star in the cryptocurrency field. With the recent launch of Tesla Equity Passes by Coinan, we cannot ignore the role played by FTX.
While centralized exchanges have a broader user base and a smoother experience, derivatives trading can run into financial regulation issues, so exchanges bear the legal risk. For example, BitMEX, the oldest cryptocurrency derivatives exchange, was affected by the ripples last year.
DEX Direct Pursuit – Pointing to the Exchange Form of the Future
In the entire cryptocurrency space, decentralized exchanges are not yet mainstream, let alone the still small-scale derivatives trading segment track.
But both from the logic of exchanges and the logic of cryptocurrency derivatives, the future shape of cryptocurrency derivatives exchanges finally points to DEX.
First of all, starting from the evolutionary logic of exchanges, the AMM trading model based on liquidity pools completely overturns the traditional order book model – anyone can provide their funds to the liquidity pool to participate in AMM market making.
Blockchain technology has directly stepped on the monopoly threshold constructed by the elites of the “classical finance” world. This technological trend cannot be stopped, it is just a matter of accelerating or delaying it in time.
So let’s look at it from a development perspective, AMM-based decentralized exchanges will undoubtedly go farther.
Also mentioned here are DEX based on the order book model (e.g. dYdX) and DEX based on vAMM (e.g. Perpetual).
Strictly speaking the order book model cannot be called a DEX in the strictest sense of the word, and the order book model lacks enthusiasm for community participation (in contrast to the highly motivated liquidity providers of AMM-based exchanges).
It can be said that any DeFi project that does not achieve “making farmers capitalists” is not a DeFi project in the strictest sense of the word.
The vAMM is a virtual AMM to generate prices, but in the end, the price generated by the virtual AMM has to be set to the price given by the oracle by the arbitrage mechanism, which is purely superfluous.
The core of AMM is to let the liquidity pool act as the counterparty of the trader, but Perpetual does not have a liquidity pool, so it does not “let the farmer be the capitalist” and is not a DeFi project in the strict sense.
Secondly, from the evolutionary logic of cryptocurrency derivatives, DEX will also become the most mainstream cryptocurrency derivatives exchange.
Cryptocurrency derivatives can seamlessly interface with all financial products in the traditional financial markets, which may seem redundant because investors can go directly to the traditional financial markets to trade without having to indirectly go through cryptocurrency derivatives.
But for the vast majority of investors, cryptocurrency-based derivatives have a very strong appeal indeed.
While traditional financial markets are still stuck in a 400 year old model where exchanges around the world open and close on local time, resulting in a de facto synchronized global financial market that works asynchronously, Bitcoin is the first global financial network that is state synchronized.
The blockchain network and cryptocurrencies derived from Bitcoin can be traded 24/7, so you can trade financial products anywhere at any time, thus truly creating a worldwide financial market.
More importantly, the process of mapping financial assets to the digital world inevitably involves ownership, and blockchain networks are the optimal solution that currently exists.
So while almost all centralized exchanges have introduced derivatives trading modules, DEX is theoretically the ultimate form of cryptocurrency derivatives exchange.
Perpetual Contracts – Types of Cryptocurrency Derivatives
The derivatives market is very complex and can be classified in different dimensions.
In terms of product form, there are four main categories: forwards, futures, options and swaps, of which forwards and swaps are not applicable to the cryptocurrency market.
From the primary assets can be divided into primary cryptocurrencies, stocks, bonds, foreign exchange, commodities, etc., while cryptocurrency derivatives can cover almost all kinds of assets.
In terms of trading methods, they can be divided into OTC and OTC, although the emergence of DEX has eaten into the viability of OTC trading.
From a comprehensive perspective, in the cryptocurrency derivatives market, the most mainstream type of derivatives is futures contracts, followed by options contracts. Among them, futures contracts are divided into delivery contracts and perpetual contracts.
Delivery contracts are traditional futures, which have different expiration dates, such as the current week and the current quarter, so there is a problem – liquidity will be divided, and liquidity is called the “blood of the market”, which supports the operation of the market mechanism, while perpetual contracts do not have this problem.
A perpetual contract is an innovative trading product unique to the cryptocurrency space. A perpetual contract is a contract with no delivery date, and then the funding rate is settled every 8 hours to keep the price of the perpetual contract essentially the same as the underlying spot price.
For investors, a perpetual contract is almost the same as a leveraged and shortable spot, making it the most popular form of derivative.
If you want to become a Coinbase stock trader, the stock market barrier will keep most people out, but you are free to trade Coinbase equity-based pass-throughs and have unlimited granularity to split assets.
If you are very sure about the trend of Coinbase stocks, you can also go long or short without any threshold, thus magnifying the return several times (of course, if you make a mistake, it is the risk that is magnified).
There are not many decentralized derivatives exchanges, based on the AMM model, such as Deri, Hegic, dFuture, etc.
Among them, Deri has done a good job on perpetual contracts, and now supports COIN perpetual contracts on BSC. And according to Deri’s oracle mechanism, the transaction scope can be extended to any transaction underlying that oracle can support. In other words, Deri can add almost any traditional financial products into it.
Deri’s further product design is to pass on users’ positions so that these assets can be easily imported into other DeFi programs.
For the average trader, this certainly frees up liquidity more fully. More importantly, for other DeFi programs, Deri can be used as a base component when they need to trade some kind of risk exposure (use Deri’s position passes to build your own Lego blocks).
In short, the volume of derivatives should be larger than spot, not to mention that cryptocurrency derivatives are benchmarked against the entire financial world – forming another mirror world with more financial inclusion – so the scale of cryptocurrency derivatives trading in the future will definitely be far larger than that of native cryptocurrencies.
In addition, decentralized exchanges have far more opportunities than centralized exchanges, both in terms of the technological trend of exchange evolution and the nature of cryptocurrency derivatives.
So we are likely to see a decentralized derivatives exchange emerge in the next year or two that is far larger than the current Uniswap.
And since no clear leader has emerged in the current decentralized exchange circuit, who will be the next unicorn?
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/cryptocurrency-derivatives-that-mirror-the-entire-financial-world-who-will-become-a-bigger-unicorn-than-uniswap/
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