The Multi-Chain Derived Platform enables the creation of synthetic assets that track the value of assets in the real world. This article will explain the current state of the industry and how derived protocol enables creation of these derived assets, what are some of the features that give us unique advantages in this space.
What are Derived (Synthetic) Assets?
Derived (synthetic) assets like in traditional markets allows users to own the underlying assets / instruments without necessarily having to hold them. In crypto currency markets, this gives the user to gain exposure to the assets, giving investors the leverage to trade digital and traditional assets, while staying in the crypto ecosystem. For example: we can have xUSD and derived token to USD or xBTC as a derived token for BTC or xAPPLE as derived token for apple shares, so on and so forth. The applications of derived tokens are limitless. There can also be a basket of synthetic assets (example: Synthetic S&P 500, Synthetic NASDAQ etc.,). By theory anything that has a clear, definite and easily trackable price can be synthesized. Synthetic assets are not backed by the real assets, there is no peg and you do not need to deposit your real asset in any smart contract and that is why it is called a derived (or synthetic) asset. But, why would you need one?
Need for Derived assets
The traditional Derived assets are options, futures or swaps — that simulate an underlying asset — stocks, bonds, commodities, indexes, currencies or interest rates. The average volume in the US Equity market alone is 50 trillion with a 3 billion daily average.
It is very hard for any person from other parts of the world to buy stock in the US and vice versa. In some recent cases, people who were in the US were denied to buy or sell certain stocks by their own brokers. This exposed the fault lines in the centralized platforms that can dictate unfair terms to the users.
The Decentralization of Finance (DeFi) movement was started to address these issues, and there were a lot of solutions offered in the DeFi space. The current influx of users are entering the crypto markets is mostly though centralized exchanges that offer easy on-boarding. Most of the new users do not completely understand the benefits of decentralized platforms. The synthetics trading market is on a cusp of an explosive growth, as seen in last 3 years with decentralized exchanges like Uniswap. It is bound to grow once the Institutions and traditional Finance users realize the true power of DeFi.
Current Market State
This past year has seen an influx of retail, institutional and traditional financial market traders entering in to the crypto markets. The current synthetics trading landscape is dominated by few major platforms. There is a general lack of understanding around the decentralized synthetics trading. Most platforms are based on Ethereum, which is still struggling with scalability issues and high transactions cost. This has been a roadblock in the adoption of these platform and DeFi in general. These chains also have long block times (20 — 30s) and persistent issues like front running, which means that no serious trades can be executed on these exchanges.
The second issue with the current platforms is that they have a very high Collateralization Ratio (CR) that is required to be maintained in order to mint synthetic assets and to trade them. The Collateralization ratio can be as high as 650% and is usually fixed by the platform itself. To understand this problem, just imagine buying a crypto token worth $650 to be able to trade for $100 worth on a synthetics platform. There is no flexibility in regards to the CR and there is a huge locked collateral in these platforms that is underutilized.
Moreover, the current platforms are not able to attract enough users onboard primarily due to 1. Lack of easy on-boarding; 2. Inability to adapt to the emerging market trends; 3. Focus on a limited assets types. All these challenges have been the bottleneck for years that has been plaguing the current platforms.
Welcome to the DERIVED Platform
Derived finance aims to propel the usage of synthetic assets on Polkadot. In the age of blockchain, transparency, censorship resistance and globally distributed characteristics makes tokenization of assets a lucrative investment opportunity for an average person to invest in stocks, commodities and any other assets in the world.
The Derived platform will be built primarily on Polkadot that means that it instantly inherits all the interoperability, security and scalability features of the Polkadot Architecture. The cheap and fast transaction time on Polkadot solves the issue of high gas fee of the other blockchains. Also, Derived will be a multi chain platform that means the users on popular blockchains, like Ethereum, BSC etc., will still be able to access the platform from any major blockchain. The platform is built to scale over all major blockchains while retaining the cheap and fast transactions.
Derived will also be the first and only platform that allows Leveraged Minting to its platform users. That means that users are no longer locked in with a high Collateralization Ratio (CR), but will be able to use leverage up to 3x and thereby decide the CR with which they want to mint the synthetics assets. Based on the leverage the CR will vary thus each user will be having the flexibility to mint using their individual risk tolerance. This gives the power back to the user and frees the locked collateral potential.
Derived will also be the first platform that would allow its user unique features like the ability to create Hybrid Tokens and access to features like Binary Options, multiple native currency support, among many others.
Conclusion
Derived Finance is the first and only true Multi-chain Synthetics Trading Platform. The platform is built on Polkadot that allows it to have high throughput and efficiency at its core. It is a horizontally and vertically scalable platform that would be accessible across various blockchains as well as across multiple platforms. It offers a unique bouquet of features like Leverage Minting, Hybrid Tokens, Binary Options among many others.
In the upcoming weeks we will be discussing individual features in detail and how they work and overcome the shortcoming of other platforms. Till then, make sure to follow us on our social handles (Telegram, Twitter and Website) to keep up to date with the latest news.
