DeFi Derivatives - Learn Everything About It

Since its inception, when Satoshi’s whitepaper first came out, the blockchain industry has shown to be the most innovative happening in the financial world.

Now, these possibilities became even more promising, given that DeFi (decentralized finance) suddenly appeared to create a financial upheaval and impact future generations.

Despite the current crisis, the DeFi world has broken record after record in a short period. Demonstrating to be an encouraging environment to make business, year after year, it hits all-time highs for TVL (Total Value Locked), trading volumes, daily active users, and engagement.

The numbers cannot lie- these metrics can be seen as a foresight of what’s coming ahead for decentralized finance.

When we take a closer look, it is not hard to identify what is the single most optimistic niche within DeFi. Showing auspicious metrics and exponential growth in recent occasions, the sector of derivatives associated with DeFi markets offers an excellent prospect for the future.

But why are derivatives so important to DeFi, and why there’s so much potential in this specific market? Keep reading, and we will explain it in detail.

Back To Basics – How Do Derivatives Work?

Derivatives are financial contracts whose value is dependent on an underlying asset(s). Several assets can be used as an underlying factor for a deal- such as stocks, bonds, currencies, commodities, or market indices.

The big secret behind the profitability of derivatives is the theory in which the transaction itself is backed. Derivatives are profitable due to the speculation of the value of underlying assets in the future.

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Now we understand the nature of derivatives, it is easier to know how it can be combined with DeFi’s energic approach.

Derivatives Represent an Impressive Size of the Financial Industry

There is no big news in the fact that the derivatives market is the single largest financial global market nowadays. It happens because, unlike many people may think, derivatives aren’t merely a fetish for traders.

On the contrary, derivatives are an essential aspect associated with several financial services that are vital for the modern monetary system. For instance, some popular financial services that rely directly on derivatives include personal checking accounts, insurances, and mortgages.

Learn more: What are the best DeFi wallets in 2020?

Derivatives still represent just a tiny piece of the DeFi market. However, the DeFi ecosystem necessarily has to experience massive growth in the derivatives sector to reach mass adoption.

As the metrics explain, any significant financial system has an average market size ratio between money, debt, and derivatives of 1:10:100, respectively. The current DeFi market doesn’t even come close to this number, which definitely must change as soon as possible.

Derivatives Help by Hedging DeFi Investments

Risk is an inherent aspect of a business, which is nothing new under the sun. However, it is possible to strategize to reduce risks and increase profit at the same time, which is a much-needed aspect of DeFi.

Currently, DeFi users are still exposed to significant risks- but they aren’t even aware of it. Unfortunately, the bad news is that most people only realize this fact when systemic failure or fund loss happens on a vast scale.

Derivatives can help DeFi investors, protecting them against potential losses by making constant balancing or compensating transactions. Some investors have already taken an attitude in this sense, looking forward to hedging positions and portfolios against breaches.

Further read: What is a DeFi money market and how does it work?

For instance, investors are seeking DeFi insurance in protocols such as Nexus Mutual or Opyn. Also, many are opting to purchase put options on exchanges, to help to secure their funds against volatility.

The bigger the share the derivatives market has within the DeFi world, the less volatile it tends to be for investors. This fact is due to the nature of derivatives, which makes it possible for market participants to manage risk by limiting potential returns and losses.

DeFi Derivatives Have Their Own Share of Benefits for Investors

As the traditional derivatives market is a tough, strongly-built, and structured market, it’s unlikely that it will ultimately be surpassed by the DeFi derivatives market in our generation. However, the DeFi environment has already shown benefits incentivize traditional derivatives players to have their share on it.

The DeFi derivatives market is accessible. Most products require nothing more than an internet connection and an Ethereum web3 wallet to enable full access. Unlike traditional financial markets, the decentralized fintech was created to surpass barriers of any type, such as location, social, or economic status.

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Unlike the traditional derivatives market, creating a custom derivative on DeFi doesn’t require a massive financial and legal structure. Instead, the process is cheap and can be done by anyone who has a piece of proper knowledge about blockchain technology.

When compared to the DeFi derivatives market, the traditional homonym can be seen as an unfair and inefficient market, as DeFi offers a democratic and privacy-first approach to transactions involving derivatives.

How to Have a Pro-Level Approach on the DeFi Derivatives Market?

It’s plain to see that this niche has shown a profitable dynamic for investors. The DeFi derivatives market has plenty of potential as an optimistic environment for the future, despite its tiny numbers when compared to the traditional derivatives juggernauts.

As new users start taking their share of participation within the market, liquidity will naturally increase- which will lead to an exponential growth that will surprise even the fiercest of critics.

But how to have a pro-level approach on the DeFi derivatives market? In this sense, the Opium Network is a welcome innovation for investors of all sorts of levels and backgrounds.

Welcome to the Opium Network

Opium exchange

Founded in 2017, Opium is a universal and robust protocol, based on a set of open-source smart contracts built on Ethereum. In this ecosystem, users will be able to create, settle and trade derivatives with never seen freedom.

Opium built a bridge between two worlds, reuniting the advantages of DeFi and traditional markets together. This robust protocol allows the creation of decentralized derivatives empowered by a risk profile similar to traditional markets.

Composability and Structure

Designed to be composable with DeFi markets and traditional markets, the Opium protocol has a unique approach to derivatives. It relies on an innovative structure, based on a strong and straight on-chain layer (financial structure), which can be further leverage off-chain.

In the first layer, the user will access robust financial primitives. Thus, the second layer will give users the possibility to access more complex features. This category includes order books, market-making strategies, arbitrage, combined orders, dynamic pricing, hedge fund strategies, and advanced derivatives.

Who’s Behind Opium Network?

Based in the Netherlands, the Opium team employs experienced traders, mathematicians, and programmers to develop innovative financial products to impact the fintech world. The mission is to upheaval the traditional financial sector in a positive way by democratizing access to derivatives and other financial products.

Final Words

Derivatives represent the biggest financial market and it’s just a beginning for DeFi market. There are many ways derivatives can be implemented in DeFi for increasing security and profitability. Opium protocol is just one of the pretty innovative projects that enable regular users to trade derivatives with a single click.

How the future of derivatives looks like? It will be definitely an interesting journey with million possibilities.