Helping the above average John guy understand the Defi space : decentralized derivatives, Decentralized perpetuals, Decentralized options and Synthetic Assets, Perpetual Protocol, dYdX, Ophyn, Hegic, Synthetix, UMA, Risks + Notable Mentions

"I am here to learn something new and more in depth on this topic. I need a quick reminder however." Sure thing John :

Decentralized derivatives are advanced financial tools built for digital assets. Traditionally, these are widely used on centralized platforms like Binance Futures.

However, the rise of decentralized derivatives platforms now allows traders to engage in trustless trading of crypto derivatives.

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"What was the meaning of decentralized perpetuals?" Here is a friendlt reminder :

Decentralized perpetuals are a widely used type of cryptocurrency derivative. They allow users to take leveraged positions on a futures contract that doesn't have an expiry date. In the past, you could only do this on centralized exchanges, but now, decentralized platforms like Perpetual Protocol and dYdX have made it possible for the broader DeFi (Decentralized Finance) community to access leveraged trading while maintaining control of their funds.

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"Ok, what is up with Perpetual Protocol?" Here is your answer John :

Perpetual Protocol is like a platform for trading special types of cryptocurrency contracts that never expire. These contracts allow users to bet on the price of cryptocurrencies going up or down, with the option to use leverage (borrowed money) to amplify their bets.

Here's how it works: Instead of storing the actual cryptocurrencies, Perpetual Protocol uses a virtual system called vAMM, which is similar to other systems like Uniswap. This vAMM doesn't hold any real assets. It uses USDC (a stable cryptocurrency) as collateral to let users take leveraged positions. The total amount of money in this collateral vault determines how much traders can profit.

To make trading faster and reduce transaction costs, Perpetual Protocol uses the xDai chain. This ensures high liquidity (lots of available assets) and low price slippage (the difference between the expected and actual price).

But there are risks involved, like funding rates and liquidation ratios. Funding rates are like fees that traders pay or receive hourly, and liquidation ratios are a safety measure. If a trader's position falls below this safety level, it can be taken over by keeper bots, which earn a fee for doing so.

Perpetual Protocol has its own cryptocurrency called PERP. It's mainly used for voting on platform changes, and holders can also stake it for more PERP and a share of transaction fees in USDC. However, stakers need to commit to a fixed period called an epoch, which lasts seven days. They can't withdraw their funds until the end of the epoch, but they can claim transaction fees right away. PERP rewards, though, are locked for up to 6 months. Stakers don't have to worry about something called impermanent loss, but the PERP token's price can still be volatile.

As of April 2021, you can use Perpetual Protocol for trading on the Ethereum and xDai mainnets.

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"And the other one called dYdX?" Here is an explanation :

dYdX is like a decentralized exchange that offers various crypto services like lending, borrowing, regular trading, and more. It's different from traditional exchanges because it operates on the blockchain.

You can do things like lend your crypto to others and earn interest or use your crypto as collateral to borrow more. But what sets dYdX apart is that you can also trade with borrowed money, which is called margin trading. For example, you can use 5 times the amount of your own crypto to make a trade. They support Ethereum (ETH), USD Coin (USDC), and DAI for regular trading.

They also have something called perpetual swaps, which are like contracts where you bet on the future price of cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Aave, and LINK. You can use up to 10 times the amount of your crypto to make these bets.

When you lend your crypto on dYdX, you start earning interest immediately, and the interest keeps adding up with every transaction. The interest rates can change based on how much people are using the platform. If more people are borrowing, the rates go up.

For borrowers, you need to put up at least 125% of the value of what you're borrowing as collateral, and you have to keep it above 115% to avoid getting liquidated (basically losing your collateral).

dYdX also offers different types of trading orders like market, limit, and stop orders, similar to regular exchanges. Trading fees are charged when you take certain actions, and they can be either 0.3% or variable gas costs, whichever is higher.

They have this thing called perpetual markets, where all the contracts use USDC as collateral. But each contract has its own rules and requirements.

In early 2021, dYdX teamed up with Starkware to make transactions faster and cheaper using a Layer-2 technology called StarkEx. It uses something called zero-knowledge rollups and settles transactions on the Ethereum network. This makes it more efficient.

