Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

With reference to the ratio of DEX to CEX trading volume, the trading volume of decentralized derivatives still has the potential to grow at least 20 times.

Summary:

  • The issuance of dYdX tokens has accelerated the process of replacing centralized derivatives, which is reflected in the substantial increase in the ratio of DEX/CEX trading volume of derivatives. I think DEX trading volume has at least 20 times the growth potential, because derivatives should have the same DEX/CEX ratio as spot trading.
  • Perpetual contracts are currently the most popular decentralized derivatives. Just like in the centralized field, today (September 1), the cumulative trading volume of decentralized perpetual contracts is 47 billion US dollars, which is the largest of the cumulative trading volume of options. 92 1 times, the latter is more suitable for hedging by highly skilled gamblers.
  • I simplified the two liquidity models of derivatives: “Peer to Pool” ( Perpetual Protocol , Synthetix, etc.) or “Peer to Peer” (dYdX, etc.). The first type allows derivatives to be traded freely, with lower liquidity requirements; but the latter platform has less risk, higher leverage tolerance, and diverse order types (luckily, Uniswap V3 actually enables limit orders and more Order type becomes possible.)
  • I like vAMM design! vAMM is only used for price generation and separates the liquidity pool to reduce the impermanent loss of the pledger. Different from AMM designs (such as Uniswap), a single token staking (Staking) enables investors to hedge their positions and alleviate the loss of profits of the pledger. The Uniswap pledgers have to bear all the loss of profits from their positions, because they are also the counterparties of the pledged token pair.
  • In my opinion, perpetual contract projects designed using “point-to-pool”, such as Perpetual Protocol, are an improved version of Synthetix, with better UIUX and higher capital efficiency.
  • I defined a fully diluted valuation (FDV)/annualized projected revenue (APR) ratio, and estimated the FDV of dYdX to be approximately US$11.451 billion. Given that the total supply of dYdX tokens is 1,000,000,000, the price of each dYdX token should be approximately $11.45. Interestingly, this estimate is valid, and its estimated figure is not far from reality: as of September 1, 2021, Perpetual Protocol’s estimated FDV is 2.801 billion U.S. dollars, while the actual market value is about 3.01 billion U.S. dollars.

Driven by macro factors: (If you already know that DEX is the general trend in the future, please skip this part)

  • The regulation of centralized derivatives trading is becoming more and more stringent. Binance recently closed its derivatives trading products in Hong Kong, Germany, Italy and the Netherlands. BitMEX, once the world’s largest derivatives exchange, was recently required to pay a $100 million fine to reach a settlement with the US Commodity Futures Trading Commission (CFTC) and the US Treasury’s Financial Crime Enforcement Network (FinCEN). Traders in more regions are turning to decentralized derivatives.
  • CEX is too powerful and lacks innovation. Due to the custody of user assets and the exclusive use of transaction data, we have seen many “emergency situations” such as suspension of withdrawals, freezing, and downtime. To make matters worse, CEX may abuse transaction data. Robinhood has previously been accused of its main business model of selling customer orders to high-frequency traders, thus benefiting from leaking customer information. It is difficult for centralized platforms to gain the trust of users.
  • Layer 2 is empowering DEX to improve its capabilities. In August, the trading volume of dYdX was 55 times that of March 2 and its Layer 2 perpetual contract was launched in April. Perpetual Protocol will soon launch V2, Curie will land on the Arbitrum layer 2 network, and Futureswap’s V3 will also land. DEX is expected to replace CEX.

Two internal signals show

Among all derivative products in this field, perpetual contracts are currently the most popular and the most traded products. They are developed on the basis of delivery of goods with no expiration date. Therefore, its feature is the capital interest rate mechanism, which aims to prevent prices from deviating from spot prices and avoid becoming a pure gambling tool.

DEX / CEX ratio

2021 first quarter hub of sustainable development for more than 14 contracts traded volume 3 trillion. In the same period, to the center of sustainable contract to produce 70 4 billion dollars in trading volume, accounting for 0.05% of the trading volume of the center. Currently, decentralized perpetual contracts account for 0.5% of the monthly trading volume of centralized perpetual contracts 5 , which is 10 times that of the first quarter.

In the spot market, this figure is 10% 6 . This means that even if there is no growth in centralized derivatives, the volume of decentralized derivatives trading will still increase by at least 20 times.

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

Data source: CoinGecko, data as of August 31, 2021. Remarks: CEX includes Binance Futures, Huobi Futures, OKEx Futures, FTX derivatives, Bybit Futures

Token issuance effect

I personally believe that the issuance of platform tokens by leading projects is very important for the entire industry. The following figure shows the impact of the platform tokens of the derivatives leader dYdX and the spot leader Uniswap on centralized exchanges before and after the issuance. It can be seen that after the issuance of UNI , the spot DEX/CEX ratio jumped to 20% and never returned to the level before August 2020 (there were rumors of token issuance before and after the last round of financing).

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

Data source: The Block. Note: I ignored the September data due to incomplete data

Which are the best investment targets?

I only discuss in this article: Perpetual contracts with linear profit and loss, options with convex P&L (convex P&L), and synthetic assets with irregular profit and loss.

Perpetual contracts with a cumulative trading volume of US$47 billion prove themselves to be the most popular crypto derivatives. This figure is 92 times the cumulative trading volume of options. Options are suitable for hedging by professionals. However, there are several projects that are trying to get crypto options into the eyes of mainstream investors. Shield Official is testing simple perpetual/perpetual option products for general users.

Synthetic assets are interesting. Unfortunately, none of them are as easy to understand and trade as perpetual contracts, and some of them provide diversified innovative products. For example, one of the most popular products on the UMA Yield Dollar, $ 36 million locked up about 7 assets, similar to zero coupon bonds (fixed-rate / yield).

