DeFi Derivatives Series: (1) DeFi Derivatives Ecosystem — Futures
verse2 has been researching various chains of Defi Derivatives for projects with main players and innovative products. Before we share the details of the project research, we would like to briefly introduce the players in the Defi Derivatives ecosystem compiled by verse2.
The DeFi Derivatives Series: (1) DeFi Derivatives Ecosystem is divided into two parts.
-The first post will focus on the ‘Futures’ Protocol.
-The second post will analyze the various forms of the ‘Options’ Protocol.
As we have previously shared in the DeFi Derivatives Series:(0), we’ve determined that besides the enormous market demand, derivative products that cannot be implemented even by TradFi or CeFi will be the primary driver of DeFi Derivative growth. Even though the DeFi Derivative market is still in its early stages, a wide variety of Protocols are growing based on proprietary technology.
1. Perpetual Protocol
Perpetual Protocol is an exchange for Perpetual Futures (futures contracts with no defined expiration date) implemented in Optimism (L2).
Project Description
* Currently, trading of Perpetual Futures up to x10 leverage is available in the protocol.
* Trading and Futures pricing are done through vAMM (Virtual Automated Market Maker). In this case, vAMM mints virtual tokens to form a pair, so there is basically no need to provide liquidity other than to collateralize the position.
* V2 (Curie Protocol) allows users to set a price range for specific underlying assets to supply liquidity and receive transaction fees and liquidity supply compensation.
* A ve model has been added to the PERP Token, and vePERP holders will receive a share of the commission revenue.
TVL Trends / $45.17M (2022.07.15)
verse2 Insight
It is the first DeFi Futures Protocol to operate on an AMM basis opposed to a Order Book system and is the protocol with the second-highest On-Chain trading volume after dydx. To overcome the limitations of vAMM, V2 introduced a liquidity provision system and applied improvements such as algorithmic adjustment of the K-value, which is evaluated as having a positive impact on volume growth.
2. dYdX (Starkware L2)
dYdX is a DeFi protocol implemented on Starkware (L2) that supports Lending services and Spot/Margin/Futures transactions.
Project Structure
* In addition to Spot, Leveraged Trading of Margin (up to x5) and Perpetual Futures (up to x10) is available.
* Currently, ETH, DAI, and USDC can be borrowed, with a minimum collateral ratio of 125% and a clearing critical point set at 115%.
* Similarly, ETH, DAI, and USDC can be borrowed, and the Utilization rate automatically adjusts the interest rate.
* The dYdX foundation compensates users for their trading participation.
(The commission and OI per epoch determine the compensation.)
* The Governance Token is DYDX, and users are entitled to DYDX Staking compensation.
* DYDX is also offered as compensation for Retroactive (7.5%), Trading (25.0%), and LP (7.5%).
* The Liquidity Module (2.5%) exists as a staking pool for Protocol’s Market Making.
* The Safety Module (2.5%) exists as a staking pool to protect the ability to provide the protocol.
TVL Trends / $543.51M (2022.07.15)
verse2 Insight
The same Order Book-based protocol as the traditional CEX, this is StarkWare’s debut stage as an L2 and is the protocol that currently accounts for the majority of DeFi Futures trading volume. This appears to have started as an L2-based protocol that provides fast transaction speeds and sets up a well-set inducement to continue trading within the protocol. It recently made a big splash through its announcement to build its Chain based on the Cosmos SDK.
3. Kine Finance (Ethereum, BSC, Polygon, Avalanche)
Kine is a Liquidity Pool-based Defi Futures Protocol that allows P2P trading through 3-way liquidation.
Project Structure
* Users can Stake their assets in Kine and issue kUSD (Stable Coin) up to 80%.
* kUSD can be used as margin in Kine, and kUSD can also be swapped with UniSwap, DODO, etc.
* Staking KINE (Native Token) and receiving xKINE will provide a portion of the Protocol fee, similar to the xSUSHI model.
* You must redeem kUSD upon Unstaking, creating the effect of burning redeemed kUSD.
* Currently, USDT/USDC can be used in addition to kUSD as margin in the protocol.
