Exploring Curvy vs. Linear Products in DeFi
Many defi users are familiar with linear products. Examples of these products include spot and perpetual future markets. It is easy to grasp because at its core it is a multiplier * returns of the underlying asset.
When we say linear we mean the payout looks like this:
Remember y = mx + b in school? It is very similar, deriving the payout of these products = r * leverage — the cost of carry. Where r is returns of the underlying asset, leverage is notional value divided by account balance, and cost of carry is funding rates.
These products are great for taking a two-dimensional approach to crypto markets. You earn a positive or negative PnL based on the asset moving up or down.
However, they can be quite limiting in certain environments. Let’s take a look:
ETH has been range bound for the better part of this year. This leaves limited opportunities to make money in a 2D format. This is where the concept of trading relative to time or volatility has come into play.
You can think of these as different dimensions in trading (it helps me conceptualize). In this dimension, we can trade curvy products. A curvy product that most have heard of is a vanilla option contract. Whether it be a call or a put they have components to them that make them curvy.
For visual learners, this is what I mean when saying “curvy”.
While linear products have seen significant adoption, the curvy product market is just starting to gain traction.
Squeeth falls into the realm of curvy products. Its long payout = 2r + r² — the cost of carry, similar to the linear products it still holds linear components but with the addition of r² it has convexity making it curvy.
ETH price relative to dollars has been range bound since the beginning of March, leaving long/short trading quite difficult. ETH vol has seen consistent declines WoW, opening the door for opportunities in the curvy product market.
Let’s run through an example:
User A is sick of linear markets and would like to trade direction and volatility.
They head over to oSQTH and decide to create a short-vol position.
Referencing our fancy sheet here, they deposit 7 ETH mint 68 oSQTH and sell them to hold a long position on ETH and a short position on oSQTH.
Because Squeeth is an ETH derivative, it allows for a curvy approach to the ETH market shown below:
By doing this User A holds a short ETH position and short-vol position. They benefit from the passage of time, decreasing implied volatility, or directional down move in ETH.
Users often find more value within a multi-dimensional view in markets as it allows for multiple ways to profit and a better expression of an opinion.
Disclaimer: The information provided in this document is for general informational purposes only and does not constitute financial advice. It should not be relied upon as a substitute for professional financial advice or investment recommendations.
