How Do DeFi Derivatives Fit into the DeFi Ecosystem

Decentralized Finance has brought with it a whole new landscape of finance, empowering the individual over the entity. With drastic change comes new features, such as ‘staking’ and ‘yield-farming’. However, several aspects within DeFi have transferred seamlessly from the TradFi world. One perfect example would be: DeFi Derivatives.

What Is a DeFi Derivative?

A DeFi derivative is a contract between two or more persons to buy or sell a specified asset on or before a predetermined date. DeFi derivatives bring regular derivative trading onto the blockchain. Find a detailed guide about DeFi derivatives here.

Derivatives within DeFi are different compared to TradFi in two main ways:

1. As DeFi is a trustless environment, no central organization is used as a middle-man, all participants trust the smart contract.

2. Creates the potential for singular derivatives; the contract is with a smart contract, not another person.

Use Cases

DeFi derivatives, like in the world of traditional finance, are primarily used for speculation and hedging. However, the main change is how these actions are completed.

• Speculation

By including more order types, such as options trading, within DeFi, cryptocurrency traders can speculate even further on their crypto assets whilst knowing they are in complete control of their assets. Often large speculative plays done by retail investors get shut down by ‘fair’ centralized authorities, which have large hedge funds in mind.

Within the world of DeFi, shutting down the ‘system’ would be impossible, offering maximum clarity and reassurance to investors.

• Hedging

With the addition of derivatives, DeFi traders will be able to short crypto assets through inverse assets, where the inverse assets price moves inversely to its ‘paired’ asset.

For example:

If a trader bought inverse Bitcoin at $40,000 and it increased in price to $41,000, their inverse asset would decrease in value to $39,000.

Who Is Making This Happen?

The team over at Horizon Protocol are making Synthetic Assets possible through DeFi derivatives, helping traders speculate and hedge their bets whilst continuing to enjoy all the privacy advantages of the DeFi world. The Horizon protocol is aiming to be able to convert any type of asset into a synthetic one through tokenization.

By creating synthetic assets of both real-world or virtual assets, they are reducing the barrier to entry for countless individuals who cannot buy or trade their preferred asset class because of location or opportunity.

Conclusion

Derivatives are the biggest market in the world, totalling in at a massive $1 quadrillion dollars. The Horizon team and DeFi investors as a whole hope DeFi derivatives will bring massive adoption to the space, without limiting the freedoms and anonymity investors currently have in the space.

DeFi grants every person a trustless and permissionless financial environment, free from overruling centralized third parties, with DeFi derivatives being another step closer to mainstream adoption.

Author Bio

Tim first stepped into the crypto world in 2017 and has never looked back since. Now CEO of crypto and NFT marketing agency Lunar Strategy, he’s contributed to a number of respected crypto publications and is always into talking all things tech.