What are Decentralized Finance Derivatives?

Decentralized finance (DeFi) has become a serious alternative to traditional finance over the past few years. Starting from just a few buggy smart contract platforms in 2017 to a multibillion-dollar industry. The growth has been astonishing.

But to become a strong and mature market it needs decentralized derivatives. What are decentralized derivatives? Don’t worry in this article I will be explaining them and much more. So without further ado, let’s get right in.

Traditional derivatives

Before we dive into DeFi derivatives let’s talk about them in the traditional sense. In finance, derivatives are contracts that derive their value from an underlying asset. These assets can be commodities, indexes, etc.

Prices are ultimately determined by the volatility of the underlying asset. They are usually leveraged products that increase risk but also reward. These contracts are also used for speculation. For example, futures contracts are used to bet on the future price of an asset. So with the basics out the way, let’s look at DeFi derivatives.

Decentralized finance derivatives

DeFi derivatives are essentially the same as traditional derivates except they are done in a completely open and permissionless way. Derivatives contracts are cryptographically encoded which provides a more robust platform that is less prone to malicious activities. At the end of the day, the code is open source so any illicit activity is visible. Not only that but there is no central authority dictating who can or cannot use the platform.

Top 3 DeFi derivatives platforms

Synthetix – this is an Ethereum-based project founded in 2017. It is one of the most popular derivatives platforms with over $500 million locked up. Essentially, this protocol enables the creation of synthetic assets as erc20 tokens. These assets track underlying assets such as gold, silver, cryptocurrency indexes, etc. The system is based on a debt pool, users stake the Synthetix token (SNX) which is used as collateral. Issuance of the assets is only given if you provide SNX as collateral. As they are erc20 tokens they can all be traded on a decentralized exchange (DEX).

DyDx – this is another Ethereum-based project with a great reputation in the industry. Founded in 2017 by former Coinbase engineer Antonio Juliano it has received over $80 million in funding. As result, the platform is lightning fast with a fantastic UI. Not to mention, the platform offers both spot and margin trading. The unique thing about DyDX is that it combines off-chain order books with on-chain settlements. This is all done using StarkWare’s Layer 2 for a truly fast, seamless, and inexpensive experience.

UMA – this stands for universal market access. As the name suggests this platform is completely open. Unlike Synthetix, anyone can create a synthetic token that tracks any asset. In return, they are provided trading fees for that asset. At this stage, the token is now on the open market where anyone can interact with the smart-contract to issue more tokens. These are all erc20 tokens that can be traded on Decentralized exchanges.


As you can see, decentralized derivatives are bringing a ton of benefits to the crypto sphere. From leverage trading to futures contracts. This is all done in a transparent and permissionless way.

Not to mention, it provides exposure to assets outside of the cryptocurrency ecosystem, all of which can be traded on decentralized exchanges. From the likes of UMA or DyDx the ecosystem is strong and will only get better. Thanks for reading.

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