- Derivative markets are indicative of how mature financial systems are.
- The DeFi derivatives space is in its infancy and lags in development relative to its peers such as AMM smart contracts.
- ClearDAO was born to help reduce the gap between the lack of derivative infrastructure and its growing demand in DeFi.
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Derivatives are crucial to every mature financial system. Financial systems are made up of financial markets, and financial markets are all about risks. Derivatives allow for market participants to manage their risks by limiting the potential returns and losses. In traditional financial systems, most derivative markets are already very large and liquid.
ClearDAO Believes the Market Share of Derivatives will Increase for the Foreseeable Future
As the DeFi space grows, the market for derivatives will grow exponentially, thus making derivatives a significant opportunity for both builders and investors. Hence, DeFi will absorb a significant part of the centralized derivatives market.
Since the inception of Ethereum, its smart contract writing capabilities enabled developers to create rich and diverse applications. Due to natural pairing of blockchain protocols with financial systems, the first batch of core applications on Ethereum centered around management and usage of on-chain native digital assets, including DAO (Decentralized Autonomous Organizations) and DEX (Decentralized Exchanges). However, in the process of developing on-chain applications, aside from the security issues of smart contracts, the “liquidity dilemma” of on-chain assets had frustrated developers a great deal, and became a major obstacle to the blossoming of Ethereum applications.
With the advent of Uniswap in November 2018, we witnessed a simple yet elegant solution to the onchain liquidity problem: the x*y=k pricing curve, which introduced the AMM (Automated Liquidity Provider) mechanism to resolve issues of liquidity growth and aggregation. With its smart contract functionality, Uniswap enabled the exchange of any arbitrary ERC20 token, a standard for Fungible Tokens on the Ethereum blockchain.
As the flagship Ethereum application and largest DEX by trading volume, Uniswap has been integrated in over 200 DeFi projects and deployed on two Layer 2 systems, Arbitrum and Optimism. It’s this composability, also commonly known as “money legos”, that has granted a very real competitive advantage for financial applications in DeFi, creating an open ecosystem with sustainable growth and a strong liquidity infrastructure.
Since Uniswap’s rise, its liquidity pool and AMM designs have been widely adopted by a variety of descendants. Though they all inherited the core design of Uniswap, they each came with their own specialized pricing function. Take Curve, which uses a mixture of constant product and constant sum, or Balancer, whose multi-asset pricing function is defined by a multi-dimensional surface.
As the demand for using Ethereum has experienced a slight halt due to the amount of time and level of complexity it takes to scale the network, other public chain ecosystems such as Binance Smart Chain (BSC), Polygon, and Solana have emerged in an attempt to grow their market share.
We can thus infer that we are at a historic turning point of DeFi 2.0 where fundamental liquidity infrastructure has increasingly improved and liquidity has reached critical mass.
Now, the infrastructure and liquidity provision for the entire industry stand ready for the next phase known as DeFi 3.0: a mature financial system with decentralized derivatives at the core. Despite the astonishing growth of DeFi in the last couple of years, the derivatives space remains in its infancy. Is not an exaggeration to think about derivatives as one of the most important missing primitives in the DeFi space.
The DeFi derivatives space is in a very immature state and, with the talent and level of innovation working in those problems, it is expected that the platforms mature rapidly. In this context, and in opposition to the traditional derivatives markets where the trade volume is typically higher, the DeFi derivatives trade volume is unsubstantial compared to mainstream DeFi protocols. To tackle the need for development in the DeFi derivatives market the ClearDAO was born.
ClearDAO is building a decentralized crypto derivatives factory to provide developers with an SDK and tools to accelerate the development of crypto derivatives and marketplaces. To date, the project has completed the template development of options, notes, perpetual futures, and CDS. The project has a multi-blockchain strategy and already supports Ethereum, BSC, Solana and Arbitrum.
Within the ClearDAO system, there are three key main roles: liquidity providers, developers, and traders. They collectively make up the DAO governance council. The three roles are not mutually exclusive and are defined based on function alone. In theory, a user can assume multiple roles simultaneously. The functions of each role are as follows:
Liquidity Providers: These are the product creators of the ClearDAO ecosystem. They define open derivatives for trading based on parameters on the Derivatives Workshop, and provide liquidity for the derivatives created.
Developers: Developers use SDK provided by ClearDAO to create and launch new trading platforms. Developers can also create their own derivatives products and assume the role of liquidity providers, or they could sell other products created by other liquidity providers.
Traders: Traders are the end users of derivative products. Hence their feedback will determine the future development direction of ClearDAO.
DAO Governance: As ClearDAO is an open protocol for DeFi derivatives, when all the governance tools have been developed, all updates to its core capabilities will come under the DAO governance framework including product development, roadmap and economic model.
As DeFi matures and institutions embrace crypto, ClearDAO believes the market share of derivatives will increase for the foreseeable future. By enabling developers to create bespoke derivatives and lowering the barrier of entry, ClearDAO is accelerating the growth of the derivatives sector. ClearDAO aims to provide a clean and simple user interface so users can intuitively complete the trades they wish to execute.
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