The State of Decentralized Derivatives Trading: Research #14
We are back with our new decentralized derivatives market research! Today, we’ll go deeper in understanding one of the hottest derivatives market trends – DOVs, discuss the stablecoin pros and cons, cover the recent updates in the NEAR ecosystem and ofc outline the hottest DeFi derivatives news. LFG!
Decentralized option vaults in a nutshell
Let’s start our bi-weekly update with Decentralized Options Vaults (DOVs). This sector exploded during Q4 2021 and has reached a great share of the market.
The essence of DOVs is perfectly described by the QCP Capital team in their Medium:
The beauty of DOVs lies in its simplicity. Investors simply ‘stake’ their assets into vaults which deploy the assets into options strategies. Before DOVs, option strategies were only available to accredited investors through over-the-counter (OTC) trading or by self-execution on option exchanges like Deribit.
DOVs generate yield by accruing capital and selling collateralized call and put options. There is one problem: most of the options are bought by market-makers who resell them on Deribit. So, that is a one-way options market, where DeFi users can sell options but not buy. There are a few Ethereum-based on-chain protocols, such as Premia, Dopex, Lyra and others, but their trading volume is too small compared to DOV protocols, so there is more room for growth.
The main problem with DOVs — is the process of selling all options every Friday. DOVs operators should make arrangements with many market-makers. So, Paradigm developed a solution to implement Friday’s Ribbon auctions to their platform. It will bring a lot of buyers’ liquidity to decentralized options.
The stablecoin landscape
Mango decided to add a UXD token as collateral. Not many people know about UXD Protocol, but their approach to launching a stablecoin might become very widespread. Multicoin Capital wrote a brilliant article about it. Short story — any existing stablecoin in crypto has some cons:
- USDC, USDT — centralized stablecoins, collateral might be blocked by US governance, or addresses might be blacklisted. Also, there are some concerns about short-term bonds and credits, which are also included as USDT collateral.
- DAI. 65% of Maker stablecoin was minted by depositing USDC as collateral. So, DAI has all the same risks as USDC. But, at the same time, using ETH as collateral is ineffective because users need to put in more ETH to mint less DAI. In other words, DAI is an ineffective capital stablecoin.
- Algostables exist till people believe in them, and many dead Olympus forks are a proof of it.
- UST stands alone, among other stablecoins, and Terra was able to spread their stablecoin and make it stabilized. But it is a concern that in case of a massive bank run from UST, LUNA capitalization may drop so much it won’t provide enough capitalization for keeping the UST peg.
Not a case for UXD, which is decentralized, capital-efficient and stable. To create UXD users make a delta-neutral position on Spot plus Perp. Sounds difficult? Actually, it’s not. For example, a user buys 100 SOL on the spot market, sells equivalent amounts of SOL-Perp and locks this position for minting UXD. If SOL costs 90, this position is worth $9000. If the price moves in any direction, nothing will happen to its value. So, we can mint 9000 UXD, which represents this position.
There are two main risks: negative funding (in that case, UXD Protocol will pay funding from the treasury fund or would turn over positions) and derivative exchange risk.
In general, it sounds like a good case for how to create a new type of stablecoin that really can solve the stablecoin trilemma.
If we speak about stablecoins, let’s discuss USN. Finally, NEAR has their own algorithmic stablecoin. DAO Decentral Bank will drive it, and new tokens can be minted by depositing NEAR as collateral. This function is turned off right now, but we expect it will be turned on in the coming days. Any user can buy it on Ref Finance or Spin.
USN staking will be launched soon and probably will offer about 20% APY.
One more player that’s also joined the algorithmic stablecoins race is Tron. Justin Sun (creator of Tron) announced that USDD would be launching on May 5. The Stablecoin will provide a 30% APY risk-free rate. There are no details yet, but it will probably work the same way as UST.
Apparently, Terra’s success attracted a lot of attention, and several players in crypto also want to be a part of it by using the same features. But there are several issues like:
- First of all, the stablecoin protocol has to pay a lot of money for such high yields because earnings can’t cover it. In Anchor’s case, ANC holders suffer from dilution and Terra spends a lot of money from their treasury. Without it, the protocol is unprofitable, and it can’t cover yield for lenders with earnings from borrowers.
- The second — in Terra’s case, TVL of Anchor was growing smoothly, and the deposit excess of borrowing was relatively small, so they kept rates high for a long time. But now, most users know about UST and in case of high rates, a lot of mercenary capital will flow to the USN and USDD. Probably prices of native tokens will also increase, even if anybody knows about it right now because potential demand for NEAR and TRX should be high for transferring it to stablecoins.
It’s possible that quite many DeFi nerds will exploit the situation and, first of all, make some good yield for stablecoins reserves and, second, on native tokens prices growing. There are two risks — mistakes in smart contracts and excess impact of stablecoins on the token price when the market cap of USN or USDD becomes too big. In that case, potential bank-run might impact prices of NEAR and TRX a lot, and stablecoins might unpeg. In other words, it’s safe until it’s big.
But let’s come back to derivatives!
Injective has listed the First NFT Floor Price Perpetual market. It is a new type of Perpetual contract which makes it possible to trade derivatives on NFTs. As a market price, it takes the Floor price of the NFT collection. Trading started on the 21st of April, but now trading volumes are small and the spread between the best bid and ask is high. Probably people are not sure about trading new types of products right now, maybe we will see them getting adopted later, but this market definitely needs market-makers with liquidity and tight spreads.
Messari published a lengthy article about the state of dYdX for Q1 2022. Also, the protocol plans to move toward complete decentralization by the end of 2022 with the V4 release. The most interesting part here is fees, which now fully go to dYdX Trading Inc. If fees switch to token holders, it might increase dYdX price a lot because now the protocol has 8,41 P/E according to Token Terminal and is ranked fourth based on this parameter.
Friktion launched Crab Strategy based on its position on entropy.trade. This strategy is different from the usual DOVs covered calls because it extracts funding from Power Perpetuals. People who invest money in this strategy become sellers of Power Perp. Also, their position hedge makes it delta neutral. If the price goes beyond borders, Vault investors lose money, as shown in the picture below. This strategy works well in a calm market where price volatility is low, but in case of rapid price changes, losses might be very big till the liquidation of positions. So, more risk, more gain. The current APY on the BTC Crab strategy is 38.5%, compared to 18% on a simple covered call strategy. Detailed description here.
NEAR Protocol news
So, what’s happening on NEAR besides the USN release?
Spin has launched its first order book DEX on mainnet. The trading fees at Spin are lower than those of AMMs (say, 0.3% on Ref vs. 0.1% for NEAR/USDC and 0.04% for USN/USDC on Spin).
Ref Finance launched the USN-USDT farm. The current APY is 16.95%, and it’s a great yield for stablecoin farming!
Finally, NEAR has been listed on FTX, one of the biggest crypto CEX! Rumors have it that NEAR will be listed on Coinbase in the next few months.
Sweatcoin will launch its own token on NEAR Protocol! It’s a widely accepted Move 2 Earn app, which will bring more users to the blockchain. Now users can gain inner tokens that’ll be later converted to tokens on NEAR after TGE.
That’s our wrap for this report. Let us know your thoughts in the comments below and what else you’d like to get updates about in the Crypto atmosphere.