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"Some other platforms that you might want to consider?" Sure, here are some notable mentions :

• Futureswap: It's like a decentralized exchange where you can bet on the future prices of cryptocurrencies. You can use up to 10 times your own crypto to make these bets.
• MCDEX: This is a decentralized exchange too, but it uses something called automated market makers for perpetual swaps. Anyone can create a market here as long as there's a price feed for the cryptocurrency you're trading and some ERC-20 tokens to use as collateral.
• Injective Protocol: This one operates on a special network called Injective Chain. It supports a fully decentralized order book, which is like a list of all the trades happening, and it can connect to Ethereum using a special token bridge. As of April 2021, it's still in test mode, not fully launched yet.

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"Decentralized options?" Yes, here is what they are :

Decentralized options are a bit like a bet you make in the crypto world. You can use them to protect your investments from losing value or to try and make even more money without risking too much. Traditional finance has used options for a long time, and now, in the world of decentralized finance (DeFi), we have protocols that let you do the same thing.

Before, people traded options on centralized exchanges like Deribit. But now, there's a growing interest in having decentralized options protocols. In this section, we'll explore two of the top ones: Hegic and Opyn.

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"Now I remember that we talked about Ophyn. What's up with Hegic though?" Glad that you are curious John :

Hegic is like a digital platform where you can buy and sell options for cryptocurrencies like ETH and WBTC. Options are like contracts that let you bet on whether the price of a cryptocurrency will go up (call option) or down (put option) by a certain date. You can even customize these options by choosing things like the price at which you'll buy or sell and when the contract expires.

When you use Hegic, it calculates the prices for these options, and there's a small fee when you buy them. These options can't be traded like regular cryptocurrencies, but you can use them whenever you want because there's always enough money in the contract.

Hegic works by having people put their cryptocurrency into a pool, and this pool is used as collateral for all the options. There are separate pools for ETH and WBTC. If you put your cryptocurrency into the pool, you get tokens called Write tokens, which represent your share of the premiums paid by users to buy options. These Write tokens can be staked to earn rewards, and there's even a way to earn more valuable tokens called rHEGIC.

If you have a lot of HEGIC tokens, you can become a Hegic Staking Lot owner and get a share of the fees collected by the platform. If you don't have that many tokens, you can still delegate some of your tokens to earn rewards.

Hegic is a popular platform with lots of cryptocurrency locked in it, and it handles a significant amount of trading every day. So, it's one of the top places for decentralized options trading.

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"I would like to receive a reminder for Ophyn." Anytime friend :

Opyn is like a digital platform where you can create and trade options for cryptocurrencies. These options are like contracts that give you the right to buy or sell a cryptocurrency at a specific price and time. What's unique about Opyn is that it makes sure there's always enough cryptocurrency to back up these options, so they can always be used.

The first version of Opyn, called Opyn V1, allows you to create these special option tokens called oTokens. You do this by putting 100% of the cryptocurrency you want to use as collateral. These options can be made for cryptocurrencies like ETH, WBTC, UNI, and SNX, but they have fixed terms like a set expiration date and a specific buying or selling price. You can use oTokens to buy or sell the cryptocurrency they're linked to, or you can trade them on Uniswap. Opyn V1 doesn't charge extra fees for transactions or settlements.

Opyn V2, the newer version, has more features like auto-exercise, which means options can be automatically used if they make sense to do so. It also has something called flash minting, which is a bit like flash loans on Aave. The latest version, Opyn V3, offers options in a way similar to traditional options markets like Deribit, but for Wrapped Ether (WETH) with specific prices and timeframes.

So, Opyn is a platform where you can trade options for cryptocurrencies, and it has evolved to offer more features and flexibility over time.

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"What are the differences between them?" Here is your answer :

Hegic and Opyn, two options platforms, have some similarities but also important differences.

Both platforms require the people creating options (called options writers) to have enough cryptocurrency to cover the options they create. This ensures that if someone wants to use one of these options, there's enough cryptocurrency backing it.

However, they have different ways of handling the money put up by options writers and support different cryptocurrencies. Hegic pools together the funds from options writers for each cryptocurrency separately. In contrast, Opyn locks up 100% of the cryptocurrency for each option created.

