Decentralized Derivatives Market: A Tripartite Confrontation

6 min readMar 16, 2023

Preface: Why talk about derivatives?

When collating the history of Crypto development in 2022, I found that the field of derivatives is extremely intriguing.
For one, after the 2022 bear market, its market share has increased rather than decreased. While the overall TVL of derivatives, after the Luna incident in May, slipped from $2.88 billion to $1+ billion. But of DeFi's overall $40B market share, it grew from 1.65% at the beginning of the year to 2.70% by the end of 2022.
Second, the player landscape in the market has changed quite a bit. Synthetix, once the head player, lost a significant amount of market share and in its place rose GMX, whose market share went from negligible at the beginning to a three-way tie with dYdX and Synthetix by the end of 2022.
So this made me think that although niche, the derivatives track could have interesting market opportunities emerging. So I've put together this brief study note.
If you have any suggestions/additions, feel free to reach out or comment!

Content

About the derivatives market
dYdX
GMX
Synthetix

Let‘s start!

1. About the derivatives market

The market size of derivatives trading in the crypto market has always been larger than that of spot trading.

The market size in January 2023 was $2.04 trillion, up 76.1% from December, accounting for 70.3% of the overall cryptocurrency market.
This compares to an average daily trading volume of about $95 billion on derivatives and about $31 billion on spot for the top 10 CEXs in 2022

The market for perpetual contract decentralized exchanges is very large.

The perpetual contract is a unique futures contract in the cryptocurrency trading space and is one of the most traded derivatives today
15% of spot trading volume has been achieved through DEX, while perpetual contracts only account for 2%, leaving much room for improvement
BitMEX, Binance and other CEXs are still the main providers of contract products, but the FTX crash has accelerated users' distrust of DEX, which to a certain extent has driven the penetration of DEX

2. dYdX

💡 Takeaways💡

1. dYdX's Token use case shortage has throwback downward pressure. The growth of trading volume now is mainly due to dYdX rewards from trading and dYdX's lower trading commissions. And after users get the dYdX rewards, they will sell the rewards because there are not enough use cases, and it leads to the price drop. So the team announced in January 2023 to delay the unlocking to stabilize the price.
2. Moving to Cosmos may lead to dYdX milestone growth (maybe Cosmos is more noteworthy).
3. To get sustained growth, dYdX's token economics need to be better refined.

a. General Introduction

A decentralized order book derivatives contract exchange based on Ethereum. The project was founded in August 2017.
It has raised $87 million in four funding rounds since 2017, with a list of investors including A16Z, Paradigm, Polychain Capital, Kronos.

b. Team

Star team: Founder Antonio Juliano graduated from Princeton University in 2015, the others are from the University of Pennsylvania, Nanyang Polytechnic University, etc.

c. Mechanism

Traders: At the end of each epoch, the dYdX protocol will airdrop 3835616 dYdX, and each trader will receive a share of the reward for each epoch based on the fees and open positions generated by the trader's transactions.
Pledger: Pledges USDC into the liquidity pool/security pool for liquidity pledge mining.
Professional Market Maker: Liquidity provider mining, at the end of each epoch, the dYdX protocol airdrops 1.15 million dYdX.
dYdX: receives a trading commission, which is not shared with traders.

d. Data

dYdX has a TVL of $316m on March 16, 2023, ranking second in its category behind GMX's $539m.

Cumulative volume $30.7b, annual revenue $103.92m.

Trading is dominated by USD-BTC and USD-ETH.

3. GMX

💡 Takeaways💡

1. The supply of GMX is relatively small. The GMX allocated by the team only accounts for 1.88% of the total supply; and esGMX’s lock-in mechanism is attributed to the 2M GMX of the reserve fund.
2. GMX may perform well in the short term. tokens of GMX have many use cases and are also introduced on other protocols.
3. There is liquidity risk in a bull market. In a bull market, GLPs are bound to lose money by lending assets, while they are compensated for liquidity. But once the compensation is lower than the GLP’s loss, the LP may take away the liquidity.

a. General Introduction

A decentralized perpetual contract and spot exchange on the Arbitrum and Avalanche chains, founded in September 2021.

b. Team

Anonymous.

c. Mechanism

Traders: Pay “Borrow Fee”. Trade with assets in GLP’s asset pool and add leverage up to 50x. There is a zero-sum game relationship with the GLP and the transaction fee is related to whether the assets in the current GLP pool are overvalued/undervalued.
LP: Provides liquidity to the asset pool by minting GLPs and receives a 70% transaction fee, with the price of the token GLP varying with the price of the assets in the pool.
GMX Holders: Pledge GMX, get 30% transaction fee share, get esGMX\30% transaction fee and Multiplier points. esGMX can be used to vest and vote.

d. Data

The TVL of GMX on March 16, 2023 is $539m, the first ranked protocol of its kind.
Cumulative trading volume**$110.35B, total platform commission $169.46M, annual revenue $46.21m, number of de-duplicated users 169,879.
Total GMX token value is 13.25 M, esGMX is 2M.

4. Synthetix

💡 Takeaways💡

1. The high collateralization rate will have a large impact on the asset liquidity of sSYN, leading to a cap on the depth of the asset pool.
2. The overall mechanism design is quite interesting, with an ambitious vision and a long relative return on investment cycle.

a. General Introduction

Synthetix is actually a synthetic asset protocol on the Optimism and Ethereum chains. The project was founded in 2018 and was formerly known as Havven.
Technically speaking, the largest project in the synthetic asset space is makerDAO, but Synthetix is cutting into derivatives trading with synthetic assets, so it is placed in the decentralized derivatives trading track.

b. Team

Founder Kain Warwick flunked out of Sydney University in 2000 and used to be the guitarist and vocalist of the band. He founded Blueshyft, a crypto gateway.

c. Mechanism

Synthetix’s debt pool model is actually a dynamic zero-sum game
Liquidity user. Can go trade all kinds of derivatives and does not require counterparties, so there are no slippage and liquidity issues that you would normally encounter with DEX. The cost of trading is typically 3 per thousand
Liquidity provider. Also a holder of SNX. The sUSD can be minted by pledging SNX in the ratio of SNX : sUSD = 4:1. sUSD is minted and the system’s debt is assumed in proportion to the minted sUSD.