The Growing Role of DeFi Derivatives

In traditional finance, derivatives are a type of financial instrument that allows traders to speculate on the price action of an asset, without actually owning that asset. These derivatives track and derive their value from a separate underlying asset, such as a commodity, index, share, interest rate, and as we’ll soon find out, cryptocurrencies.

They allow investors to gain exposure to practically any kind of asset through an exchange-traded investment product, such as futures and options contracts, without all the usual hassles that might come with directly trading these products — e.g. storage, transportation, insurance, and authentication.

Derivatives have recently exploded in popularity in cryptocurrency and decentralized finance (DeFi) sectors, due to their sheer utility and accessibility.

Derivatives in DeFi

Right now, the vast majority of cryptocurrency derivatives are offered by centralized platforms, like Binance, BitMEX, and Deribit. These platforms act as a broker and allow users to trade futures, options, and perpetual swaps in an easy, intuitive fashion — but also typically require users to jump through hurdles to get started, such as requiring KYC verification and funding a custodial wallet.

DeFi derivatives are widely considered to be the next big thing in the derivatives industry since they allow traders to access the benefits of derivatives without the usual limitations. These are offered by decentralized platforms and protocols that can be accessed by anyone, from anywhere with no restrictions, and leverage smart contracts to settle trades on-chain without the need for a central custodian or broker.

Though there have been great strides made in developing a complex, varied landscape of DeFi derivatives, most fall into one of four categories:

  • Futures: these are contracts between counterparties to exchange an asset at a specific price on a specific date. This includes so-called “perpetuals” which are a special type of futures contract that can be settled at any time.
  • Options: these are similar to futures, but give counterparties the option to exercise an exchange of an asset on a specific date at a specific price.
  • Swaps: simple derivatives that allow two or more parties to exchange specific financial instruments or cashflows over an agreed period of time.
  • Collateralized loans: take the form of collateralized debt positions or obligations that can be freely exchanged and traded.

Being decentralized, DeFi derivatives make use of smart contracts and permissionless user interfaces to enable users to trade essentially anything over the blockchain with few to no eligibility requirements. In many cases, DeFi derivatives platforms will make use of blockchain oracles to source their pricing data, defend against market manipulation and black swan events, and trigger smart contact operations on derivative tokens.

Today, DeFi derivatives are being used to help users to gain price exposure to and trade assets that were previously reserved for traditional investors — like precious metals, commodities, shares, and indices — while completely eliminating the storage, insurance, and handling requirements that often come with these investments.

Image courtesy: Mirror Protocol

Tokenized stocks are one of the most popular DeFi derivatives.

The Current State of DeFi Derivatives

Though the DeFi derivatives market is still arguably in a state of infancy, it has grown by leaps and bounds in recent years, and there are now dozens of different platforms and protocols offering DeFi derivatives.

Some of the most popular DeFi derivatives platforms are briefly highlighted below:

  • dYdX: The platform allows users to trade perpetual futures with up to 25x leverage and is currently by far the most popular decentralized exchange for margin trading.
  • Mirror Protocol: Built on Terra, Mirror Protocol allows users to issue and trade synthetic assets (known as mAssets) that mimic the value of their real-world counterparts.
  • DerivaDEX: Derivadex is an Ethereum-based derivatives trading platform that combines a decentralized autonomous organization (DAO) with an insurance mining solution to improve security and opportunity for derivatives traders.
  • Synthetix: Synthetix allows users to create unique derivative assets known as synths that can be tied to essentially any real-world asset — such as fiat currencies and commodities.
  • Nexus Mutual: A popular risk-sharing market that allows users to take out insurance against smart contract risks while introducing a new asset class known as tokenized credit default swaps.
  • Augur: A decentralized prediction market that allows users to create their own prediction markets on almost any event or outcome.

The DeFi derivatives sector has seen its adoption grow at a near exponential pace in recent years, as the platforms that offer these services become more accessible, more capable, and better known.

As per data from DeFi Pulse, the total value of assets locked in blockchain-based derivatives platforms has soared from $175 million in February 2020 to almost $2.2 billion today — a more than ten-fold increase in two years. A large chunk of this value is associated with dYdX, which currently has a 45% market share.

Image courtesy: DeFi Pulse

DeFi Derivatives have seen near exponential TVL growth in the last four years.