Both Hegic and Opyn like American-style options because they are more flexible for the fast-paced DeFi world. These options allow you to use them at any time before they expire. On the other hand, centralized exchanges like Deribit prefer European-style options, which can only be used at their expiration date. In Opyn V2, there are fewer options with shorter timeframes, which suggests that there isn't as much demand for options with strict time limits in the cryptocurrency market, where prices change rapidly.

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"I quess you have another list of notable mentions for this category." You are right :

• FinNexus: FinNexus allows users to create options for almost any asset, as long as there's a reliable source of price information. They use a system called Multi-Asset Single Pool (MASP) that lets you have positions in different assets while using a single type of asset as collateral.
• Auctus: Auctus is a DeFi platform that lets you do "flash exercises" where you don't need to actually own the tokens used in the options to exercise them. They also offer principal-protected yield farming through Auctus Vaults and have a section for OTC (over-the-counter) options trading.
• Premia: Premia is like a marketplace where you can buy and sell options. They make it more efficient by letting you mint, transfer, and exercise multiple types of options with fewer transactions, saving you time and gas fees.
• Antimatter: Antimatter wants to be like the Uniswap of options by providing an exchange for perpetual options. You can get exposure to either long or short positions by buying these Polarized option tokens, and you don't have to worry about options expiring.
• Siren Protocol: With Siren Protocol, you can choose to be an options writer or buyer by purchasing either bTokens or wTokens from the SirenSwap Automated Market Maker. bTokens let you exercise options, while wTokens represent the writer's side and can be used to withdraw collateral or receive payment when options are exercised.

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"Now we are heading for Synthetic Assets. Interesting. I still have some memories for when we scrathed the surface on this topic." It means a lot that you can remember those details John :

Synthetic assets are essentially like stand-ins for real assets. They mimic the value or behavior of something else. Instead of owning the actual asset, you can have synthetic assets that follow the same value changes.

For example, you can have synthetic assets that represent real-world stocks, Ethereum gas prices, or data from websites like CoinGecko. When you trade these synthetic assets, it's like trading the real things, but you don't need to own the real assets.

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"Synthetix? I remember this name!" Very good John. Let's recap :

Synthetix is like a special platform where you can make and trade something called "Synths." These Synths act like copies of real assets, but you don't need to actually own those assets.

There are two types of Synths: Regular Synths (like sDEFi) and Inverse Synths (like iDEFI), although not all Synths have an inverse version. These Synths can represent different things like cryptocurrencies, regular money, goods, stock market indexes, and company stocks. Synthetix uses a tool called Chainlink to keep track of the prices of these assets.

To make Synths, people need to put some of their own cryptocurrency, called Synthetix Network Token (SNX), as collateral. Since the value of SNX can go up or down a lot, you have to put in a lot more SNX than the value of the Synths you're making to be safe.

If your collateral gets too low, you might have to add more or get rid of some Synths to keep it safe. Right now, you can only make one type of Synth, called sUSD.

You can trade these Synths on the Synthetix Exchange. It's not like other regular exchanges with buyers and sellers. Instead, you trade with a smart computer program that always has enough of these Synths to trade. This makes it good for big trades without messing up the prices too much.

If you use Synthetix, you might get some rewards, like fees from trading, and extra SNX if you keep your collateral safe.

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"UMA? The name gives me Adidas vibes, not gonna lie." That is pretty strange comparison, but ok :

UMA, short for Universal Market Access, is a special system on the Ethereum network that lets people create and enforce artificial assets. These artificial assets don't need to rely on real-world prices like some other systems. Instead, they depend on having enough collateral, which is like a security deposit, to back them up.

UMA has something called the Data Verification Mechanism (DVM), which helps make sure everything is fair. This DVM helps settle disputes about liquidation and contract settlements by getting input from UMA token holders. These token holders vote on what they think is the right value for an asset at a specific time.

Now, let's talk about the important players in the UMA system:

1. Token Sponsors: These are people who put up collateral to create artificial tokens. They need to make sure they have enough collateral to avoid losing it.
2. Liquidators: They watch over things and make sure positions have the right collateral. If something seems wrong, they can dispute it, but there's a delay to check before it's final.
3. Disputers: These folks also keep an eye on things and can dispute if they think there's a problem. If they're right, they get rewards.
4. DVM: The DVM helps settle disputes by proposing a fair value for an asset based on votes from token holders.
5. Token Holders: UMA token holders vote on asset values to help the DVM figure things out. They use information from outside the blockchain to make their decisions.

