Deri Protocol: A lost pearl of the decentralized derivatives track
Research institution: Mint Ventures
Researcher: Li Yuxuan
Data update time: 2021–10–12
Introduction: In the previous article on scanning the track of decentralized perpetual contract futures platforms, we paid attention to Deri Protocol. In addition to perpetual futures, its new product “everlasting options” is also impressive. We conducted an in-depth exploration of Deri Protocol, which led to this article:)
1. Key points
Deri’s perpetual futures products have bold design and proper mechanism among similar products, and its everlasting options product is an extremely excellent innovative product, which is expected to disrupt other options trading platforms.
By comparing Deri with other perpetual futures and options projects, we conclude that Deri’s current valuation is moderate.
With the general trend of decentralized derivatives track and the strong support of short-term BSC, coupled with the upcoming trade mining, Deri is expected to usher in the Davis double-fold effect (i.e., performance growth and valuation increase).
2. Basic situation of the project
2.1. Business scope
Deri is a decentralized derivatives trading platform, which currently supports trading products including Perpetuals/Perpetual Futures and Everlasting Options products.
Perpetual futures is a new derivative product created by BitMex in 2016. Due to its no-delivery, liquidity aggregation and other characteristics, it has the highest trading volume in the centralized trading platform (CEX) now.
Everlasting options is a new product just born this year. Its concept was proposed by Sam Bankman-Fried, founder of FTX, and Dave White, a researcher at Paradigm, a crypto investment institution in May of this year. Deri is the first protocol to truly implement it. Similar to perpetual futures, everlasting options also have the characteristics of no-delivery and liquidity aggregation.
2.2. Team background
0xAlpha: Co-founder and CEO
He has a B.A. in physics from Peking University and a PhD in physics from Rice University. He has worked in derivatives
pricing/transaction/structure/risk management at Deutsche Bank, HBK hedge funds, and Goldman Sachs on Wall Street, and co-founded a quantitative hedge fund focused on traditional and crypto derivatives.
Richard: Co-founder and CTO
He has a B.A. in physics from Peking University and a PhD in physics from the City University of New York. He was once the director of quantitative trading strategy, responsible for the strategy development of high-frequency trading, momentum trading, and statistical arbitrage. He is also an expert in C++/Python financial system development, and a solidity/vyper programming and smart contract development expert.
Jason: Worked as an engineer at AMD and Amazon, graduated from the University of Washington.
Janice: She was a senior risk management manager at PricewaterhouseCoopers for 11 years, with two and a half years of operational experience at VeChain.
It can be found that the team has a good educational background, and the two co-founders have very rich experience in the derivatives industry in the traditional financial field, who are also deep participants in the cryptocurrency derivatives market. Overall, the team background is excellent.
2.3. Past financing situation
· The initial financing institutions included FBG Capital, BIXIN Ventures, Lotus Capital, Black Range, LD Capital, and the amount of financing was not disclosed.
· On April 26, it completed a round of financing, with investment institutions including AKG Ventures, Kryptos Research, and CryptoDorm Fund. The amount was not disclosed.
· In June, it received GSR investment, and the amount was not disclosed.
· On October 11, it received investment from WOO, a cryptocurrency market maker firm, and the amount was not disclosed.
It can be seen that the project has received many investments from professional trading institutions and domestic institutions, but the financing amount was not disclosed in several rounds of investment.
2.4. Historical development
· In February 2021, Deri started to launch mining on the three chains ETH BSC HECO at the same time.
· On March 4, its trading function was launched on the ETH BSC HECO three chains at the same time, with the trading pair as BTC/USDT and the basic asset as USDT BAC / BUSD / HUSD.
· On March 15th, it launched the cross-chain bridge between the ETH BSC HECO three chains.
· On April 26, it completed a round of financing with investment institutions including AKG Ventures, Kryptos Research, and CryptoDormFund. This round of financing was to give part of the circulating tokens in the hands of the team to the institutions and locked the position.
· On June 1, it was attached due to the delay of the oracle and fortunately, it was discovered in time so no actual loss was caused.
· On June 4th, the V2 version was launched on BSC. The V2 version mainly adds the functions of mixed margin/liquidity pool/trading pair. So now it not only allows users to use multiple currencies as the current trading pair margin, its liquidity pool but also supports multiple-currency deposit. In addition, multiple trading pairs share the same liquidity pool simultaneously.
· From July 13th to 14th, it launched WBNB, CAKE, and WMATIC successively as basic assets, thus starting to allow the use of non-stablecoins as collateral and LP.
