Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.


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Have you experienced these important DeFi derivatives agreements?

Original title: “The Way of DeFi丨Science: Learn about various popular DeFi derivatives, how many have you used?
Written by: jakub
Compilation: Xi Yu

Derivatives are one of the key elements of all mature financial systems. As the name suggests, derivatives get value from something. This “thing” is usually the price of another basic financial asset, such as stocks, bonds, commodities, interest rates, currencies or cryptocurrencies. Some of the most commonly used derivatives are forwards, futures, options and swaps.

There are two main use cases for derivatives: hedging and speculation. Hedging can manage financial risks. To better understand hedging, let us review one of the common examples.

Imagine a farmer who mainly focuses on growing wheat. Wheat prices may fluctuate throughout the year, depending on the current supply and demand relationship. When farmers grow wheat, they will go all out for the entire growing season, which may bring them a great risk, just in case the price of wheat is low during harvest.

To counter this risk, farmers will sell short wheat futures contracts in the amount they expect to harvest. As the harvest time approaches, farmers will close their positions and generate profits and losses based on wheat prices.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

If the price of wheat is lower than initially expected, the short position will be profitable, thereby offsetting the loss of actual wheat sales.

If the price of wheat is higher, the short position will be at a loss, but the profit from selling the wheat can make up for the loss.

It is important to understand that no matter what happens to the price of wheat, farmers will eventually receive a predictable income.

Income farmers in decentralized finance can also use hedging to offset potential losses. This loss may occur if the price of one token used for income farming loses value relative to another token. For example, this can happen when providing liquidity to automated market makers such as Uniswap, which is called impermanence loss.

In addition to our agricultural example, derivatives also allow other crypto companies to hedge their exposure to different cryptocurrencies and operate more predictable businesses.

Another popular use case for derivatives is speculation.

In many financial instruments, including derivatives, speculative trading accounts for a large amount of trading volume. This is because derivatives make certain assets easy to trade, and these assets may be difficult to obtain, for example, trading oil futures instead of actual oil barrels. They can also easily obtain leverage-traders can buy call options or put options by only providing sufficient funds to pay for option premiums and gain exposure to a large amount of underlying assets.

Speculators are important market participants because they provide liquidity to the market and allow people who actually need to purchase specific derivatives to hedge risks to easily enter and exit the market.

Derivatives have a long and interesting history. From clay tokens representing Sumerian trade commodities, to the use of “fair letters” to buy and sell agricultural products in medieval Europe, to the establishment of the Chicago Board of Trade (CBOT) in 1848, one of the oldest futures and options exchanges in the world One.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

From the more modern era, since the 1970s, derivatives have been one of the main forces driving the entire financial industry forward.

The total market size of all derivatives is estimated to be as high as 1,000 trillion U.S. dollars, which completely dwarfs any other market, including the stock or bond market. Of course, it also dwarfs the cryptocurrency market that has just hit the 1 trillion U.S. dollar mark recently..

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

Each growing market will naturally develop its own derivatives market, and eventually its scale may be an order of magnitude larger than its underlying market.

This is why many people in the field of decentralized finance (DeFi) value the potential of decentralized derivatives. Contrary to traditional finance, the developers of decentralized derivatives can be used by anyone without permission and openness. Way to create. In turn, this has increased the speed of traditional financial innovation that has been stagnant for some time.

Now that we have a better understanding of derivatives, let us dive into some of the most important derivatives agreements in DeFi.


When talking about DeFi derivatives, Synthetix is ​​usually the first protocol we think of.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

Synthetix allows the creation of comprehensive assets that track the price of its underlying assets. The protocol currently supports synthetic fiat currencies, cryptocurrencies and commodities, which can be traded on trading platforms such as Kwenta, DHedge or Paraswap.

The Synthetix model is based on debt pools. In order to issue specific synthetic assets, users must provide collateral in the form of SNX tokens.

The agreement requires over-collateralization-the current mortgage rate is 500%. This means that for every $500 of SNX locked in the system, only $100 worth of synthetic assets can be issued. This is mainly in response to any sharp price changes in synthetic assets, and it is likely to reduce the mortgage rate in the future.

Synthetix is ​​also one of the first DeFi projects to migrate to Layer 2 to reduce gas fees and make the protocol more scalable.

There is currently approximately US$1.8 billion in value locked in the Synthetix agreement.


UMA is another protocol that allows the creation of synthetic assets.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

The main difference here is that UMA is not an over-collateralization agreement, but instead relies on liquidators with financial incentives to discover and liquidate improper mortgage positions.

