Creating an Open and Trustless Derivative Market: Our Thoughts

When we set out to contemplate the ideas that eventually turned into SynFutures, we have brainstormed and debated a lot of topics. We will share those topics in a series of medium posts and in this first post, we discuss our view on decentralized derivative products in the perspective of our vision to create an open and trustless derivative market.

📈 A Gap to Fill

According to TokenInsight data, 2020 trading volumes in centralized crypto exchanges amounts to $21 trillion for spot, $12 trillion for futures and $77.2 billion for options. For the top three exchanges, Binance, Huobi and OKEx, derivatives daily trading volumes are 2 to 3 times of that for spot and this pattern resembles the foreign exchange market. On the decentralized side, spot exchanges took off after the AMM models are widely accepted by the markets and trading volume of Uniswap had surpassed that of Coinbase for a few times. However, decentralized derivatives remain largely void except for a few attempts in perpetual swaps for top cryptos but failed to replicate the same success of those in centralized exchanges.

DEX Volume from CoinGecko, on Mar 3, 2021

⏳ Burden of Funding Calculation

We excluded funding-based perpetual swap in our road map despite its popularity in centralized exchanges for a few reasons. Firstly, funding calculation can be extremely costly given the current gas situation, as it involves the state of the entire market for a trading pair. Secondly, effective funding rate discovery relies on active buying and selling of the respective contract, while most of the time decentralized liquidity is not sufficient for a fair funding calculation. Lastly, the perpetual swap by design is only soft pegged to its index and is vulnerable to market manipulation as even centralized perpetual swap could be de-pegged from the index in extreme market situations.

Futures as a decentralized derivative product easily solves these problems. Without the burden of funding calculation, trading decentralized futures can be as gas efficient as trading spot in DEXes and we will have medium post dedicated to gas optimizations in SynFutures smart contracts. All futures would be settled at the expiry at the index price and a convergence of futures price to the underlying spot price is guaranteed. In our version 2, we plan to introduce the auto rolling feature to our futures to provide similar user experience of perpetual swap.

👐 Open and Trustless

To answer the next question, who would trade decentralized futures, we turn to our spot counterpart for some clues. IDO of DeFi tokens largely contributed to the success of Uniswap as a spot DEX. Before that for a token to have liquidity, they must go through a complex, obscure, and often costly listing procedure in centralized exchanges. Now tokens could easily bootstrap liquidity by using spot DEXes and centralized exchanges are now listing tokens voluntarily to catch up with the market. For derivatives, it can be costly for centralized exchanges to maintain a large trading universe and support multiple maturity dates at the same time, as each instrument (combination of underlying and maturity date) would require market makers to provide liquidity. With AMM, that is no longer an issue. Wherever there is demand for a pair, there will be liquidity. The go-to-market approach for DEX derivatives protocol is therefore not a direct competition with centralized exchanges on major pairs, but providing a free market for arbitrary token listing and maximizing the variety of tradable assets on our platform.

There is still one big question left to answer, risk management of decentralized derivatives. Indeed, decentralized liquidity is not yet comparable to that of centralized exchanges. We are not so ambitious as to provide the same level of leverage in centralized exchanges, but 10x leverage should be sufficient for most users, especially for alt coin trading pairs. In contrast to perpetual swap, futures cannot be marked directly by the spot index prices and we have devised a comprehensive mark price mechanism and liquidation procedures to protect traders and liquidity providers on our protocol, which will be explained in a subsequent medium post.

🚀 Stay tuned!

To summarize, we have presented an oversimplified version of our thought process to build SynFutures. We have left out the details for many topics to our future posts as most of them deserves their own post to have a meaningful discussion and depth. In our next episode, we will be covering architecture of our v1 product.

💬 Join our community!

We have already launched SynFutures v1 testnet! We ardently look forward to your participation and feedback.

Please visit our website at or join our discussion on Medium /Twitter/Reddit/Discord.

Decentralized Synthetic Assets Derivatives Exchange

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