· On July 15th, it connected to chainlink, and it enabled the oracle price transmission with a quotation gradient threshold of 0.1% on BTC-USD and ETH-USD.
· On July 22, it launched the innovation zone to support the trading of axs, mbox and other assets.
· In August, it was selected as the third Star of the Month for BSC MVB (Most Valuable Builder).
· On August 26, perpetual futures added an open area, where users can create trading pairs independently without permission.
· On September 1, everlasting options was officially launched.
· On October 11, it received investment from WOO, a well-known crypto liquidity provider.
· On October 12, it was named in the US$1 billion growth fund of Binance Smart Chain and it also announced the transaction mining plan, which will launch a DERI transaction mining incentive worth US$1 million within 1 month.
On the whole, the team has a compact work progress, and it has strong execution capability with rapid launched of everlasting options product.
2.5. Business data
Deri Protocol has little disclosure of trading volume data. Currently, its official website does not have a public panel of trading volume. The data available are mainly from monthly reports.
Based on the above data, the trading volume of perpetual futures is low, but it achieved a growth of more than 150% in September. On other hand, although just launched on September 1, everlasting options have already made a trading volume of more than US$115 million.
3. Business analysis
3.1. Industry analysis
Deri is a decentralized derivatives trading platform.
According to the TokenInsight report (https://tokeninsight.com/report/2835), the trading volume of derivatives has exceeded that of spot as a whole since the fourth quarter of 2020, and maintained a more rapid growth in the second quarter of 2021.
Most of these trading volumes come from CEX.
The decentralized spot trading platform began to flourish in the summer of DeFi in 2020. At present, UNI, CAKE, SUSHI and other project tokens have entered the top 60 of circulating market capitalization of cryptocurrencies, and UNI has even entered the top 10. Meanwhile, dYdX, the decentralized derivatives trading platform with the highest market capitalization, has just entered the top 100.
Therefore, whether comparing with centralized trading platforms or decentralized spot trading platforms, the track space of decentralized derivatives trading platforms is very broad.
In the track of derivatives segment, in terms of token market capitalization or the trading volume of trading platform, the current cryptocurrency projects are mainly futures (perpetual futures), while the overall trading volume of options projects is not too high now.
According to the tokeninsight report, the total trading volume of crypto options was US$119.2 billion in the second quarter of 2021, of which the vast majority (US$92.4 billion) came from Deribit, a centralized trading platform. In the same period, the total trading volume of crypto perpetual contracts was US$18,857.2 billion, so the volume of options was less than 1% of perpetual contracts. In traditional financial markets, the trading volume of futures and options is close, and options have an advantage in terms of open interest.
In the traditional financial field, options are mainly hedging tools used by institutional or professional investors. In the crypto world, although options products have been introduced for a long time, the trading volume of options is not high because they have high operating cost as well as too dispersed liquidity, and the main users in traditional finance — institutions have not yet entered the crypto market. In this bull market, an obvious trend we can see is the massive entry of compliance institutions, which can bring more hedging demands and higher demands for options business.
Therefore, in the segment track of derivatives, the development stage of options is an earlier stage, and its space should be larger.
In addition, we can also see that at the regulatory level, the supervision of derivatives trading platforms is stronger than that of spot trading platforms. In this context, the significance of decentralization is more prominent.
3.2. Project mechanism
3.2.1. Perpetual Futures
In the design of Deri’s perpetual futures, there are mainly two types of roles: trader and liquidity provider (i.e., LP):
· After depositing basic assets, traders can trade various assets on Deri without slippage. Their transactions are executed in real time at the price of the oracle, and their yields can be settled and withdrawn in real time.
· LP can deposit basic assets into the liquidity pool. The liquidity pool always acts as the counterparty of the trade, including operations such as opening, closing, and forced liquidation. Traders interact directly with the liquidity pool. There is a direct game between the trader and the LP: if the LP and the trader are regarded as a whole respectively, the loss of the trader is the gain of the LP, and the gain of the trader is the loss of the LP.
This design originally comes from Synthetix, a synthetic asset protocol. On Synthetix, all LPs jointly bear the payment to traders. The losses of traders are the gains of LPs, and the gains of traders are the losses of LPs.
This design can be abstracted as “the transaction is executed at the price of the oracle, and all LPs bear the redemption.” For traders, the benefits of this design are obvious: because the transaction does not require a direct counterparty, the transaction is executed based on the price of the oracle, the transaction depth is unlimited, and there will be no slippage.
