Getting some background for Smart Contract Audits — DeFi Derivatives!
During my journey learning Smart Contract Auditing I often find myself in need to catch up on some background knowledge to understand what problem is a protocol trying to solve.
In this series I’ll be combining some useful resources, which helped me understand underlying concepts behind Smart Contracts.
Let’s kick it off by diving into DeFi Derivatives!
What are derivatives?
Derivative is a kind of financial contract, which value and outcome in dependant on, or derived from, another underlying asset or indicator.
Interesting part of it is that traditional derivatives market dwarfs any other market on the planet.
There are many kinds of derivatives, like: futures, options or swaps, and you can get a good overview of the basics from this video:
When it comes to understanding how to use derivatives in investing the following video goes through how to use derivatives to protect your portfolio against certain market risks, a strategy also known as hedging.
If any of the particular derivatives has caught your eye here are some deep dives, that can help you have a stronger grasp of futures,…
…options…
…and swaps:
DeFi Derivatives
Now that you’ve got a solid base of what the traditional derivatives are it’s time for the juicy part — DeFi derivatives 🔥
One of the main differences between traditional and DeFi derivatives is that the latter are available for anyone with a basic crypto knowledge and internet access, whereas the former are often limited to ‘accredited investors’. A more detailed analysis you can find here:
As the blockchain networks provide a very different infrastructure for creating derivative mechanics, even protocols which try to mimic traditional mechanics come up with different ways to make it work. Here’s a great breakdown of the inner workings of 3 option protocols: Hegic, Opium and Opyn.
As there are similarities between centralised and decentralised financial products, there are also differences. New technology allows for new solutions — like synthetic assets brought to you by Sythetix:
Another crypto specific feature popular within derivatives protocols, particularly futures, is Funding Rate. This is a system which aims to keep the prices of perpetual futures aligned with spot prices of their underlying assets. You can find out more about it in the following article from CoinDCX:
https://coindcx.com/blog/crypto-futures-trading/what-is-funding-rate-in-crypto-futures/
Or if you prefer a video format:
