Crypto staking and derivatives products are exploding in popularity.
Staking originated with the rise of alternative consensus models to bitcoin’s proof-of-work (PoW) and has become a driving narrative of 2020. Networks like Cosmos and Tezos continue to garner hype while exchanges offer appealing staking services for their expanding retail users. At the same time, derivatives products are ballooning.
CME recently launched its long-awaited options contracts for bitcoin and volumes on crypto derivatives exchanges reportedly topped $15 billion — more than double crypto spot trading volumes. Not only has the race for improved market infrastructure begun (e.g., particularly in latency), but more creative instruments are emerging.
Some of the most appealing and unique developments?
Crypto Derivatives Competition is Ramping Up
Crypto derivatives were formerly obscure — an elusive notion even among the most ardent industry proponents. That is no longer the case.
Gaining momentum following the launch of BitMEX’s XBT perpetual swap contract, derivatives innovations from bitcoin options products to more stable indexing enhancements and physically-delivered contracts are quickly gathering all the media attention. Crypto exchanges are quickly rolling out compelling products and improvements to their users in a bid to entice swaths of retail investors and financial institutions alike.
The race has sparked some intriguing consequences already. For example, Trading Technologies, a commercial trading software pioneer, has been tapped by crypto futures exchanges like CoinFLEX, helping trading interfaces and engines execute on par with legacy finance counterparts like Eurex — Europe’s largest derivatives exchange.
One of the biggest takeaways, though, is from a broader perspective.
With so many emerging exchanges and derivatives products in a blossoming industry, the window to consolidate a vaunted position among crypto’s leading derivatives exchanges hinges on attracting liquidity. Consequently, exchanges are simultaneously appealing to both market makers and retail.
Particularly in Asia, CoinFLEX, the first physically-delivered bitcoin futures exchange, is emphasizing the impact of a region brimming with financial potential. The exchange recently launched its FLEXMaker competition on the heels of its staking program, and the mixture of the two reveals some intriguing aspects of the ongoing crypto derivatives race.
FLEXMaker & Staking
CoinFLEX’s FLEXMaker program is an updated version of its DMM program. DMM’s are specialized market makers for explicit markets such as stocks or commodities. In the context of CoinFLEX, the DMM program directly appeals to market makers by offering zero maker fees and taker fees as low as 0.02 percent on physically delivered crypto futures contracts.
The program is also a competition that incentivizes market makers to opt-in to the DMM program by creating a granular prize pool for the top 10 competitors — the best liquidity providers.
For some context, maker/taker fees are critical for attracting orderbook depth and liquidity to an exchange. A maker is a party on an exchange that places a bid below the market price (the resting liquidity) and the taker is the party that removes the liquidity from the order book.
Because the taker is executing the trade by eating up the liquidity, the taker necessarily has more information than the maker, which renders the maker’s position consistently riskier.
As a result, exchanges do their best to attract makers with low fees for the cost (on the maker’s part) of adding liquidity to the order book. Liquidity begets liquidity, and at zero maker fees with FLEXMaker, that’s an enticing option for luring volume to CoinFLEX’s physically-delivered futures contracts.
All of FLEXMaker is directly correlated to CoinFLEX’s staking system, which enables any user to lock up the exchange’s native FLEX token for 30 days. According to CoinFLEX, 10 USDT is issued per 1,000 FLEX tokens staked, participants can earn higher affiliate payouts, and they can even earn from participating trading fees while their own fees are minimized.
Interestingly, CoinFLEX was not only offering physically-delivered bitcoin futures before Bakkt, but it may be the most distinct DMM offering in the market now with a hybrid staking/maker program. Such an incentive system goes beyond staking-as-a-service (SaaS) models like those of Coinbase and Binance, once again revealing the type of long-awaited innovation in derivatives products that competition in crypto is stoking.
While most mainstream media cycles continually reference Bakkt, CME, and other major financial institutions dipping their toes into the crypto market, there’s more behind the surface. CoinFLEX’s recent developments are a testament to that notion and expose a developing race for derivatives market liquidity in the wild world of Asian crypto adoption.
The SEC’s early hesitation to comprehend the crypto market has vaulted Asia ahead of the world’s largest financial market, the US — a trend that CoinFLEX is banking on will continue to bear fruit for its revamped DMM program.