UMA’s model allows the creation of “no price” derivatives. This is because the model does not rely on price oracles—at least in optimistic situations. In turn, this allows the addition of synthetic asset long tails, otherwise synthetic assets cannot obtain reliable price information and therefore cannot be created in Synthetix.

The total value of UMA’s smart contracts currently locked in exceeds $63 million.


Hegic is a relatively new defi project that allows option trading in a non-custodial and permissionless manner.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

Users can buy put options or call options on ETH and WBTC. They can also become liquidity providers and sell ETH call options and put options.

Three months after its launch, Hegic locked a total value of nearly US$100 million in the agreement, with a cumulative option trading volume of approximately US$168 million, incurring more than US$3.5 million in fees.

Interestingly, Hegic was developed by an anonymous developer, which once again shows the powerful characteristics of DeFi. Contrary to traditional finance, even a single person or a small group of people can build useful financial products.


Another DeFi project that allows trading options is Opyn.

Opyn was launched in early 2020. At the beginning, it provided ETH fluctuation protection, enabling users to hedge against ETH price changes, flash crashes and volatility.

They recently launched the V2 version of the agreement, which provides European cash-settled options that can be automatically executed when they expire.

There are two main types of options: European and American.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

European options can only be exercised at expiration, while American options can be exercised at any time before the expiry date.

Compared with Opyn, Hegic uses American options.

The Opyn agreement automatically executes options in the currency, so option holders do not need to take any action on or before the expiry date.

Since its release, the transaction volume of the agreement has exceeded $100 million.


Perpetual is another fairly new entrant in the field of decentralized derivatives.

As the name suggests, Perpetual allows trading perpetual contracts. Perpetual contracts are a popular trading product in the cryptocurrency field used by many centralized trading platforms (such as Bitmex, Binance and Bybit). It is a derivative financial contract with no expiry date or settlement date, so it can be held and traded indefinitely.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

Currently, the Perp protocol allows trading ETH, BTC, YFI, DOT and SNX.

Transactions are funded and settled by USDC, which is a popular stable currency in the defi field.

All transactions of the Perp protocol are processed using xDai Chain (layer 2 extension solution). This makes the gas cost of the agreement extremely low and is currently subsidized by the agreement.

This means that there is currently no gas fee for transactions in the Perp protocol. The gas fee is only required when depositing USDC on the platform.

The agreement has only been online for one month, but it has successfully achieved more than 500 million US dollars in transaction volume and generated 500,000 US dollars in transaction fees.


dYdX is a decentralized derivatives exchange that provides spot, margin and the latest perpetual trading.

The dYdX architecture combines non-custodial on-chain settlement with an off-chain low-latency matching engine with an order book.

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

In addition, the dYdX team is also developing a new product for perpetual contracts on the second layer. This product is supported by StarkWare’s ZK Rollups and will be launched in early 2021.

In 2020, the total cumulative transaction volume of all products on dYdX reached 2.5 billion US dollars, a 40-fold increase over the previous year.

dYdX recently raised $10 million in a B round of financing, which was led by Three Arrows Capital and DeFiance Capital.


BarnBridge is a risk tokenization protocol that can hedge return sensitivity and price fluctuations.

This can be achieved by accessing the debt pools of other defi protocols and converting a single pool into multiple assets with different risk/return characteristics.

Currently, BarnBridge offers two products:

Illustrate the working mechanism of mainstream DeFi derivatives: Synthetix, Hegic, dYdX, etc.

Smart Yield Bonds: Use debt-based derivatives to reduce the risk of interest rate fluctuations

And smart Alpha bonds: use segmented volatility derivatives to mitigate market price risk.

The total value currently locked in the agreement exceeds US$350 million.

BarnBridge is also developing a liquidity mining program that distributes its token BOND to all users who pledge stablecoins, Uniswap BOND-USDC LP tokens or BOND tokens on its platform.

to sum up

As we mentioned earlier, the derivative product market in traditional finance is huge, and how interesting the market in decentralized finance will become.

It is also amazing that more and more projects initiate derivative agreements and can create novel and exciting financial products in a permissionless and decentralized manner.

There is one more important thing-interacting with the new DeFi protocol may bring risks. Therefore, before using any of the protocols mentioned in this article, be sure to conduct due diligence first, as most of these projects are still in beta or alpha versions.

So what do you think of derivatives in DeFi? How big will they become in the future? Do you want to learn more about one of the projects mentioned in this article?

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