Today, we are going to delve into derivatives, and consider why DeFi is so damn impressive.

Derivatives are financial contracts or instruments that are based on the value of an underlying asset. Globally, they are estimated to have a notional value of $1 quadrillion – that’s a whole lot of pocket change (or 3x the estimated total global wealth, if you want to look at it that way).

‘Derivative’ is an umbrella term, that can apply to a huge range of contracts and instruments, but there are 2 clear top dogs in the crypto space: futures and options.

DeFi Derivatives

Let me talk to you about why DeFi derivatives are an absolute game-changer.

Selling options is a complex task, and one that requires constant evaluation and deep thought (or use of an algorithm) to be profitable. It isn’t suitable for your average retail investor. However, options selling, when done right, can be very profitable.

Until DeFi, hedge funds and the ultra-wealthy have kept this all to themselves. This isn’t purely selfish, the logistics of allowing retail investors to put up capital for options selling is extremely complex and almost impossible with the bureaucracy of traditional finance.

Let’s talk about how this is changing…

DeFi Options Vaults (DOVs)

DOVs allow users to benefit from the returns of options selling. You simply ‘stake’ (deposit) your assets in a vault, which will deploy them into your chosen options strategies automatically. There’s a wide and rapidly expanding range of assets and strategies available. DOVs claim users can earn high (generally advertised as 15-80%) sustainable yields.

Benefits of DOVs:

  • Speed up adoption of DeFi options by an order of magnitude.
  • Address supply and demand issues in DeFi options markets.
  • Allow (potentially) sustainable high yields with no token inflation.
  • Form part of complex structured products, democratizing access to previously unattainable yields.
  • Strategies that were only accessible to hedge funds and the ultra-wealthy in TradFi, open to anyone, and for anyone to build.

DOVs are an incredible innovation, but we’ve only scratched the surface of what is possible…

DeFi’s True Genius

The true gem of DeFi is the ‘money-Legos’ ethos that it embodies and allows. DOVs are an example of this, but they are only the tip of the iceberg.

Protocols can build on top of each other, helping facilitate their respective goals and building previously impossible products and services. As quick as protocols can come up with ways to work and build together, we will see new uses and collaborations, and consistent innovations of what is possible. A simple example would be a structured product vault, built on top of a futures protocol, an options protocol, a DeFi loans protocol, staking contracts and more, to build one unbelievably efficient and fully automated yield generation machine.

Many players in the space are already working on this, but it will only get more efficient from here. More efficient = higher yield.

This is only one example of what is possible…