Hedging, Staking and Saving - The Signs that Point to a Maturing DeFi Market
Shine Li May 05, 2021 07:48
DeFi is currently on a maturity curve comparable to the same one that the cryptocurrency markets have undergone over recent years.
DeFi is currently on a maturity curve comparable to the same one that the cryptocurrency markets have undergone over recent years.
DeFi is currently on a maturity curve comparable to the same one that the cryptocurrency markets have undergone over recent years. Like Bitcoin and Ethereum, the earliest pioneers, such as Maker, Uniswap, and Bancor, paved the way, while the DeFi explosion of 2020 can be likened to the glut of tokens that entered the markets during the ICO boom.
Over recent years, we’ve seen the crypto markets enter a new phase of maturity. The increasing availability of hedging instruments such as options, a shift in focus from get-rich-quick token schemes to saving and investing for the long term, and the entry of institutions all point to a more sustainable mode of growth.
DeFi is moving faster, but there are definite signs that the markets are also now entering a new phase of maturity. 2020 was characterized by high-stakes DeFi features such as flash loans and margin trading. However, as happened in crypto, we’re now starting to see more protocols emerge that allow users to take a more prudent approach to trading and investing. Here are three examples.
Hedging with Options
Options have only started to become popular on the broader crypto markets over recent years, as Deribit pretty much owned the market until around 2019. However, in the last year, the options markets have grown from around $1 billion to reach $20 billion, indicating that there’s plenty of appetite.
Now, projects such as Premia Finance are bringing options to the DeFi markets. Users can choose to trade call and put options for various native Ethereum and Binance Smart Chain tokens via the Premia marketplace or even mint their own.
Unlike many competitor platforms, Premia uses the ERC1155 token standard, which means it can add support for any token to its marketplace in a single multisig submitted transaction without needing to deploy a new contract for each type of token. This offers a far greater degree of customization and enables P2P trading, meaning that users always own their options and aren’t dependent on a pool.
Premia also operates its own governance token, which users can stake on the platform to earn a share of transaction fees.
Options are an essential risk management tool in the financial markets, as they allow traders to hedge their open positions. Therefore, the entry of projects focusing on options is a clear indicator that there’s a demand for instruments that enable traders to offset their risks.
Protect Against Losses with Insurance Coverage
DeFi is still a relatively nascent sector, and as such, it’s still common to find bugs and security issues in the underlying smart contracts. Many projects, including Premia Finance, undertake security audits to avoid this. However, Premia is also one of the projects that have taken out additional protection using decentralized insurance coverage provided by Cover Protocol.
Cover Protocol is a P2P marketplace for coverage, allowing users to stake collateral to mint CLAIM tokens, which can be redeemed if an exploit occurs. They can also mint NOCLAIM tokens if there’s no exploit against a protocol. Effectively, this model acts as a predictions market, allowing users who want to hedge against risk to stay on the CLAIM side. In contrast, those who believe the protocol is secure can take the risk of buying NOCLAIM tokens.
When an incident occurs, its validity for an insurance claim is determined via a decentralized governance vote by holders of the COVER token.
The availability of insurance is a further indicator that users are seeking out ways to engage with DeFi without incurring excessive risks.
Long-term Savings
As cryptocurrency has grown as an asset class, more people have engaged in longer-term savings strategies such as dollar-cost averaging. Until recently, DeFi wasn’t considered a go-to place for those wanting to save for the future. However, decentralized protocols such as PoolTogether are designed to incentivize users to save their funds rather than exposing them.
PoolTogether is quite simple. Each week, users deposit their tokens into prize pools, and the total deposited is sent to lending pools on Compound to earn interest. Each deposited token represents a ticket, and at the end of the week, winners are selected at random to win a share of the funds earned by the pool.
Anyone who doesn’t win gets their original stake back, so there’s no risk of losing funds beyond the inherent volatility of the staked token. If the funds aren’t withdrawn, they’re simply entered into the next weekly draw.
The availability of hedging, insurance, and savings protocols is a sure sign that DeFi is growing up. As the markets continue to mature, it seems likely that they’ll gain further adoption by a broader range of more sophisticated investors.
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