Free Game Friday: A comparison of key derivatives protocols in DeFi

dYdx, Opium, Opyn, Synthetix, and UMA

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The DeFi markets are heating up with more users, more TVL, more mania.

And there’s a war going on.

In the world of collaboration and community atop of Ethereum, we’re seeing a frenzy to collecting the most TVL, more users, the largest fee generation and better marketing.

Its been absolutely amazing to watch. Coinbase listings, 500% pumps, hacks, $10B TVL hit on DeFi Pulse recently.

Just absurd.

Today were taking a look at some of the top derivatives platforms in a comparison! Lets go.

- Andy


📈 Shoutout To Our Partner: MCDEX— trade the first ever decentralized ETH & LINK perp swap contracts on MCDEX.


🙏 New To Yield Farming? Use Akropolis to lend, borrow, and dollar-cost-average in the simplest way possible with their new Delphi mainnet launch!


A comparison of key derivatives protocols in DeFi

Derivatives are a crucial instrument in any financial market, as they enable market participants to manage their risk. Although the past months have seen an increase in attention for decentralized derivatives in DeFi, the space is still absolutely tiny compared to the traditional derivatives market and is expected to grow exponentially to the total growth of DeFi.

Let's take a closer look at some of the derivative protocols available in DeFi today. In this piece we will compare the protocols on some key facets that will help traders find their ideal protocol and investors find investment opportunities in decentralized derivatives. 

dYdX

dYdX is a decentralized trading platform that currently supports margin trading, spot trading, lending, and borrowing. dYdX features an advanced trading UI and uses layer-2 scaling solutions that together create a smooth user experience.

dYdX does not use liquidity pools but instead offers peer-to-peer trading using an order book. Traders on dYdX are required to post margin in order to trade with leverage. Positions are managed by a complex and hybrid on-chain/off-chain risk management system, including margin calls.

In terms of derivatives, dYdX currently only offers non-custodial perpetual swaps for BTC, ETH and LINK

Opium

Opium is a peer-to-peer protocol for the creation, trading and settling of decentralised derivatives, built on Ethereum mainnet. Opium was founded in 2017.

Opium allows for easy and fast creation of derivatives like ETH futures and YFI put options, but also more exotic and innovative derivatives such as ETH gas fee options and Credit Risk Swaps for Aave's credit delegation lines. 

Opium Protocol is unique because of its approach to risk management. The protocol is designed to prevent tail risks through keeping the on-chain primitives simple and robust, which can be combined off-chain to construct more advanced derivatives. Through the use of fixed margin, no on-chain liquidation mechanism is required which mitigates a lot of risks. Decentralized derivatives on Opium Protocol are similar to traditional finance and therefore Opium has the potential to bring in liquidity from traditional financial markets in addition to the DeFi markets. 

Opium currently offers a range of derivatives on their Opium Exchange, including (but not limited to) ETH futures, ETH gas options, YFI options, binary options on COMP and CDSs on Aave's Credit Delegation lines.

Opyn

Opyn offers call and put options which can be used by DeFi users to hedge trading risks or gain increased market exposure. Opyn is built on Convexity Protocol, which allows for the creation of options on Ethereum mainnet. Anyone is open to use their protocol and build options. Opyn features an easy to use UI for interacting with the protocol. 

Options on Opyn are tokenized as oTokens and are fully collateralized using USDC, which can then be traded on secondary markets. Their insurance feature, however, features on-chain risk management (eg. liquidation mechanisms) which introduce liquidation risks for users. Opyn also does not use any layer-2 scaling solution, which makes interacting with the protocol relatively expensive because of gas fees.

Opyn currently offers call and put options for ETH and various popular DeFi tokens (eg. COMP, BAL, YFI, CRV), varying in availability. Opyn also offers insurance on certain deposits in Compound.

Synthetix

Synthetix is a protocol for decentralized synthetic assets. Synthetic offers synthetic assets for various popular assets from both crypto markets and traditional markets, which can be purchased to gain market exposure without holding the underlying. Synthetix also offers binary options and has announced futures. Synthetix has announced that most of their functions will be migrated to layer-2 solutions, which will make interacting with the protocol cheap and fast. 

Synthetix features a peer-to-pool mechanism, which means that liquidity providers are always acting as the counterparty for synth buyers. Synthetix assets are always collateralized by the native SNX token, staked by liquidity providers. Although the collateralization ratio is relatively high, this self-referring mechanism introduces debt risk for liquidity providers/market makers, theoretically bringing them uncapped downside exposure in case of unexpected price volatility of the underlying assets. 

Synthetix currently offers over 40 synthetic assets.

UMA

UMA is a protocol for decentralized synthetic assets, which can be used by anyone to create synthetic assets. UMA is unique in that it also allows for priceless synthetic assets, which do not rely on data from price oracles. UMA is relatively flexible in that it allows for many types of financial derivatives.

UMA has implemented on-chain risk management mechanisms, such as liquidations, disputes and automatic posting of additional margin. Although the mechanisms are impressive and novel, the on-chain complexity may seem relatively risky compared to other derivative protocols and interacting with the protocol might incur steep transaction fees. The overall system seems to be decentralized and economic incentives are in place for bootstrapping a robust ecosystem.

UMA currently offers a synthetic Token to track the ETHBTC ratio, the yield dollar (yUSD) which can be regarded as a fixed-rate, fixed-term loan.

Conclusion

Even though the decentralized derivatives space is still in its very infancy, crypto traders and DeFi users already have a range of solutions available for managing their risk today. Most of the protocols available today are limited to offering options, however some protocols stand out due to novel mechanisms or advanced features.

Some notable insights:

  • dYdX and Opyn provide easy-to-use user interfaces for today's DeFi users.

  • UMA's architecture design seems novel and innovative, but in the process may introduce uncertainties and tail risk.

  • Opium Protocol is interesting because of its risk-limiting approach to decentralized derivatives and composability with traditional financial markets.

Also most protocols seem focused on serving today's DeFi market instead of also targeting professionals from traditional financial markets. The market for derivatives in DeFi will need to grow significantly in order to account for the total growth in DeFi volumes and users.

Although it is not a zero-sum game, it will be interesting to observe which protocols will be able to capture significant users and volume. 


⚠️DISCLAIMER: Investing into cryptocurrency and DeFi platforms comes with inherent risk including technical risk, human error, platform failure and more. We are strictly an educational content platform, nothing we offer is financial advice. Please refer to our blog for more on mitigating your downside when using these protocols!


📈 Shoutout To Our Partner: MCDEX— trade the first ever decentralized ETH & LINK perp swap contracts on MCDEX.


🙏 New To Yield Farming? Use Akropolis to lend, borrow, and dollar-cost-average in the simplest way possible with their new Delphi mainnet launch!


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