Derivatives trading is booming in crypto. Currently, these financial products are even outpacing traditional spot trading.
To wit: The total volume traded over the past 24 hours for spot trading is $51.2 billion, per CoinGecko. For derivatives, that same figure is a whopping $192 billion.
But why?
“I think it really comes from where crypto has really found product market fit, which is in trading, and especially in speculation, and derivatives are a really excellent tool for that trading and speculation,” dYdX founder and CEO Antonio Juliano told Decrypt. “It just takes time for the market to kind of mature around them, both in terms of derivatives and more complicated products.”
dYdX is an order book-based decentralized derivatives exchange and one of the first platforms to do it.
Across the industry—including both centralized exchanges like Binance or Coinbase and decentralized exchanges like Uniswap—dYdX commands between 1% and 2% of the entire market.
It’s not a lot, but that’s because most trading these days still happens on centralized platforms rather than in DeFi.
Still, Juliano said that dYdX is “trading about $1 billion a day,” which is nothing to scoff at.
And while derivative products come in a variety of flavors, Juliano said that one product stands head and shoulders above the rest: The perpetual contract.
“The reason for this is because these perpetual contracts, while they’re still somewhat complicated, are a lot more simple and approachable for retail,” he said. “They’re perpetual, meaning they don’t expire. You can just go on dYdX you can go online and buy a Bitcoin perpetual contract, and it just tracks the price of Bitcoin.”
Unlike simply buying Bitcoin spot, perpetual contracts let you lever long or short on the underlying asset, or bet on the upside and downside, respectively.
And that’s pretty much it.
Its simplicity has helped push it to 100 times the volume of other derivative products like futures or options.
It’s also why, as Juliano mentioned, retail investors are so interested.
In fact, they currently dominate the market—something that certainly isn’t the case in traditional finance.
There, most of the volume goes through big-name funds and more sophisticated traders, with a sliver going to Robinhood and other retail-friendly apps.
What’s inhibiting derivatives growth?
Crypto, not just trading platforms, currently faces two key bottlenecks: Scale and regulations.
These two blockers are most clear on trading platforms, where, on the one hand, users expect super-fast trading times and, on the other, regulators expect compliance.
dYdX has a technical solution for the former, opting to roll out a new platform built on Cosmos later this year.
Choosing Cosmos came after scanning the market for ways to both process 1,000 transactions per second and at relatively low gas fees—a difficult feat.
“I think you’ll see some pretty high headline numbers,” said Juliano. “Like this [other] team can support 50,000 transactions per second or whatever. All that’s bullshit, it’s like not even remotely close to the truth of what’s actually happening.”
Instead, they opted to move some parts off-chain, notably how Cosmos validators arrive at consensus over exactly which trades have been executed. There are other modifications made too, thanks to the developer kit that comes with moving to the network.
As for a regulatory solution, that’s still going to take time, said Juliano.
The exchange, for example, is currently closed to U.S. and Canadian residents. In their absence, dYdX’s most popular markets are in Europe and Asia-Pacific.
Changing that will take some time, but that’s not stopped Juliano’s team from meeting with policymakers and regulators.
“Our policy has been mostly one of education and step one, and that is just literally explaining that decentralized exchanges exist, first of all, and then second of all, how and why they’re different from centralized exchanges,” he said.
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