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

“Point to Pool” or “Point to Point”?

  • “Point-to-pool” means that a trader’s counterparty is usually an asset pool or a pledger. For example, if you pledge PERP on Perpetual Protocol V1, you are actually the counterparty of these traders. You take this risk because you get a reward for doing so (reward comes from transaction fees and token inflation). They even created a virtual AMM to reduce price fluctuations faced by pledgers to reduce impermanence losses. The purpose is to let the pledger have the courage to pledge in order to expand liquidity. This is important: imagine that there is only one trader in this system. If he makes the right bet, who should pay him? Now we know why Perpetual Protocol allows you to have a maximum leverage of 10 times, and why it has an emergency shutdown function. For these derivatives platforms, risk control is very important to prevent net negative positions.
  • “Point-to-point” means that the counterparty of a trader is usually other traders or market makers. For example, dYdX has an order book, which is a symbol of matching market making. In other words, unlike Perpetual Protocol, ideally, dYdX does not participate in anyone’s transactions. So we actually see that dYdX can tolerate leverage up to 25 times.

I believe that in the near future, both are needed. “Point-to-pool” shows the capacity of long-tail assets with low liquidity. It may even allow users to freely list token derivatives in the future, and this model may be adopted in Perpetual’s Curie version. At the same time, “point-to-point” provides a CEX-like experience, such as various types of orders. In contrast, Perpetual Protocol V1 only has market orders. But I did see a solution designed by Uniswap V3, where limit orders and more order types became possible.

The evolution of derivatives

I personally think that Perpetual of “Point to Pool” is an improved version of Synthetix. There are 3 reasons: a) When you can easily obtain cryptocurrency exposure from Perpetuals, why bother to use a more complex system; b) Currently, nearly 90% of Synthetix 9 synthetic assets have the underlying assets of crypto-composite generation Currency, which means that the demand for real-world assets is not mature. In addition, perpetual contracts are also applicable to real-world asset derivatives; c) The margin mechanism is well adopted, which shows higher capital efficiency than mortgages. For example, Synthetix’s liquidation rate is 200%, while Perpetual Protocol’s liquidation The rate is 2.5%.

The future price goes to heaven?

I analyzed the current spot DEX indicators and created a useful coefficient for further valuation forecasts: “FDV / APR” (fully diluted valuation/annualized estimated revenue).

Multiplying the median FDV/APR of the spot DEX by the derivative APR, I estimated that the FDV of dYdX is approximately US$11.451 billion, while the FDV of Perpetual Protocol is approximately US$2.801 billion.

Given that the total supply of dYdX tokens is 1,000,000,000, the price of each token should be approximately $11.45.

Interestingly, the estimated figures are not far from reality: as of September 1, 2021, Perpetual Protocol’s FDV is approximately US$3.01 billion.

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

Data source: The Block, CoinGecko

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

Data source: The Block, CoinGecko

Special thanks to MapleLeafCap, Jeff Ng, Jinze, 0xminion, Nicola Santoni, Charles, Leo Yeung and the A&T Capital team for their wonderful suggestions/comments and support!

Written by: Fiona He, Investment Manager of A&T Capital
Compiled by: Perry Wang


Appendix: Comparison of two derivatives

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

Viewpoint: The historical wheel of the rise of decentralized derivatives has become unstoppable

References:

(all the data captured as of August 31, 2021)

(1) Accumulative Vol:

Perpetuals US$46.8B [dYdX: US$17.5B from dYdX metabase metrics; Perpetual Protocol: US$25.1B from Dune Analytics @yenwen / Perpetual Protocol; Futureswap: US$4.2B from futureswap.com.]

Synthetics US$9.4B [Synthetix: US$9.4B from stats.synthetix.io; UMA: no transaction data, TVL is US$144M from projects.umaproject; Mirror Finance: ~US$13.9M from the most traded assets on mirror.finance;]

Options US $ 507M [Hegic: US $ 492M from hegic.co; Opyn: US $ 15M from Dune Analytics @loren / Opyn v2.]

(2) Our calculation is based on data from CoinGecko.

(3)https://image.tokeninsight.com/levelPdf/TI_Research_Report_-_2021_Q1_Crypto_Perpetual_Trading.pdf

(4) Our calculation includes the volume of dYdX, Perpetual Protocol, and Futureswap sourcing from CoinGecko and Dune Analytics.

(5) Our calculation includes the volume of dYdX, Perpetual Protocol, and Binance Futures, Huobi Futures, OKEx Futures, FTX derivatives, Bybit Futures. Data source from CoinGecko.

(6) I ignore the Sept figure for incomplete data.
https://www.theblockcrypto.com/data/decentralized-finance/dex-non-custodial/dex-to-cex-spot-trade-volume

(7)https://projects.umaproject.org/

(8) Fundraising Amount:

Perpetuals US$97.4M [dYdX: US$87M; Perpetual Protocol: US$1.8M; Futureswap: US$1.6M; MCDEx: US$7M; from multi-sources including Crunchbase.]

Synthetics US$55.7M [Synthetix: US$46.1M; UMA: 4.6M if estimate IDO raised $2M; Duet Protocol: US$3M;]

Options US$26.1M [Hegic: ~US$12M on ICBO; Opyn: US$9.1M; Primitive: US$3M; Shield: US$2M; from multi-sources, including Crunchbase.]

(9) https://stats.synthetix.io/

Others:
https://research.paradigm.xyz/Yield.pdfa

 

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/viewpoint-the-historical-wheel-of-the-rise-of-decentralized-derivatives-has-become-unstoppable/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

Like (0)
Donate Buy me a coffee Buy me a coffee
Previous 2021-09-08 12:49
Next 2021-09-08 13:18

Related articles