Explore Derivatives

What are Derivatives?

Derivatives are financial instruments that derive their value from underlying assets (like Cryptocurrencies). They typically include options, futures, and swaps. Derivatives provide solutions to issues like price volatility, offering hedging tools for risk management and enabling more sophisticated investment strategies.

The arrival of derivatives in DeFi represents the maturation and diversification of the sector, bringing complex financial mechanisms from traditional finance into the decentralized economy. They allow users to hedge against market risks, speculate on future prices, and access financial instruments that were previously only available in traditional finance.

By democratizing these financial instruments, more people have access to investment and risk management options. A financial revolution for all!

The Genesis

The development of Ethereum not only gave rise to DeFi but also offered a breeding ground for derivatives innovation. Smart contracts allowed for the very first perp and options protocols to launch on Ethereum. Let’s take a look at the origin story of Derivatives Protocols.

Ancient Greece

While the first derivatives saw the light of day already in ancient Greece, it took a few more thousand years until they were widely adopted. Derivatives like futures, options, and swaps became common instruments in the portfolios of modern traders and investors between the 1700s and 1900s.

Modern Ages

Fast forward to 2011, just a few years after the invention of Bitcoin – the first crypto-focused derivatives exchanges launched. But they didn’t attract much attention at first. It was only after BitMEX launched Aleksey Bragin’s inverse perpetual swap in 2016 that market activity slowly started to shift toward derivative instruments.

2019 was finally the year when crypto derivatives took over the market. All major centralized crypto exchanges adopted futures and perpetual swaps. Trading activity for derivatives showed market dominance over spot markets for the very first time. Almost unnoticed at the same time: 2016-founded Deribit, a centralized niche player focusing solely on options, became a market leader as well.

Decentralized Derivatives

DeFi Summer 2020 – after the first decentralized exchanges launched on Ethereum, derivatives products would not take long to wait for. Inspired by Deribit's success, Opyn and Hegic brought decentralized options to market, while dYdX gave life to the first perpetual swaps in DeFi. Now, sophisticated financial instruments are made available to the masses.

The Cost of Being the First!

These initial attempts at decentralizing derivatives were limited to the tools and infrastructure that were available at the time. Due to scalability impediments, early iterations of derivatives protocols were based on less sophisticated designs. AMMs and hybrid exchanges (half centralized, half decentralized) emerged as interim solutions.

Like many centralized and decentralized exchanges, the derivatives space was also not immune to hacks or market manipulation. In recent years, household names like Deribit, dYdX, and Mango were victims of elaborate cyberattacks. Navigating the untested waters of new frontiers often bears the highest risks.

Keep Calm And BUIDL!

Derivatives continue to be a vibrant and fast-growing sector in DeFi. Addressing challenges such as security and scalability are top priorities for protocols while continuing to innovate.

Solana's Contribution

Solana is made for derivatives protocols, which need high throughput and low transaction fees to scale. Protocols on slower and less scalable layer 1 blockchains have to make sacrifices at the cost of users. Completely decentralized and Order Book-based exchanges like Serum were first on Solana and were impossible to launch on any other Blockchain at the time.

Being first kicked off the innovation race in the Solana ecosystem. Mango was the first 100% decentralized margin and derivatives protocol that features an Order Book in all of Web3. Having these protocols in a single ecosystem, rather than building an app chain, also allowed other protocols to compose with one another.

Primitives like cross-exchange arbitrage, Order Book-based liquidity pools, and derivatives strategy vaults would not have been possible without composability.

Where the Future will take us!

An active community, interoperability, and the experience of dealing with intricate security threats created a breed of derivatives protocols that are now able to compete with centralized exchanges. These protocols, including Mango, are now ready to take on the bull market!