The State of Decentralized Derivatives Trading: Research #10

This time, Spin’s decentralized derivatives trading research is more global and covers not only the progress of on-chain futures and options protocols but also provides some analytics on the current market metrics and news. In our new research you will learn:

• Analytics on how the current market sentiment influences on-chain protocols
• Core updates from on-chain derivatives DEXes
• Know-hows from new participants of the market

Let’s get started!

Market sentiment & Vault protocols

Market sentiment overview for on-chain protocols, 22 Feb 2022

In the last several months the crypto world is experiencing a negative trend that has an impact on all market participants including decentralized exchanges. Even in comparison to the DPI index, consisting of top Ethereum dApps, most on-chain derivative platforms feel worse now than a few months ago.

It’s worth mentioning that options vault protocols, such as RBN, DPX and SDT show the best metrics of resistance to the global negative trend, which are competitive to those of BTC and ETH. The reason is clear: vault protocols are now in trend, and their TVL dynamic is much better than other markets’.

According to Messari, vault protocols TVL increased from $249M to $626M (+151%) in only three months. At the same time, the entire DeFi TVL increased by 34%.

The best non-vault derivative DEX, in terms of price, is Mango which lost “only ‘’ 45% in 90 days thus outperforming the DPI index. On the other hand, the worst derivative dApp is MCDEX that suffered a 86% decrease in its token’s price in 90 days.

On-chain derivatives trading: top news

1. The recent post by Jesse Powell, CEO of Kraken, was one of the most vibrant posts on Twitter this week. He admitted that, upon the governmental request, users’ funds stored on centralized exchanges can be blocked and confiscated, and if people are concerned about such a scenario, then it’s better not to keep the funds on CEXes.
2. Ribbon suggested a proposal to implement veRBN token, which means having RBN locked up to 2 years. If a proposal gets accepted, investors who have locked tokens might get a boost (maximum 2.5x) for their farming on Ribbon.
3. Nowadays, more and more protocols start to use a lock system, which helps in withdrawing native tokens from the market and supports the token price. For example, 52.9% of CRV is locked in veCRV, and many protocols would like to persuade investors to lock their tokens.
4. Mango has introduced a referral program, and it requires 10k MNGO on account for creating referral link. Discount is low (4% for invited people and 16% fee rebate for inviting). In addition, there is a 20% discount for people who hold 10k MGNO. In general, the standard fee is 5/-3 bps (taker/maker), and the discounted fee is 4/-3, so the difference is not that big. Also, Mango’s maximum leverage for ETH and SOL perps was increased up to x20. Finally, Mango will implement token lock for voting. Probably, they also are going to implement a “veMNGO” system, where people will lock tokens for up to 2 or 4 years in exchange for increasing voting and other benefits.
5. PsyOptions made a partnership with Atrix. A new pool has been created on Atrix, with dual rewards in SRM and PSY. Current APY is 312%.
6. Katana — a protocol for structured products implements Zeta FLEX, a subproduct of Zeta. Now Katana will use Zeta FLEX options for their vaults.
7. dYdx has released a proposal to reduce the threshold for participating in a liquidity mining program for market makers to 0.25%, making it easier to become a market maker. But the most interesting thing here are the votes. From 27M “yes” votes, 26M are owned by only two wallets. So, it’s actually not important how other participants would vote, the two wallets get to decide everything.
8. Opyn increases capital effectiveness for users, now it’s possible to use Uniswap LPs as collateral for shorting Squeeth.
9. Perpetual protocol recently became the first partner for Ribbon’s Treasury Vault. Besides typical vaults for farmers, Ribbon also offers Vault for DAOs, which can keep tokens from treasury and sell covered calls for it. In that case, DAO generates additional yield for tokens without selling them on the market. It’s a new and very interesting use case for Treasury and covered call vaults.
10. Solana is now available on Dune Analytics, and somebody has already done a page for Drift protocol.

Meet new derivatives warriors

UXD is a DeFi protocol for creating stablecoin, backed by a delta-neutral position that works on Solana.

In simple words, users invest some assets in UXD (SOL, for example), and UXD protocol sells SOL-Perp on Mango Exchange for the same value. As a result, users have a neutral position that doesn’t depend on SOL price moves. At the same time, the user gets UXD stablecoin, and he can use it as he wants, but his SOL spot position is locked at the same time, and it will get unlocked in case of UXD redeem.

Protocol gets profit from positive funding, because it shorts perpetuals. Part of the profit goes to stakeholders and another part goes to the insurance fund. If funding is negative, the money is paid from the insurance fund, and users don’t need to pay to support the position.

Now UXD shorts perps on Mango, and it’s a great case of DeFi, which helps reducing funding rates. But the main risk for protocol is long periods of negative funding, which might drain the insurance fund. Everybody can check the UXD position on Mango here. Indubitably, now protocol has SOL for $7,5M, and shorts SOL-Perp for the same amount of money. Due to negative funding, UXD has already lost 66,000 USDC.

Lemma protocol does the same, but is based on Arbitrum and makes a delta-neutral position on MCDEX.

Scheme of Lemma’s working process

CAP Finance is a new protocol, which now has only $3M TVL. It moved the Synthetix idea to the Arbitrum blockchain. Therefore, users are able to trade different derivatives with up to x50 leverage. The main feature here is a counterparty — pool investors act as counterparties of any traders trades. Meaning, the user’s profit is the investor’s loss, and vice versa. Plus, pool depositors get spread — difference between bid and ask for traders. On average, traders lose their money in trading, but there is still risk, and pool investors may lose money.

If you loved this research, don’t hesitate to share it with your friends and put a couple of claps under the article. Spin is building a DeFi derivatives infrastructure on NEAR Protocol, and we put much effort into analyzing the trends and metrics of the modern DeFi landscape.

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