In my very first article, I will talk about the narrative that has drawn the attention of fundamentalist crypto investors. It might be the next big wave in crypto, a promising portion of what's called DeFi 2.0
As this is the first episode of a series of articles about this subject, it will be straight to the point on why this is the future, or in other words: why this is bullish.
CEX vs DEX
In 2021, we saw a significant transition from Centralized Exchanges (CEX) trading to Decentralized Exchanges (DEX) trading, especially the Spot Trading known as “Swap” on DEXes.
Just for a quick illustration, have a look at the cumulative LPs and volume on Uniswap:
As you can see, we had exponential growth on DEXes in the last couple of years, and it was only the first step for DeFi. We will discuss and make a detailed comparison in a further article.
Decentralized ways to do business, cutting its intermediary mean freedom. The adoption is only a matter of time.
Spot vs Derivatives trades
Looking through the volume of trades on Binance last year (2021), we see that the average daily spot trades were $23bn, while derivative trades were $77.5b → 3.36x more.
Furthermore, the total 24-hour spot trade volume on Uniswap V3 on 20/Sep 2022 was $681.89m, while that of derivatives on GMX was only roughly $250m on the same day → 63% below, while in the last comparison, it should be worth 3.36x more: ~$2.29B
This shows a giant derivatives market in DEXs that needs to be addressed, as more and more CEXs suffer from government regulation and people will seek more autonomous and decentralized ways.
The Growth of Derivatives
There are a few reasons that finally, the investors are looking and migrating on a big scale into decentralized derivatives protocols.
One of them is the controversial government proposals. They want a piece of cake, and the most fragile and effective way to do it is to go after the Centralized Exchanges, as they are registered companies and must follow the rules.
The second one is that there are some manipulative scandals of some big CEXes, and also go down in volatility momentum, causing big losses to investors, including myself (@Mut_Eth); In May 2017 had six figures loss because the exchange I had a majority of my portfolio did not work.
And to finish, the business model of some of them, of sharing a big portion of the fees to incentivize the liquidity (solving one of the major problems of the lack of vol, subject to another thread).
Revenue & Real Yield
The fees of derivatives trading will always be higher than spot, first because the volume is 3–4x more, and second, because there are trading fees for leveraging and, in the worst case, for liquidations.
Competing with major protocols: chains, bridges, and lending protocols… $GMX and $SNX are both in the top 10 collecting fees.
The protocols have different models, whereas they share the fees in most, which has worked pretty well. TVL is climbing, the main problem protocols pioneers had, the lack of liquidity, is not a problem anymore.
Now, take a look at the comparison of the 180D & 7D Revenues by Token Terminal:
1- You can notice that the derivatives got position between other Dapps, $dYdX is up from #4 to #2 | $SNX from #7 to #4 | $GMX from #13 to #5
2- Smaller protocols such as $CAP, popping up in the 7D
3- If you calculate the revenue from the last 7D:
$GMX would have 30.85M on the 180D
Conclusion
The derivative is a multi-billion market, and naturally, it migrates to Decentralized protocols. Although it grows snappy, it’s far from what the market is worth, and there are multiple opportunities for investors.
The article is too short for the immensity we could dive into, so we will keep it for the following articles and Twitter threads.
Please show your support. It takes time to write an article, and I am doing it for free, because this is all about educating the ecosystem and making friends.
See you around!