TVL Trends / $11.2M (2022.07.15)
4. Mango (Solana)
Mango is a DeFi protocol implemented on top of Solana that, like dydx, provides Lending services in addition to Spot/Margin/Futures transactions.
Project Structure
* Perpetual Futures through Mango’s Order Book system can be Leveraged up to 20x and Margin Trading through the Serum DEX engine up to 10x.
* User position liquidation is determined by the “Maintenance Health” of the account. Liquidation occurs when the percentage of collateral assets decreases and the Maintenance Health becomes less than 0.
* If liquidation occurs, the account will be liquidated through USDC of Insurance Fund ($70M) if the collateral is large enough to redeem the loaned assets.
* The utility token for the protocol is the MNGO, and users can lock Up the MNGO (up to 5 years) to enjoy greater voting power. In this case, as in the veCRV model, voting power decreases linearly with the lock-up period.
TVL Trends / $132.92M (2022.07.15)
verse2 Insight
It has grown rapidly, supported by the speed of the Solana Chain, and currently has the largest trading volume and TVL among Solana’s DeFi Futures. It also has the singularity of facilitating Futures trading and Margin trading, each using a different pricing engine. It is additionally characterized by its high potential for coupling with the DeFi Protocol (ve Token collection, Convex, and similar Protocols, etc.) riding through a ve model similar to veCRV.
5. Drift (Solana)
Drift is the first DeFi Futures protocol to introduce Dynamic AMM (DAMM) and Decentralized Limit Orderbook (DLOB).
Project Structure
* DAMM allows for lower slippage than traditional vAMM by utilizing the Swap Curve as a mediating variable for OI increases and the difference between the Oracle and final prices.
* Drift Cover: Mechanism that maintains low slippage by allowing trades to occur at the center of the curve to the maximum extent possible, even though Swap occurs outside of the high Slippage curve when prices deviate from the opening/final price.
* Adaptable K: K is increased for forging as Protocol and OI increase. At this time, as K increases, the user enjoys less slippage due to position liquidation.
* DLOB is responsible for filling orders generated by DAMM based on the “Keeper” Bot.
* Liquidation is based on Position Health, with 0% resulting in full liquidation and ~5% resulting in partial liquidation.
TVL Trends / $1.67M (2022.07.15)
verse2 Insight
The volume of transactions has grown significantly thanks to the fast speed of the proprietary AMM, DAMM, and the Order-Book Mechanism, DLOB, and Solana Chain. Still, the LUNA-UST situation has revealed fatal problems with the model and protocol. It is currently in the process of scrapping V1, and V2 is in development.
6. Tracer
Tracer is an Open Source Defi Futures Protocol implemented in Arbitrum (L2).
Project Structure
* Tracer allows you to trade Perpetual Futures using the power leverage method instead of the traditional linear leverage (x2, x10, etc.). In this case, Value Transfer is determined by the 1-(P0/P1)^(leverage multiplier) method, which prevents losing 100% of the collateral assets in excess.
* Users can trade Futures in the Perpetual pool, and the Keeper Bot is activated for Rebalancing the Pool.
* Users can issue or burn (redeem) a Leverage Token (ownership interest in the pool’s collateral, L-token for Long, S-token for Short) in the pool.
* The Keeper Bot adjusts the L/S token ratio of the pool to a 1:1 ratio through Rebalancing.
* Position profit is determined by Value Transfer and Rebalancing rate (=(L-Collateral/S-Collateral)-1).
* Protocol commission is formulated annually at 1% of TVL.
* Staking of Perpetual pool Leverage Token or Balancer AMM Pool Token (BPT) will be compensated.
* The Protocol Governance Token, TCR, is used in the DAO Governance proposal and voting process and can be locked-Up in Tokemak to receive TOKE compensation.
TVL Trends / $0.32M (2022.07.15)
verse2 Insight
This is a Protocol that not only offers Perpetual Futures with its own power leverage method but also allows trading based on the Perpetual pool by Tokenizing individual Positions. In addition, it is a protocol that shows the effort made to provide a variety of utilities in that individual positions can again be rewarded by staking.
7. Deri (Ethereum, BSC, Polygon, HECO)
Deri is a DeFi Protocol that trades Perpetual Futures and Perpetual Options and provides a bridge between Chains.
