Introducing Derivio: Part One

Derivio is a next-generation on-chain structured derivatives ecosystem

Presently, the on-chain derivatives market is filled with protocols hyper-focused on capturing the existing degen user base. They’re not prioritizing the next wave of traders, or the next phase of mass adoption.

We are developing Derivio as a forward-thinking derivatives protocol suite, building for where DeFi and its users are headed — not where the space currently is. This means a UX prioritizing simplicity and a range of products wide enough for retail and institutional participants of varying needs and all experience levels with DeFi. Starting with perpetual futures and digital options, Derivio will first launch on zkSync, the leading zkEVM.

Derivio envisions an ecosystem of structured derivative products that can satisfy both speculative and hedging needs for a plethora of digital assets, with a user experience that is smooth for all users, retail and institutional.

We built a Liquidity-as-a-Service derivatives model with a focus on execution and pool security, in order to extend it to the creation of new markets that offer better risk hedging. We are imagining a future where risk management becomes significantly more important for token holders who operate upon consistently stable and reliable expectations of their portfolio risk exposure. The fulcrum of derivatives is the structuring of new risk protocols that can cater to organic demands arising from the expanding communities of token holders.

Derivio’s leading tenets are:

• Productive & sustainable real yield sources via organic market behavior
• Algorithmic risk protection for liquidity providers to achieve scalable TVL
• Fully decentralized architecture & non-custodial trading
• Innovative & composable derivatives with high capital efficiency & wide market offerings
• Community-owned and driven with institutional-grade standards

Today, DeFi is still in its juvenile stage. Most of the protocols have designs that can lead to serious problems under fickle market conditions. This is unsustainable and not scalable as the risk management capabilities of protocols and users are still limited. The reflexivity in leveraging assets on the way up also applies on the way down, and non-scalable mechanism design implies profitable exploitation, as we have seen in the past year from various systematic shocks to the DeFi ecosystem.

Now, DeFi is seeing the early emergence of organic yield supported by demand for utility rather than financial zero-sum games; DeFi needs to start catering to organic demand for operational risk management as much as leveraged speculation.

How will Derivio solve these DeFi-native problems?

Structured derivatives are a type of derivative with varying terms, payout, and risk profiles on a range of underlying assets. They allow investors and traders to construct a specific type of payoff given certain events, enabling more granular hedging strategies and risk management. Vanilla futures and options, such as perpetual futures, are basic ingredients of structured derivatives. One can say that if the structured derivative only has one layer, then it can be perpetuals.

Structured derivatives allow for sustainable leverage within DeFi just as they have been broadly facilitated in CeFi and TradFi. With them, traders can access leverage in a more capital-efficient manner. In addition, demand for these structured derivatives generates organic yield for Derivio liquidity providers while enabling risk protection products for other liquidity providers across the crypto ecosystem. Through structured derivatives, investors and traders can create more elaborate hedge with unique payoffs for their specific exposure or speculate on assets via DeFi.

We create a powerful liquidity & trading engine which offers traders deep liquidity & smooth trading experience, to enable liquidity providers one-click market-neutral market-making abstraction, so as to serve as the foundation for future product offerings.

Building out a vibrant structured derivatives protocol suite will be the key to institutional-grade DeFi & mass adoption from financial institutions.

Why build structured derivatives in a decentralized manner?

In traditional finance, the top 10 derivative companies have a combined market share of more than 60%. With this concentration, privileged institutions provide the platform and products while professional market makers make the market, with both parties making abundant profits out of the users. Given this system, there are significant custodial risks that are almost impossible to manage in the current state of CeFi.

The implosion of FTX is a great example of this risk, but it doesn’t stop there, any CeFi custodial exchanges (ex. Huobi) and stablecoins (ex. USDT, BUSD) that are not fully regulated are equally liable to the custodial risks. This doesn’t stop in crypto, during the 2007 global financial crisis where major wall street brokerage firms aggressively and fraudulently marketed Lehman Brothers structured notes to unsuspecting consumers before the collapse of US financial markets, and just before Lehman Brothers went bankrupt. DeFi introduces radical transparency that eliminates custodial risk.

Derivio believes the DeFi derivative opportunity should be democratized, trustless, and transparent. Smart contracts enable vaults that allow anyone to be the market maker, while Derivio acts as the platform enabling it. A trustless counterparty and full transparency are guaranteed by the distributed ledger technology that blockchains enable.

This also allows anyone, not just large funds, to gain access to these products permissionlessly. Derivio is building the modern derivatives exchange powered by blockchain technology that is fully decentralized, robust, and composable.

In the last twelve months, over $400M in revenue has been generated by 5 perpetual derivative protocols alone (dYdX, Synthetix, GMX, Perp Protocol, Gains Network). Derivio stands to capture a large portion of the perpetual derivatives market on new blockchain ecosystems while bringing the $7T structured derivatives market in traditional finance on-chain. In order for increased institutional adoption of crypto assets, we will need a larger range of structured derivatives and hedging products than perpetual futures and there is still huge potential to grow.

In Phase 1, Derivio plans to introduce perpetual derivatives and digital options with aggregated liquidity over crypto, forex & commodity markets. Liquidity-as-a-service tokenization will also be used to build interest rate, zero coupon bond, and index derivatives markets — novel composable financial primitives that only DeFi could make possible.

In Phase 2, we’ll release more exotic options & structured products currently under R&D. This includes vaults with organic yield such as autocallable, warrant, and fixed income products that give users more granular and exotic yield opportunities.

If you are passionate about DeFi structured derivatives and want to be more engaged to support Derivio, apply to become a DWhale! Angel whales pre-register here: DWhales

Derivio aims to build products that are critical to expanding the DeFi derivatives market size to the trillion-dollar level by building for the specific needs of specific groups of crypto market participants. We will achieve this by building the leading DeFi derivatives ecosystem atop our infrastructure partners who offer the most robust technical foundations and unique market opportunities.

This is part one of a three-part Derivio introductory series — parts 2 and 3 coming soon to discuss our differentiators, timeline, and project roadmap! In the meantime, if you want to learn more about Derivio and stay up to date on project details, join our Discord and follow us on Twitter!