Written by Amidzic Momir

According to tokeninsight.com, in 2020 the trading volume for cryptocurrency spot, futures, and options trading reached 21 trillion, 12 trillion, and 77.2 billion US dollars respectively.

Despite the spot market is still the largest, over recent years we see a trend of derivatives closing the gap and it is expected that as in traditional finance, derivatives would eventually become several times larger relative to the spot market.

Yet as illustrated above, in both spot and derivatives markets, centralized exchanges are still dominant. Their decentralized counterparts started making noise primarily in the spot market, driven largely by AMMs such as Uniswap, Sushiswap, Curve, etc.

However, when it comes to derivatives markets DEXes are still in the exploratory stage.

Why are DEXes failing to attract volume in derivatives markets?

As for the order-book-based models, Ethereum layer 1 at the current state is not enough, which is why several notable protocols are launching directly on layer 2 e.g. dYdX, or building application-specific blockchains such as dTrade (Polkadot), Vega Protocol (Tendermint), etc. Such products are development-heavy and require a long time from idea creation to market-ready projects.

On the other hand, in regards to AMM models, we see a lot of experimentation and interesting model designs. Yet, there is still a lot of trial and error, and constant iteration of the current designs.

For instance, one of the most popular derivative AMMs, Perpetual Protocol experienced a crash on April 18, where the Ethereum price dumped as low as $900, while the real price i.e. price on the other trading venue has never been below $2000.

Volatile market environments are certainly a stress test for DeFi protocols and a great learning opportunity and chance for further optimizing the models.

After all, many of the current DeFi blue-chips have been struggling with the early adoption and only after repetitive product iterations have created robust mechanisms.

Also, derivatives trading is much more challenging than spot trading, requiring sophisticated risk management, margin trading, liquidations, price oracles, etc. Therefore it is reasonable that more time is needed to develop sound models.

Currently, there are many innovative AMM designs that are yet to be launched in the market. Below we analyze some of the novel models in perpetual swaps/futures direction, their design choices, and trade-offs implicit in each design.

Finally, we expect derivative trading volumes on decentralizing venues to take off in the near future, and gradually even to exceed those facilitated by spot markets such as Uniswap, Sushiswap, or Curve.

Which protocol could become the next unicorn?

About IOSG:

Founded in 2017, IOSG Ventures is a research and community-driven firm. We focus on open finance, Web3.0 and cross-chain ecology. IOSG Fund Ⅰ portfolio covers more than 60 projects, including the Layer 1 (NEAR Polkadot, Cosmos, Conflux), Defi (1 inch, Synthetix, UMA) and middlewares protocol (Celer, Raiden, Reach). We have been actively involved in various developer & DAO communities, invest in potential founding teams. We always believe in long-term partnerships and we work closely with our portfolios to advise and support them along their journey of entrepreneurship.

Written by Amidzic Momir

According to tokeninsight.com, in 2020 the trading volume for cryptocurrency spot, futures, and options trading reached 21 trillion, 12 trillion, and 77.2 billion US dollars respectively.

Despite the spot market is still the largest, over recent years we see a trend of derivatives closing the gap and it is expected that as in traditional finance, derivatives would eventually become several times larger relative to the spot market.

Yet as illustrated above, in both spot and derivatives markets, centralized exchanges are still dominant. Their decentralized counterparts started making noise primarily in the spot market, driven largely by AMMs such as Uniswap, Sushiswap, Curve, etc.

However, when it comes to derivatives markets DEXes are still in the exploratory stage.

Why are DEXes failing to attract volume in derivatives markets?

As for the order-book-based models, Ethereum layer 1 at the current state is not enough, which is why several notable protocols are launching directly on layer 2 e.g. dYdX, or building application-specific blockchains such as dTrade (Polkadot), Vega Protocol (Tendermint), etc. Such products are development-heavy and require a long time from idea creation to market-ready projects.

On the other hand, in regards to AMM models, we see a lot of experimentation and interesting model designs. Yet, there is still a lot of trial and error, and constant iteration of the current designs.

For instance, one of the most popular derivative AMMs, Perpetual Protocol experienced a crash on April 18, where the Ethereum price dumped as low as $900, while the real price i.e. price on the other trading venue has never been below $2000.

Volatile market environments are certainly a stress test for DeFi protocols and a great learning opportunity and chance for further optimizing the models.

After all, many of the current DeFi blue-chips have been struggling with the early adoption and only after repetitive product iterations have created robust mechanisms.

Also, derivatives trading is much more challenging than spot trading, requiring sophisticated risk management, margin trading, liquidations, price oracles, etc. Therefore it is reasonable that more time is needed to develop sound models.

Currently, there are many innovative AMM designs that are yet to be launched in the market. Below we analyze some of the novel models in perpetual swaps/futures direction, their design choices, and trade-offs implicit in each design.

Finally, we expect derivative trading volumes on decentralizing venues to take off in the near future, and gradually even to exceed those facilitated by spot markets such as Uniswap, Sushiswap, or Curve.

Which protocol could become the next unicorn?

About IOSG:

Founded in 2017, IOSG Ventures is a research and community-driven firm. We focus on open finance, Web3.0 and cross-chain ecology. IOSG Fund Ⅰ portfolio covers more than 60 projects, including the Layer 1 (NEAR Polkadot, Cosmos, Conflux), Defi (1 inch, Synthetix, UMA) and middlewares protocol (Celer, Raiden, Reach). We have been actively involved in various developer & DAO communities, invest in potential founding teams. We always believe in long-term partnerships and we work closely with our portfolios to advise and support them along their journey of entrepreneurship.