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How do DeFi Derivatives Fit into The DeFi Ecosystem


Decentralized Finance has brought with it a whole new world of finance, which empowers the individual. Although there has been mass change, many current aspects of DeFi have been brought over from CeFi as they are simple economic principles. An example would be: DeFi Derivatives.

What Is a DeFi Derivative?

A DeFi derivative is a binding contract between two or more parties to fufill a certain action, such as buy or sell, a specific asset before or on a specified date. DeFi derivatives brings this to the blockchain market, allowing anyone with an internet connection to participate. You can find a detailed guide about DeFi Derivatives here.

DeFi Derivatives change the way they are traded in two main ways:

  1. As all actions in DeFi markets are completed by smart-contracts and not centralized organizations, they completely remove the need for middle-men.
  2. Creates the potential for singular derivatives; creating a contract via collateral instead of another party

Use Cases

In traditional markets, derivatives are used for Speculation and Hedging. The world of DeFi Derivatives is no different, the difference lies in how they are done. 

  • Speculation 

Investing in cryptocurrency is already considered heavy speculation, so it’s users clearly have a want for more! DeFi Derivatives allow for even greater speculation through options, creating a all-or-noting situation. Unlike traditional markets however, all financial information is secured irrefutably on the blockchain, giving ‘speculators’ all a fair chance at timing the market correctly.

  • Hedging

Investors in DeFi will be able to short crypto assets through inverse assets, where assets move match, but move inversely in price, to their counterparts. 

For example: Buying inverse Ethereum would mean if the price of Ethereum dropped, the price of inverse Ethereum would increase, creating a shorting dynamic. 

Who Is Making This Happen?

A prominent example of a DeFi protocol bringing DeFi derivatives to life is the Horizon Protocol through the use of Synethic Assets. Synthetic assets are a way to participate in a contract of value, without having to own the asset. Done through the tokenization of derivatives, synthetic assets can be anything from stocks to NFTs. 

Each synthetic asset mirrors the price of the real asset, allowing anyone from anywhere to actively participate in the trading of an infinite amount of real-world or virtual assets regardless of their nationality or location. 

For Example:

A Portuguese citizen, who may not have access to the US stock market, can easily trade US company stocks through synthetic assets. 


The derivative market is estimated around $1 quadrillion dollars, an unimaginable amount of wealth, more than has ever existed. This is the ‘value’ that DeFi derivatives can bring the space, without the restriction that centralized markets impose on individuals. 

DeFi Derivatives will help break down borders, with projects such as the horizon protocol as a spearhead, for investors who currently don’t have the privilege of their own financial agency. 

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