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Exploring Derivatives in DeFi - Strategies and Main Protocols

Pedro Veiga, Kassandra DAO

Derivatives are financial contracts that derive their value from underlying assets. In this article, you'll learn about its use in DeFi, allowing you to create different investment strategies for your crypto journey.


Derivatives play a critical role in the global financial market, providing an essential tool for companies, hedge funds, and retail investors alike. These versatile instruments allow for a variety of investment strategies that would otherwise be unattainable.

Some analysts estimate that the derivatives market is worth more than $1 quadrillion dollars, which is 10x more than the world’s GDP.

In this article, we delve into the realm of derivatives and their intersection with the field of cryptocurrencies and [DeFi]https://www.heimdall.land/research/decentralized-finance-explained. _Could this be a golden opportunity in the making? Let’s explore_.

Understanding Derivatives

Derivatives are financial contracts whose value is derived from an underlying asset or group of assets. Essentially, this means that a change in the price of the underlying asset will cause a corresponding change in the derivative contract's value.

Derivatives can take various forms, such as Futures Contracts, Options, and Synthetic Assets, each playing a significant role in the world of cryptocurrencies.

  • Futures

A futures contract is a legal agreement to buy or sell an asset at a predetermined price on a future date. When trading futures contracts, traders don't deal with the actual assets but a contract that gives them the right to buy/sell the assets. A long position anticipates a price increase, while a short position speculates on a price decline.

  • Options

Options, though similar to futures, are more intricate and offer a wider range of strategies. An options buyer has the right (but not the obligation) to buy/sell an asset at a predetermined price in the future, whereas the seller (or writer) of the option is obligated to fulfill the contract if the buyer exercises this right.

  • A call option means that the buyer has the right to buy the asset if it reaches the strike price. The buyer of a call is betting that the price will go up (Long), and the seller is shorting the asset.
  • The buyer of a put option is betting that the price will drop, and he has the right to sell the asset at a higher value if the strike price is reached. The seller of a put option is betting that the price won’t go down.

The seller of an option receives the premium (paid value from the buyer) at the moment that someone buys the option, which enables the possibility of leveraging his portfolio positions.

Many different strategies can be created with options, such as: Covered Call, Covered Put, Long Straddle, Short Straddle, Butterfly Spread, and many others.

  • Synthetic Assets

Synthetic assets mirror the value of a specific asset, be it a cryptocurrency, stock, commodity, or traditional currency. These assets play a pivotal role in DeFi as they allow tokens/coins from a specific blockchain, like ETH, to be traded on a different chain, such as Polygon or Avalanche, at the same price as the original. An example of a synthetic token is wBTC, which represents Bitcoin on the Ethereum blockchain.

Also, synthetic cryptocurrencies are used in Liquid Staking and Lending/Borrowing platforms so that the staked/lent assets can keep the same value as the original.

  • Derivatives allow for multiple strategies, often used by traders and hedge fund managers to leverage and hedge positions - in other words, they’re protecting partially or completely a position if the market goes in a different direction.
  • These contracts can be more volatile than the underlying asset by itself. Knowing that, many traders use them to speculate possible market movements, which could generate a higher profit or also a higher loss (100% or more).

Derivatives on the Blockchain

Many centralized exchanges like Binance, Kraken, and Kucoin offer derivatives, contributing significantly to their daily trading volumes. Recognizing the market potential and the adoption rate in crypto, several DeFi protocols have been created to introduce this service to the blockchain, offering a decentralized approach to another financial service.

Let's examine some of the main DeFi protocols offering derivatives trading today.


Launched in 2017, dYdX began offering perpetual future contracts in 2019, initially offering only BTC and ETH products. Today, the protocol offers 37 pairs and leverage of up to 25x.

dYdX operates on the StarkWare Network, a layer 2 solution that provides faster and cheaper transactions on the Ethereum Blockchain, but has plans to migrate to its own network in the future. 
As of now, dYdX holds a Total Value Locked (TVL) of U$400 Million and an annualized trading volume of U$204 Billion, according to DeFiLlama and Token Terminal, being one of the biggest and preferred protocols by traders in the sector.


GMX, another decentralized perpetual futures exchange built on Arbitrium, is also a layer 2 scaling solution. The platform leads the sector today with a TVL of about U$1.12 Billion. However, it’s behind dYdX when looking at cumulative trading volume, having about U$106 Billion.

Traders can operate on four different pairs, ETH/USD, BTC/USD, UNI/USD, and LINK/USD, with the possibility of leveraging their positions up to 50x. GMX also offers a very interesting feature where Liquidity Providers can earn interest by depositing assets into a pool and receive from market making, swap fees, and leverage trading.


Synthetix follows a different path than the other examples, although also offers perpetual futures on the platform. As the name suggests, it’s a protocol that focuses on synthetic assets, which they call Synths.

The Synths available are voted on by the community and they can be anything with a price, from fiat currencies and stocks to commodities and cryptocurrencies.

With an impressive TVL of U$537 Million, Synthetix has managed to raise U$46.1 Million across five funding rounds,  attracting attention from institutional investors like Coinbase Ventures and Paradigm.

Final Thoughts

The derivatives market, already a cornerstone of Traditional Finance, is carving out a space within the crypto ecosystem. Blockchain technology offers novel features that are accelerating this shift, and there is plenty of room for exploration and innovation.

Trading derivatives can be quite risky, so it's advisable to familiarize yourself with these products before venturing into the market. Alternatively, you can invest in the sector by buying the tokens of the protocols or participating in the liquidity pools these applications offer.

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