However, for LP, there is a significant risk: if the positions held by the trading users are all in the same direction, then LP may face serious losses in the unilateral market, even affecting the stability of the entire system. Let’s take ETH as an example, if trading users have more long positions in ETH as a whole (which often happens), the traders will make significant gains in the unilateral market where ETH has risen sharply, while LP loses a lot. On the one hand, the loss will affect the willingness of LPs to continue market making. On the other hand, because LPs bear the redemption of all traders, when LPs suffer a serious loss, the redemption ability of the whole system is also a hidden concern.
In order to solve this problem, Synthetix encourages all LP users to allocate their assets for hedging according to the overall position of the system. On the other hand, it also uses SNX tokens for a long period of time to motivate users to short, so as to offset the risks brought to LP by users’ enthusiasm for long ETH. In addition, in the recent sip-181 (https://sips.synthetix.io/sips/sip-181/), Synthetix also considers solving this problem through the adjustment of the core mechanism.
On the other hand, Deri solved this problem well by drawing lessons from the funding rate mechanism of centralized trading platforms. In Deri’s perpetual futures design, the net position party needs to pay a funding fee, which will be allocated to the counterparty (because LP is also the counterparty, LP will also receive this funding fee). Let’s take an example to explain Deri’s funding rate mechanism: at a certain moment, if long parties hold 1000 contracts and short parties hold 700 contracts, all long parties need to pay a funding fee, 70% of which goes to the short party, and the remaining 30% is allocated to LP. In this way, Deri not only maintains the excellent experience of no slippage trading for traders, but also ensures the stability of the system in the long run.
Deri currently supports transactions on the four chains of BSC, Polygon, ETH, and Heco, but the official mainly incentives BSC and Polygon (providing liquidity on these two chains will obtain the official $DERI token incentives):
· In the main area of BSC, the basic assets are BUSD, WBNB, and CAKE, and the current trading targets include BTC, ETH, and BNB;
· In the innovation zone of BSC, the basic assets are BUSD and DERI. The current trading targets include AXS, MBOX, iBSCDEFI (an index composed of 6 DeFi tokens on the BSC chain), iGAME (an index composed of 7 game tokens), ALICE, and AGLD;
· In the main area of Polygon, the basic assets are BUSD, WBNB, and CAKE, and the current trading targets include BTC and ETH;
· In the innovation zone of Polygon, the basic assets are USDT and DERI, and the current trading targets include AXS, ALICE, SAND, QUICK, GHST, and AGLD;
· In addition, Deri also has an open area on BSC, allowing users to independently create transaction targets (and set up basic assets by themselves).
From the above, we can see that the main zone corresponds to the trading of mainstream assets, and it is relatively aggressive in basic assets, allowing some non-stablecoins with good liquidity and high market capitalization on the current chain to be used as basic assets. The innovation zone supports the trading of some popular new tokens, and the basic asset adopts the combination of stablecoin + Deri. On the one hand this can ensure the stability of the basic assets in the innovation zone, on the other hand, it also gives a use case for the DERI token. Third, the existence of the open zone is the embodiment of “open finance”: anyone can add transaction targets, and the whole process is completely decentralized without anyone’s permission.
In terms of transaction fees, Deri allocates 80% of the transaction fees to LP, and the remaining 20% goes to DAO FUND for regular buyback and burn.
3.2.2. Everlasting options
Deri’s everlasting options product is the first perpetual options product (on the earth), which is based on a paper published by Paradigm researchers Dave White and Sam Bankman-Fried in May this year.
To understand everlasting options, we need to briefly understand options first. A typical option product is “BTC-21OCT30–55000-C”: Among them, BTC refers to the trading target; 21OCT30 refers to the expiration date; 55000 is the exercise price; C (CALL) refers to the direction of the option, which is a call option, and the corresponding is the put option P (PUT).
Therefore, the above “BTC-21OCT30–55000-C” means that on October 30, 2021, the BTC exercise price is $55,000 for a call option. In addition, options are also divided into European options (cannot be exercised before the expiration date) and American options (can be exercised before the expiration date) and so on.
It can be seen that different trading days, different exercise prices, or different directions will form new option products, so the liquidity fragmentation of options will be more significant than delivery futures.
The trading object of Deri option products is everlasting options. The price of everlasting options is based on the Black-Scholes pricing model (a common option pricing model). After obtaining the spot price and volatility data through the oracle, it is calculated based on the pricing formula of everlasting options derived by Deri.
In terms of market-making algorithms, the everlasting options products of Deri use the DPMM mechanism (Derivative Positive Market Maker). DPMM is based on the PMM algorithm created by the spot trading platform DODO. PMM is also an automatic market-making algorithm (AMM). However, it differs from Uniswap and other constant product market makers (CPMM) in that the PMM mechanism will actively aggregate the liquidity in the pool to the current price, so as to achieve better transaction depth.