Project Description
* Each user’s Position is Tokenized by NFT and can trade a variety of Funding Fee-based Perpetual Futures in a single pool.
* DPMM (Deri Proactive Market Making) instead of dealing in Perpetual Futures and Options, respectively. DPMM (Deri Proactive Market Making) was designed to universally handle all Perpetual Swap Contracts on a Funding Fee basis. In fact, DPMM has only one general-purpose trading Pool that provides pricing and funding fees Logic.
* In the case of Funding Fee for Perpetual Futures, Long Position pays Short Position.
* The Protocol provides incentives to LPs in the form of DERI Tokens to mitigate the risk of loss for LPs, as LPs cover the Position mismatch between Long Position and Short Position in a specific trading Pool with added liquidity.
* DERI is the Protocol’s Utility Token, which is offered as an incentive to participate in Governance, join protocol as a clearing member during Lock-Up, and receive a discount on VIP transaction fees.
TVL Trends / $5.95M (2022.07.15)
verse2 Insight
It is a Protocol that provides a glimpse of financial engineering expertise through the DPMM-based Perpetual Swap Contracts pricing calculation Mechanism. It also attempts to eliminate the Position imbalance problem that may occur during Pool-based trading through LPs. Unlike other DeFi Futures, it has the distinction of supporting Perpetual Options trading in addition to Perpetual Futures.
8. GMX
GMX is a DeFi Futures protocol that allows Spot and Perpetual Futures to be traded based on a multiple trading Pool.
Project Description
* Users can trade AVAX Perpetual Futures on Avalanche and ETH Perpetual Futures on Arbitrum.
* LPs receive GLP tokens to provide liquidity to a separate futures pool for derivative trading, and 70% of the protocol fee is distributed to the GLP holder.
* Minting GLP (Avalanche) will provide liquidity to the AVAX Futures trading pool, and minting GLP (Arbitrum) will provide liquidity to the ETH Futures trading pool.
* Staking an additional GLP will provide esGMX and ETH compensation.
* On the other hand, esGMX can be converted to GMX after a vesting period, and you will receive the same compensation as GMX when staking.
TVL Trends / $459.37M (2022.07.15)
verse2 Insight
The fact that 70% of the transaction fee is allocated to the GLP Holder and the remaining 30% belongs to the GMX Holder makes this protocol attractive to users who want to operate LPs in a Passive manner. On this basis, GMX’s trading volume and TVL have grown rapidly, while at the same time, Token prices have remained more stable when compared to ETH.
Beyond providing a UX similar to CeFi, the DeFi Futures Protocol implemented a variety of experimental models that could be implemented On Chain in addition to the Order Book method; there were also Protocols that used models developed from the AMM or used the Order Book and AMM simultaneously. It was also possible to provide a non-linear leverage structure, unlike the traditional Perpetual Futures method, which only allows linear leverage.
DeFi Futures are the largest component of DeFi Derivative and are clearly the key axis guiding DeFi Derivative’s growth. However, due to the nature of most of them being Perpetual Futures, it is difficult for DeFi Futures alone to provide users with stable income while hedging their positions, and the same is true for LPs that provide liquidity to the Perpetual Futures Pool. The same is true for LPs that provide liquidity to the Perpetual Futures Pool. Unlike DeFi Futures, DeFi Options supports users to embody a variety of Synthetic Strategies with the desired revenue structure, which is why verse2 is in the process of researching DeFi Derivative beyond DeFi Futures. This has allowed us to focus on DeFi Option and the protocols that support structured products.
In the following “Defi Derivatives Ecosystem — Option” section, we would like to discuss various aspects of the “Option” Protocol.
This article is <DeFi Derivatives Series: (1) DeFi Derivatives Ecosystem — Futures> provided by verse2. If you would like to read the entire series, please see the list below. We recommend you read the articles sequentially.
1. DeFi Derivatives Series: (0) Why DeFi Derivatives?
2. DeFi Derivatives Series: (1) DeFi Derivatives Ecosystem — Futures
3. DeFi Derivatives Series: (2) DeFi Derivatives Ecosystem — Options