Although the early days of DeFi derivatives largely centered around the Ethereum blockchain, other alternative platforms have seen far more growth on this front in recent months — thanks to the near-perpetual congestion and high fees Ethereum currently suffers from.

Most DeFi derivatives platforms are now either building on an alternate blockchain, such as Binance Smart Chain, Polkadot, Terra, or Polygon, or take a cross-chain approach to development — with plans to deploy on multiple sovereign chains. Perhaps the best example of this is Injective Protocol, a platform that is designed the facilitate cross-chain derivatives trading. Likewise, with the rapid growth of the Polkadot ecosystem and the real-world testing of its parachain concept, cross-chain derivatives may become the norm, rather than the exception.

Why Trade Derivatives?

DeFi derivatives have been a staple in the toolbox of many expert traders for years, but they have only recently become accessible and intuitive enough to be easily leveraged by even novice traders.

The most popular types of DeFi derivatives are decentralized futures and options contracts, which can be traded on a variety of derivatives exchanges. These allow users to speculate on the direction of markets and deploy potentially advanced trading strategies by simply buying and selling derivatives contracts.

With the use of DeFi derivatives, traders can easily speculate on the direction of the market, hedge their positions, maximize the capital efficiency of their trades, and increase diversity in their portfolio — all without relying on centralized platforms. Derivatives also increase transparency and liquidity, while facilitating more efficient price discovery by opening markets to a more diverse array of traders and speculators.

Most traders will first gain exposure to DeFi derivatives through synthetic assets or futures/options trading platforms, but the scope of financial primitives that fall under the DeFi derivatives umbrella is growing rapidly — and now includes assets like leveraged tokens and decentralized indices.

Leveraged derivatives tokens allow traders to multiply their exposure to the price action of an asset without needing to put up collateral. For example, a 10x leveraged BTC token (e.g. MOON) would double in value if Bitcoin appreciates by 10%, whereas a 10x leveraged BTC short token (e.g. DOOM) would double in value if Bitcoin falls by 10%.

Similarly, there are now an array of inverse tokens that see their prices move opposite to the direction of the asset they track, such that inverse ETH would appreciate in value if native ETH falls in value.

These tokens essentially encapsulate a more complex trade, allowing less experienced users to execute strategies that may be technically challenging to do manually.

That said, DeFi derivatives aren’t always perfect, and many have substantial drawbacks that limit their utility, desirability, and accessibility. One of the main limitations facing DeFi derivatives today is a lack of liquidity, making it difficult for users to execute large trades without facing significant slippage.


DeFi derivatives have the potential to transform the way that individuals and investors utilize their assets by providing an inclusive, intuitive, and highly efficient means to speculate at a variety of risk tolerance levels.

But the industry is still evolving incredibly quickly, and the landscape of DeFi derivatives is almost certainly set to grow in both diversity and complexity in the years ahead. Developers building DeFi protocols will be able to bake in support for an increasingly novel and powerful array of financial primitives, whereas users will be increasingly able to access markets and opportunities that were previously reserved for technically savvy or well-informed investors.

Standardization and interoperability will likely grow in importance as more projects look to incorporate support for DeFi derivatives. Regulators, on the other hand, will likely struggle to keep up with the cadence of change in the DeFi derivatives space, and may be forced to either take a backseat and watch how everything plays out, offering little to no regulatory oversight. Or they may resort to broad, sweeping regulations in an attempt to catch all DeFi derivatives in a single net.

Given the SEC’s recent statement on DeFi, the latter seems unlikely.

“If investment opportunities are offered completely outside of regulatory oversight, investors and other market participants must understand that these markets are riskier than traditional markets where participants generally play by the same set of rules.” — Commissioner Caroline A. Crenshaw, U.S. Securities and Exchange Commission.

Nonetheless, with increasingly novel DeFi derivatives on the horizon, and more people than ever before now getting to grips with their potential, centralized derivatives trading platforms will be forced to either innovate or lose market share. Whatever the case, the users will be the ones to benefit, since more competition almost invariably leads to better opportunities for everyone.

Want to learn more about blockchain technology and keep informed of the latest Master Ventures news? Consider following us on Twitter and Medium!

About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

For any questions, please feel free to reach out to us on:

MV Website | MV Telegram| MV Twitter



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store