Derivatives DeFi Protocols
Futures in Decentralized Finance
dYdX is a leading Derivatives protocol with billions of dollars of trades happening every day. On dYdX, traders can buy and sell special kinds of futures contracts called Perpetual Futures with no expiry date. Since there is no expiry date involved, instead of a cash settlement, every pre-defined time interval, based on the price difference between the futures contract and the spot price of the underlying asset, buyers and sellers of the contract exchange capital called funding cost.
While Perpetuals are available on centralized exchanges, decentralized exchanges such as dYdX enable perpetually trading in perpetuals in a non-custodial ways.
Options in Decentralized Finance
Opyn and Ribbon Finance are the leading protocols that offer Options. Similar to DeFi Futures, DeFi Options offered by Opyn do not have an expiry date or a strike price. Instead, they use a funding mechanism to track the value of ETH^2 called SQUEETH. Ribbon Finance builds on top of Opyn to provide structured products such as covered calls.
Covered calls are derivatives transactions where an investor sells call options (i.e., the buyer of the option can choose to purchase the underlying asset from the investor) while holding the underlying asset.
In traditional finance, the derivatives market is typically much larger than the spot market and is primarily used by massive firms and large hedge funds. Derivatives bring in liquidity and provide risk management tooling that encourages institutions to participate in the markets.
On the other hand, the derivative market in DeFi has limited applications and fairly minimal volume.