Why decentralized derivatives are the second half of DeFi – SheepDex
The connotation of decentralized finance DeFi, in the narrow sense, consists of “using a decentralized network to transform traditional financial products into disintermediated, reliable and transparent protocols”. We believe DeFi’s most ambitious vision is to achieve the so-called “universal market access”. Allow anyone in the world with access to the Internet to openly own or trade any financial asset.
From the recent DeFi market, we can see that the big bang is very remarkable characteristics, from the decentralized DEX agreement, stable currency, leverage, synthesis of assets to emerging insurance products, with high liquidity can widen the potential energy, with one hundred times the speed of the real world DeFi transforms traditional financial products for the process in the form of agreement, More sophisticated and structured financial instruments are beginning to enter the DeFi market, but the DeFi space is still ‘de Lego type ”, modular and the underlying products and services are not yet complete enough to qualify as“ decentralized financial market ”.
Similar to the characteristics of traditional financial product development, the current DeFi market boom is a typical ‘cDOS’ based expansion, including the very familiar over-mortgage rate and cash extraction often occur in layers of nested mining design. , in the design of the DeFi mechanism which does not claim any need for trust, At present, one can only rely on over-sizing to avoid stopping the credit of the main body. Therefore, cDOS are inherently the most information insensitive financial product structure design.
Boom DeFi in the past two months, liquidity support mining assets in general can be divided into the basis of transaction fees, loan income and governance tokens, nested types, we have witnessed, Once the underlying asset base (or “productivity”) is insufficient to support the credit boom, the risk of a similar “financial crisis” will itself emerge.
So, for the DeFi market to truly develop, the underlying assets with real cash returns remain the most important building blocks.
In both traditional financial markets and decentralized financial markets, demand for “safe” assets and liquidity is persistent and stable, also based on CDOS. In the traditional financial market, we can see that the collateralization of short-term debt of monetary assets, long-term debt, based on redemption or based on securitization of currency sovereign credit assets or MBS, ABS , such as assets, and on this basis, formed the scale, rich tool of the financial derivatives market, to increase risk transfer, pricing and strengthen the role of market liquidity, thereby forming a systemic financial market in its entirety.
Whether we expect the DeFi market to swallow the CeFi market or witness the merger of two parallel universes, the need for “safe” assets, liquidity and risk pricing on the part of DeFi users is just as urgent.
In the current DeFi market, we can see that there is a stable USDC currency or DAI secured debt position as some “safe” assets. Because crypto assets are more original and have unique asset attributes, aside from technical issues, only from the point of view of financial products, At present, basic financial instruments and pricing mechanisms such that the income structure, interest rate structure, and volatility structure across the DeFi market as a whole are still missing. In the process of mapping traditional financial market products, it is inevitable to meet the challenge of building decentralized financial derivatives.
DeFi, which lacks derivative markets, is still immature
From the point of view of the ecological evolution of DeFi, we look at the position of the synthetic asset track as an exposure to financial assets, even the synthetic asset itself is one of the types of financial derivative tokens, and at the same time more bullish in decentralized derivative markets for decentralized and primordial markets The handling, circulation and transfer of the risks of “safe” assets, the core of the capital valuation function, to a certain extent, in order to achieve the completion of the entire finance of the DeFi universe.
The concept of financial derivatives is actually quite broad, mainly including swaps, futures, futures and options, etc. The underlying assets cover asset classes such as interest rates, stocks, currencies and commodities. They are widely used to balance position risk with investment management needs such as liquidity, hedging and leverage. grow up quickly.
We are strongly bullish on the decentralized derivatives path, not only because of the short-term trading profit opportunities of decentralized derivatives projects and the profit share of central derivatives giants such as Binance, FTX, BitMEX. and Deribit. More importantly, from a long-term value perspective, the decentralized derivatives market has enormous potential at scale, occupying the heart of DeFi’s ecological core and industry chain. It will be the most difficult “puzzle” to conquer and finally to build for DeFi, but also the “puzzle” with the most lucrative dividends.
The combination of derivative agreements creates financial products with rich risk-return characteristics
The booming development of decentralized derivative agreements will break the “island” of DeFi agreements, and the combination of “Lego style” and “modular” DeFi agreements will give rise to more promising trend opportunities. We believe that we may soon see similar trends in the market:
MCDEX plans to launch structured products based on decentralized perpetual contracts, allowing users to profit from trading automated trading robots / smart social trading contracts.
The FinNexus option agreement plans to launch to hedge UniSwap-LP against uncompensated losses in AMM market making;
The emergence of the IRS (Interest Rate Swap) market (like Horizon.Finance) can be combined with Option / Futures contracts to replicate the classic OBPI (Option Based Portfolio Insurance) strategy on the traditional financial market. Provide enhanced fixed income products and structured products for the DeFi market.
SheepDex is a decentralized cross-chain liquidity aggregation platform based on the integration of spot and derivatives on BSC (Binance Smart Chain). Unlike other decentralized exchanges that focus on the spot, these are the first DEFI products where the spot and derivatives coexist. Participation in SheepDex can earn LP rewards and trade extraction rewards, while also allowing Liquidity Providers (LPs) to deploy funds within a certain price range in trading pairs and reward fund providers. transaction, thereby improving the efficiency of the use of funds, by focusing more on the depth of transactions, providing end users with better liquidity and promoting the transaction and clearing of derivatives. Among SheepDex’s derivatives, perpetual contracts without funding rates are the main innovative products, and contractual products such as leveraged tokens will continue to be launched. SheepDex aims to be a decentralized Binance.
These portfolios will map the ecological structure of traditional financial markets from the level of financial products, thus providing richer asset classes for the DeFi world and flattening the current volatile yield curve in the DeFi world.
TThe expertise and sophistication of decentralized derivatives will redefine the business model of asset management
The traditional financial market is typically faced with the chief agent, investor and manager diligence and accountability, and other issues. In DeFi and non-custodial ownership of decentralized financial derivative assets, the business model of traditional financial institutions as asset managers and third-party custodians will usher in changes.
In the short term, as the current DeFi market machine gun pool strategy tends to homogenize and the expected rate of return declines, the machine gun pool will soon compete for the strategic capability of financial products, and the pool project machine gun that is limited only to liquid mining will soon lose its competitiveness in the market. We see that DFI. Communities like SheepDex are already discussing richer investment strategies and plan to launch derivative-based strategies to provide clients with a richer risk-return matrix.
In the long run, the wealth of financial products in the DeFi market and improving market depth will further increase DeFi user demand for investment and wealth management tools and services. Decentralized asset management protocols such as dHedge and Set Protocol and investment advisory protocols will also welcome great potential development opportunities.
Financial products that only map the traditional financial market in a decentralized way are not the true meaning of DeFi and decentralized agreements. The development of decentralized derivative agreements will be unprecedented, and the organizational relationship of asset management, unchanged for over 100 years, will be redefined in a trend.
Realize the vision of allowing anyone in the world with access to the internet to freely own or trade any financial asset we really want.
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