In 2020, the DeFi market, which had been dormant for more than 2 years, finally exploded under the macro background of the global liquidity glut. Bitcoin mining halved to kick off the digital asset bull market, and micro innovations such as liquidity mining and AMM automatic market makers. Among them, the DeFi space of decentralized stablecoins, lending and spot exchanges all made substantial leaps forward and gradually gave birth to a number of leading projects.
The Revolutionary core features of DeFi
The success of these DeFi projects has led us to recognize the revolutionary core feature of DeFi:
- The Non-custodial assets and transparency of transactions: assets no longer need to be placed in the custody of third-party trusted institutions (not your keys, not your coins), while all transactions are authentically traceable eliminating human mischief.
- Trustless: Trust is no longer limited by brand, but comes from open source and code.
- Disintermediation: the removal of centralized institutions that provide intermediate information and credit (tax intermediaries), returning 100% of revenue back to the maintainers of the decentralized network (value creators).
In the long term, these revolutionary qualities will drive a paradigm shift in traditional financial markets. Put simply – DeFi is eating CeFi and TradFi with its competitive edge and appeal, and becoming an unstoppable trend in the process.
The DeFi dilemma of derivatives
The derivatives space, one of the largest financial markets in the world, has not witnessed the emergence of paradigm-shifting DeFi products. To understand why we need to start by analyzing the user needs of the current derivatives market.
Derivatives are primarily used to meet hedging and speculative needs. The current digital asset derivatives market is dominated by speculative demand. Years of practice show that the main requirements of users in the speculative market are:
- Positions: to accurately capture the price at which they wish to open a position.
- Liquidity: the need for sufficient inventory liquidity to guarantee the amount without slippage of the transaction.
- Leverage: the need for sufficiently high leverage to increase the rate of return on capital.
- Know-How: the need for trusted people to teach the knowledge and strategies that can profitably trade.
Based on the current performance of the public chain, derivatives DEX in these core needs lag way behind CEX, just as the 1700’s stream train did not beat the horse and carriage on anything other than speed.
Here’s a closer look at why this is so:
The Shield Protocol: An Innovative Breakthrough
Uniswap’s great success has not come from delivering a better spot trading experience than the current CEX, but from meeting the demand for long-tail asset distribution that the CEXes could not meet with a license-free, extremely low-cost offering. Essentially, its success came from tapping into a new unmet need in the market.
The fundamental solution to cracking this game lies only in applying the characteristics of blockchain technology to meet needs unmet by traditional finance. Shield, a Pay Little to Win Big risk-free perpetual protocol, is one such derivative protocol that follows the same path as the Uniswap breakout.
From a trader’s perspective:
- Going the wrong direction with 0 loss of position: Paying little daily funding fee, no loss for opening the unfavored price direction but gain profit for opening the right price direction.
- Unlimited intraday liquidity: The dual liquidity pool mechanism allows the private pool to hedge the market-making risk, while the lower-risk public pool can accommodate huge liquidity to guarantee sufficient intraday liquidity.
- Ultra-high leverage: Around 100x daily, up to 1000x.
- Decentralized broker system: Allows for earning up to 40%-100% commission rates and getting more people to participate in trading education.
Take an example here:
- Molly opens a long position on 1 ETH @ $2500 and pays a one-time transaction fee of $2.50 (1%).
- After that, the system only needs to deduct the daily funding fee (the daily funding fee varies from the volatility), and the position can be maintained all the time, taking the $25 first day funding fee as an example.
- If ETH rises 10% on the same day, Molly’s profit will be 2500*10%-25-2.5=$222.5. If ETH falls 10% on the same day, Molly loses only $25 in position fees and $2.5 in transaction fees.
This is addressing a whole new demand for trading – a market that has always existed but one that had not been explored.
But why had such a market not been explored? Because such a setup actually requires super-advanced financial engineering product design capabilities and the need to cross a huge trust gap. The market could not be activated if the top financial institutions do not step in.
That was until the emergence of blockchain, which broke the trust gap and allowed the talents of financial engineering experts buried in top universities and internet companies to come to the fore.
The Financial Engineering Behind Shield Protocol
The financial engineering of the Shield protocol is its exotic offering of no expiration dates. A daily option fee is charged in the form of a funding fee paid by the trader. Unlike traditional Black-Scholes options, pricing an option that has no delivery date, i.e., is perpetual, remains a difficult academic problem. As seen in the Shield whitepaper, the Shield team successfully derived and solved the exact analytical solution of the partial differential equation for pricing the Shield protocol funding fee.
At the same time, unlike the traditional nonlinear pricing model, Shield applies linear approximation by cutting up the nonlinear process, allowing decentralized risk-free perpetual work well on the Ethereum blockchain with on-chain settlement.
The Steam engine trains survived in the capacity market in the 17th century by comparing load rather than speed and then continued optimization iterations revolutionized the capacity market.
Shield protocol fully applies the revolutionary qualities of DeFi with academic-level financial engineering (perpetual options) innovation to meet a differentiated market need that has been unmet by CEX today with limited blockchain infrastructure. With its IDO (Initial Dex Offering) scheduled in the next 2 weeks, the market is about to see a truly innovative offering very soon.
In short – with Shield, a new path has been created for derivatives to break the ice.