The DPMM mechanism is a variant that brings the PMM mechanism into the specific scenario of everlasting options.
Similar to perpetual futures, Deri’s everlasting options always have the liquidity pool as the trading counterparty. Users can make market by depositing BUSD in the liquidity pool. The liquidity provider (LP) and trader as a whole are also a zero-sum game. If traders lose, LP will gain; if traders gain, LP will lose.
However, unlike perpetual futures, there is no oracle that can directly obtain the price of an option. Therefore, the transaction price of a trader’s everlasting option on Deri is mainly determined by the following two factors:
The first is the “theoretical price” of an option, which cannot be directly provided by an oracle. The “theoretical price” of Deri everlasting options is calculated based on the everlasting option pricing formula derived by itself. The pricing formula is mainly based on the Black-Scholes pricing model (a general option pricing model), and it needs to obtain the spot price and volatility data from the oracle. Deri disclosed in detail the pricing calculation logic and derivation process in the white paper of everlasting options. Readers who are interested in it can go to https://github.com/Deri-inance/whitepaper/blob/master/Deri_everlasting_options_whitepaper.pdf to view it.).
The second is the DPMM algorithm. After determining the theoretical price, the actual transaction price is determined based on the current LP liquidity and the current net position of the system.
Among them, the second factor is also to prevent the loss of LP caused by the excessively high option position in one direction to some extent. It is the protection to LP. Under the non-linear yield curve of options, the yields of LP need to be protected very carefully.
In addition, Deri’s everlasting options also have a funding rate mechanism, but the funding rate logic of everlasting options is not the same as that of perpetual futures, and it is more similar to traditional options which disperse a single premium to be paid every second. Compared with traditional options products, the advantage of this is that the liquidity of the options can be improved, and the held option products can be cash-outed at any time according to the market price. Of course, the funding rate of an option is also related to the option price, which can also play a side role in reducing the possibility of system loss caused by the excessively high option position in one direction. For example, for a call option, when the long sentiment is high, the price of the option will increase, and the funding rate will also rise, raising the cost of holding the position and thereby somewhat inhibiting the enthusiasm for long.
At the same time, Deri’s liquidity pool can also support multiple targets simultaneously. At present, all DERI options, including 4 options of BTC and 4 options of ETH, are traded by the BUSD liquidity pool as the counterparty.
In summary, under the above mechanism, combined with the non-linear characteristics of the option itself, the product provided by Deri is a product with a continuous quotation and good transaction depth for a given exercise price and option direction. In addition, by formulating different strategies, multiple demands can be achieved.
For example, the deep out-of-the-money option lottery strategy. Out-of-the-money option refers to a call option whose current price is lower than the exercise price or a put option whose current price is higher than the exercise price. By buying call out-of-the-money options or selling put out-of-the-money options, extreme leveraged returns can be achieved. The picture below is Deri’s BTCUSD-50000-C product. The red and green bars in the picture below represent the price of Deri options, and the blue line chart represents the price of BTC (note that the left and right axes are different, and the options on the right quotation axis is non-linear).
We observe that the price of BTC has risen from 42000U to 55000U, and the price of BTCUSD-50000-C has risen from 3U to 5488U. Although the long party still needs to pay the funding fee in the process, it is still much less than the yield rate. This is also the charm of non-linear yield products such as options, which used to for small broad extremely.
Another example is the covered strategy, which collects funding fees by selling out-of-the-money options with a high exercise price. As long as the judgment is correct and the margin is sufficient, you can gain the increase the currency standard itself and reap funding fees at the same time.
An example of a covered strategy is as follows: Alice is a long BTC and firmly believes that BTC can rise to US$100,000, so Alice can sell BTCUSD-100000-C everlasting options while keeping enough collateral in the margin account. As long as Alice’s short position is maintained (that is, the balance is higher than the minimum margin requirement), when the price of BTC reaches US$100,000, Alice can not only get the increase in BTC itself (BTC is still in Alice’s hands), but also can obtain the financing expenses paid by the long position during the period.
Of course, the above strategies can also be realized through traditional options, but Deri greatly simplifies the difficulty of understanding option products. It simplifies the complex option pricing process to a variable option price, and the trading product itself has good liquidity, by which the option products can be allocated new funds at any time (the position can be closed at any time). This is also a big advantage over traditional options products.
Compared with similar products, Deri also pays great attention to the composability of protocols. The composability mainly lies in two aspects: whether the products of other protocols can be used, and whether the products of its own protocol can be used by other protocols.
