The crypto industry has significantly evolved in the past decade, with Bitcoin setting the stage for other cryptocurrencies like Ethereum and Dogecoin. However, the biggest shift has been the mass migration to decentralized exchanges (DEXes) following the debut of protocols such as Uniswap and Sushiwap. The former surpassed Coinbase Pro daily trading volumes on August 30, 2020, processing $426 million, while Coinbase Pro recorded $349 million during the same time.
Since then, the DeFi ecosystem has grown exponentially as other decentralized platforms debuted to challenge the long-standing dominance of centralized crypto services. Currently, this nascent crypto niche touts a total value locked (TVL) of $258 billion, a figure that was barely $1 billion at the onset of 2020. Going by the numbers, it is evident that more crypto stakeholders are starting to appreciate the value of self-custodial platforms over centralized services.
So, what fundamentals are behind this shift? At the core, DeFi protocols introduce decentralized ecosystems governed through Decentralized Autonomous Organizations (DAOs). Unlike their centralized counterparts, DeFi protocols are permissionless and rely on smart contracts for execution. These two fundamental aspects have been a big game-changer, given that they resonate with the core principles of cryptocurrencies; decentralization and autonomy.
That said, one can decipher why DeFi protocols have been giving centralized crypto services a run for their money. The question, however, is whether these protocols will eventually flip centralized crypto platforms.
Growth Trends in Favour of DeFi Protocols
While most DeFi protocols launched as recently as 2020, their value proposition has attracted massive liquidity to the platforms. DEXes, in particular, has grown exponentially; the latest crypto exchange market report by Chainalysis shows that the total value received by DEXes shot up from $10 billion to $143 billion as of September 2021.
The report further reveals that DEXes transactions tend to be larger than those carried out through centralized exchanges (CEX). According to the analysis, the average mean transaction size on a DEX stands at $26,520, while CEX transactions had a median of $12,431. This goes on to show the increasing interest in DeFi protocols over centralized platforms.
“The biggest takeaway here is that DEXes have become extremely popular, which coincides with the explosive growth of the DeFi category in general.” noted the report.
Despite this growth being attributed to DEX spot markets, there are other emerging trends, including decentralized crypto derivatives exchanges. The crypto derivatives market has thrived mainly on centralized exchanges like Deribit, FTX, and Binance, growing by 686% within the past year. Some of the capital is now finding its way into DeFi derivative protocols.
DeFi Derivatives; The Next Crypto Trading Frontier
Dating back to the 17th century, derivatives are a trillion-dollar market with notable traditional exchanges such as the Chicago Mercantile Exchange and Nasdaq leading the pack. Today, these exchanges are not only offering exposure to traditional instruments but crypto derivatives as well. However, they remain inaccessible to a larger part of the world’s population, given jurisdictional and KYC limits.
Decentralized crypto derivative trading platforms are changing this narrative by offering users DAO governed ecosystems where anyone can trade seamlessly. As far as innovation goes, several crypto derivative platforms have launched in the recent past. One such platform is SynFutures, an open and decentralized crypto derivatives exchange that allows users to synthesize and trade Ethereum-native tokens, cross-chain and off-chain assets.
With SynFutures, crypto derivatives traders don’t have to go through an intermediary such as Binance or Deribit. Instead, they can leverage the platform’s Synthetic Automated Market Maker (sAMM) infrastructure that allows users to provide a single asset while the smart contract synthesizes the other trading pair. Additionally, SynFutures features an Automated Liquidator (ALQ), reducing the probability of liquidations.
As more sophisticated investors join the crypto derivatives market, decentralized platforms such as SynFutures present a perfect trading platform. This is primarily because of their underlying value proposition as decentralized ecosystems. For instance, the latest China crackdown on crypto operations may have caught many traders off-guard, but that was not the case for DEX traders.
The crypto derivatives market now accounts for over 50% of the daily traded volumes, according to the latest crypto exchange review by CryptoCompare. Going by the rate at which institutional investors are pouring in, crypto derivatives will soon be competing with traditional instruments on large exchanges like the CME, CBoE, and Nasdaq.
However, the regulatory hurdles of operating on centralized exchanges call for a consideration of DeFi protocols that feature derivative markets. As the market grows, we will likely see more capital trickle into decentralized derivative trading platforms. This may take some time or happen sooner than expected; after all, crypto markets are highly spontaneous.