If everyone does their job right, things work smoothly. But if someone messes up or tries to cheat, the system has ways to punish them and make sure it's fair. People have used UMA to create different products, like tokens that become worth a certain amount over time and tokens to bet on Ethereum gas prices. They've even made options for popular DeFi tokens like Sushi and Balancer.

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"And what separates those 2 platforms?" Here is the answer :

Both Synthetix and UMA offer synthetic assets that require users to provide collateral to create them. However, they have some differences:

Synthetix relies on an on-chain price feed to determine the value of its synthetic assets and collateralization ratio. It's more focused on options and supports a wide variety of synthetic assets, with over 50 available.

UMA takes a different approach by incentivizing participants to act fairly in the system. It has a more flexible collateralization requirement based on a global ratio, making it potentially more capital-efficient. However, it doesn't support as many different synthetic assets.

Synthetix has also built a strong ecosystem around its synthetic assets, with platforms like dHEDGE and Curve Finance using them for various purposes. dHEDGE allows users to invest in portfolios that include synthetic assets, while Curve Finance uses Synthetix as a bridge for asset swaps.

In terms of liquidity and trading volume, Synthetix currently has an advantage, with more trading activity and established platforms for synthetic asset trading. UMA's trading volumes are lower, but the future adoption of synthetic assets by retail and institutional users is still uncertain and could change the landscape.

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"Stop teasing me and tell me the other options." Alrighty Johny :

Mirror Protocol: This protocol operates on both Ethereum and Terra blockchains and creates synthetic assets called mAssets. These mAssets imitate the prices of real-world assets like stocks and indices. For example, you can find assets like mAMZN (mirroring Amazon's stock) and mQQQ (mirroring the Nasdaq 100 index).

DEUS Finance: DEUS Finance is a DeFi protocol that allows users to access data from oracles and turn them into tradeable assets known as dAssets. These dAssets are designed to have a 1:1 peg with their real-life counterparts, and this peg is maintained using data from price oracles. Essentially, you can trade assets in the crypto world that represent real-world assets.

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"And what the risks that I am exposing myself to if I choose to operate on the platforms that we have discussed?" I am glad that you are being cautious John :

When you're involved with decentralized derivatives platforms, it's crucial to understand that trading with leverage and using derivatives can be very risky. To stay safe in this part of decentralized finance (DeFi), you should maintain a good collateral ratio and always be aware of the liquidation price for your positions.

Synthetic assets, which are central to these platforms, rely heavily on oracles for price information. If these oracles provide incorrect data, it can lead to undesirable outcomes. Also, since synthetic assets are primarily created by putting up collateral, there might not always be enough liquidity for these assets, causing their prices to differ significantly from real-world assets.

For options trading, make sure you can exercise your profitable positions promptly, as some platforms don't offer automatic exercise features. As more and more people participate, keep an eye on significant option expiration periods, as they can bring increased volatility to the market.

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TL;DR :

Decentralized Derivatives:

• Advanced financial tools for digital assets.
• Trustless crypto derivative trading.

Decentralized Perpetuals:

• Crypto derivatives with no expiration.
• Accessible via DeFi platforms.

Perpetual Protocol:

• Trading platform for perpetual contracts.
• Uses virtual collateral and supports leveraged trading.

dYdX:

• Decentralized exchange with lending, borrowing, and margin trading.
• Supports assets like ETH and USDC.

Decentralized Options:

• Crypto betting for hedging or speculation.
• Protocols like Hegic and Opyn provide options.

Notable Mentions:

• Platforms like Futureswap, MCDEX, Injective, and more.
• Offer unique DeFi trading features.

Synthetic Assets:

• Copycat assets mimicking real-world value.
• Synthetix and UMA are key players.

Synthetix:

• Offers Synths tracking real assets.
• Uses SNX collateral and Chainlink price data.

UMA:

• Creates synthetic assets without real-world prices.
• Involves UMA token holders for dispute resolution.

Risks in Decentralized Derivatives:

• High-risk trading, manage collateral carefully.
• Reliance on oracles and potential liquidity issues.
• Be cautious with options and large expirations.

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All of the info above was written by me with the help of the How to Defi book, advanced edition, from Coingecko. Hope it helped others like it did for our boy John here!