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Friday Metrics Watch, Decentralized Derivatives

A Happy 4th of July to all our readers in the US.

A quick note on decentralized crypto derivative platforms

After our coverage on the booming crypto-derivatives market yesterday, it is important to also point out, especially given that this is the Friday DeFi metrics edition, that there are quite a few players trying to bring decentralization to crypto derivatives. Some interesting projects in this space include Market Protocol, UMA, Daxia, and DyDX. All of these have slightly differing approaches. Market, for instance, focuses on a BTC-DAI product with a 28 day reset. The advantage here, in addition to some regulatory leeway, is that unlike a perpetual swap, the dominant product on BitMEX and other crypto derivatives platforms, this is much less volatile, and trades close to the underlying especially as expiry approaches. The holy grail with smart-contract based derivative settling is of course the pricing oracle, and that is the other area where there are slight differences in approaches. All of these ultimately aim to do away with the ‘arbitrariness’ one associates with current centralized platforms, around liquidations, socialization of losses, and lack of scalability.

Volumes are still low, most of these are also very early in their product development cycle. As we like to remind readers periodically, the 99% cares more about convenience than decentralization. Like with spot exchanges and their dominance over decentralized exchanges, the likes of Bitmex and Deribit dominate the crypto derivatives space. Additionally, derivatives are not quite a mass market product, unlike, for instance, lending is. A Dharma or a Compound is intuitively first-order, and the product adoption cycle is fairly quick for such loan platforms. This has been reflected in the uptick in volumes of ETH locked up in these platforms for loans.

Why are decentralized platforms important

Long term however, as DeFi picks up steam, decentralized derivatives platforms could potentially be key components, in conjunction with lending, securitization and credit assessment platforms; especially as decentralized identity solutions evolve, and FATF and other regulatory regimes start cracking down on unregulated platforms like BitMEX with their absence of KYC/AML filters. Most current centralized derivatives players focus on tapping inveterate Asian gamblers, especially from the mainland, Japan and Korea. Solutions are emerging for QIBs (qualified institutional buyers), and decentralized derivative platforms, in conjunction with decentralized identity solutions, could be the way forward for retail users that are too small for the institutional platforms, and are either unable to or unwilling to access the casinos that BitMEX, Deribit etc are.

Other use cases and usage patterns emerge naturally; market makers on decentralized derivative platforms, for instance, could borrow from decentralized loan platforms like Dharma, as long as they are confident of making a spread from market making which is higher than the borrowing rate.

And now on to the metrics watch..

Ethereum Locked in DeFi

MakerDAO still accounts for a lion’s share of ETH locked up in collateral, with more than 1.56 million of ETH locked up. Uniswap and Compound showed a strong w/w increase of 11% and 16% in ETH locked up and Augur showed a w/w decline of 3%. ETH locked in MakerDAO increased by 1%.

Lightning Network Growth:

Capacity per channel showed a moderate increase of 1% w/w. The total number of nodes increased w/w by 1%, and the total number of channels decreased by 1%.

(For reference, some previous articles on LN, here).

DEX Tracker:

Trading volumes on DEXs have increased on a w/w basis, with the average daily trading volume averaging 35k ETH for this week. IDEX remains the biggest DEX in terms of trading volume and DAI is the highest traded cryptocurrency on DEXs.

(For reference, some previous articles on DEXs, here and here).

Crypto Loans Tracker:

Compound Loans:

Total loans issued on Compound for the last week stands at approx. $4.5 million for the week, a meaningful increase from $3.4 million in the previous week. WETH is the most borrowed cryptocurrency on Compound followed by DAI and BAT.

Dharma Loans:

Total loans issued on Dharma Lever for the last week stands at approx. $2.1 million for the week, up from $175k the previous week. DAI is the most borrowed cryptocurrency on Compound followed by WETH and USDC.

MakerDAO Loans:

DAI loans issued on MakerDAO for this week stand at ~$6 million, a meaningful decrease from $14 million last week. The total outstanding DAI debt currently stands at ~$90 million.

(For reference, some previous articles on MakerDao, here and here).
You can also check out last week’s Metrics Watch here.

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