A deeper dive into DeFi, Part IV: Derivatives

by Alyona Shepilova

In the final part of our DeFi series we'll look into derivatives, asset management and insurance

DeFi derivatives

A derivative is a contract that derives its value from the price of an underlying asset. Two main reasons for using derivatives are insuring against price fluctuations of the underlying asset (also known as hedging) and speculation. High-risk by nature, we strongly recommend not to trade derivatives without sound financial knowledge and skills.

One of the most well-known solutions for issuing and trading DeFi derivatives is Synthetix. Synthetic assets or synths follow the underlying asset's price and allow holders to profit on assets without actually owning them.

The three available types of synths are fiat (sGBP, sEUR, sUSD etc.), crypto (sBTC, sETH, sLINK etc.) and index (sDeFi). SDeFi is comprised of a variety of tokens, and the value of the synth depends on their performance, so it's a working solution for risk diversification. You can easily trade synths on Synthetic.Exchange. Since you're trading directly with a smart contract, you won't have to worry about liquidity and processing times.

Suppose you're not planning to start trading derivatives just yet, but still appreciate the idea. In that case, you can always consider investing in the native tokens of the DeFi derivatives platforms. With Cryptopay, you can buy SNX simply, in just a few minutes.

We will be finishing our DeFi tour by taking a peep at asset management. It's only fitting as this category incorporates all the ones that came before (see parts I, II and III).

Derivatives are high-risk by nature. We strongly recommend not to trade them without sound financial knowledge and skills

Asset management and DeFi

Not to mince words – DeFi can be remarkably lucrative. It can also help you lose all your money very quickly. Trading is hard: it requires knowledge, skill, experience and a good portion of dumb luck.

But if you want to hop on the bandwagon of crypto trading no matter what, there are options. Some platforms will provide you with the tools necessary to navigate the ever-growing DeFi space: analyse it, find the right opportunities and maybe even do some trading for you. We're talking about DeFi asset management solutions.

Such platforms are usually non-custodial, meaning that they don't hold your funds. To start using them, you just need to connect your wallet. You will then get exposed to various DeFi projects such as lending, DEXs and derivatives. Asset management platforms can either help track and manage your assets, or they will play a more active role. For example, they can add collateral and liquidate positions when necessary without your intervention.

DeFi is vast, so asset management solutions can help you keep track of and optimise your trading activities. As always, though, research vigorously before starting with one – you will be trusting it with your money.

And the very last one for today – insurance.

What is DeFi insurance?

Born in 2018, DeFi is growing with tremendous speed. As of May 2022, the total value locked (TVL) in the ten biggest DeFi projects is approaching 53 billion dollars. At the same time, a few reasons might prevent it from reaching its full potential. One of them is that playing the DeFi game is too high-risk. Therefore, there must exist a solution to protect participants from financial loss. That's what DeFi insurance is all about.

Insurances in DeFi are pretty similar to insurances in traditional finances: you choose the provider, the duration and the amount, and if worse comes to worst – you receive a cover. When selecting a provider, you should pay close attention to what the insurance actually covers. Is it a stablecoin price crash? Is it a DEX running out of liquidity? Is it a protocol exploit or a hack? These all are very real worries, which, incidentally, shouldn't be disregarded when starting with DeFi.

Ok, so where do the insurance funds come from? No surprise here – from the insurance pool. An individual or company that provides funds to the pool qualifies as a liquidity provider and is entitled to a share of the bought insurance. Buyers pay more for riskier DeFi projects; the risk level is decided upon by risk assessors. There are also claims assessors who review claims and decide on whether they should be paid or not.

DeFi space is constantly evolving. And so are the risks of hacks and exploits. Paying for DeFi insurance might be a great way to protect yourself, especially if you plan to go big.

And with that, we're done. Now you definitely know about DeFi as much as the next person (or even more).

Explore other parts of our DeFi series:


Please note: From October 8, 2023, at 8 AM UTC, the new rules governing Financial Promotions come into effect; UK Customers will no longer be able to make Bank Deposits, buy cryptocurrencies with a bank card, and use Exchange functionality to buy or sell cryptocurrencies.

Check what services are available here.

Explore other articles