In terms of “utilizing the products of other protocols”, on Polygon Deri supports the use of amUSDC, AAVE’s USDC deposit certificate as an underlying token (it can be use as either a margin or a market maker for LP). This provides users the opportunity to participate in perpetual contract transactions without losing the returns of AAVE deposits.
In terms of “the product of its own protocol is used by other protocols”, Deri’s user positions are also NFTs like Uniswap-V3’s LP, leaving room for interaction with other protocols.
In addition, the founder 0xAlpha also revealed in the AMA that they will develop a package of “perpetual products” after perpetual futures and everlasting options.
3.3. Competitive landscape
3.3.1. Perpetual Futures
In terms of the on-chain perpetual futures trading platform, Deri has many competitors. For the mechanism comparison between Deri and these competitors, you can refer to this article (https://www.chainnews.com/articles/401282432144.htm).
In general, the author believes that Deri’s mechanism is more excellent from the perspective of product mechanism:
· It adopts a bold mechanism of “the transaction is executed at the price of the oracle, and all LPs bear the redemption”, and also uses a funding rate mechanism to effectively balance naked positions (excessive positions in one direction will bring dangers to the system).
· Compared with similar GMX and Cap Finance, it also has a more perfect naked position processing mechanism.
· Compared with Perpetual Protocol, MCDEX, Futureswap and other protocols that adopt some kind of AMM mechanism to determine the transaction price, Deri performs betters in the transaction depth.
However, the current excellence of the Deri mechanism is not reflected in the trading volume. Compared with MCDEX, GMX, and Cap Finance, the trading volume of Deri perpetual futures is much smaller. This is certainly related to the lack of trade mining incentives and the fact that BSC lags behind in the public chain competition in the short term. In addition, it also shows that the team still needs to continue efforts in operation promotion and transaction stimulation.
However, with the announcement of the US$1 billion ecological incentive fund plan by BSC on October 12 and the trade mining plan announced by Deri at the same time, both will produce fundamental changes.
3.3.2. Everlasting options
In terms of everlasting options, apart from Deri, only Shield also on the BSC has launched (at least on the test network). However, Shield’s products are still in the internal testing stage and cannot be really compared with Deri.
On the other hand, there are many projects focusing on option products, including Hegic, Opyn, Lyra, Premia, Hedget, and so on. Among them, Opyn is an old options project, but its liquidity is scarce with little transactions. Now it is also planning to do everlasting options. Hegic, which was highly expected by the public in the past, had an average monthly trading volume of no more than US$30 million after the new launch of its V8888 version. In the last month, it has only two days of trading. Lyra, which relies on the Synthetix ecosystem, was launched on Optimism Ethereum (OE). However, due to the progress of the entire OE ecosystem, it has not yet made a big breakthrough. In addition, other projects either have not issued coins, or their trading volumes and user size are relatively small with little influence.
Although Deri was launched in just one month, it has more than US$100 million in trading volume.
Perpetual futures have developed very rapidly since it was founded by Bitmex in 2016. The trading volume is now close to 10 times that of delivery futures (Tokeninsight report in Q2 of 2021), and it still maintains a quarterly growth of more than 50%. The emergence of perpetual futures shows that the market recognizes simpler and easier-to-operate trading products.
From this perspective, the meaning of everlasting options is the same as that of options, even closer. Everlasting options cancel the concept of maturity date, avoiding the trouble of exercising and position transfer, and shifting positions. It also simplifies the pricing result of the complex Black-Scholes pricing model into a simple option price, resulting in the K-line loved by traders, so that newbies can easily play with options through some exploration. As a result, the potential user group of the product has been greatly increased. In addition, the problem of the transaction depth of everlasting options has been well solved through the design of shared liquidity pool + DPMM.
The author believes that everlasting options products are likely to outstrip options products, similar to perpetual futures products surpassing delivery futures products. In the field of options, Deri’s everlasting options products currently have no real competitors.
3.4. Token Economy
Deri Protocol’s native token DERI is 1 billion in total, including:
· 600 million tokens are allocated to liquidity mining, and a total of 44.7 million tokens have been released so far.
· 360 million tokens are allocated to the team and investors, which will be linearly unlocked within 2 years. Since Deri did not disclose the specific investment amount and valuation in any round of valuations, we do not know the exact ratio of the team to the investors.
· 40 million tokens are allocated to the vault.
According to Coingecko data, 131,192,006 DERIs are currently in circulation.
In terms of use cases, in addition to governance, DERI is mainly used to incentive LPs, including LPs of perpetual futures and LPs of everlasting options.
DERI tokens can capture 20% of the transaction fee by depositing it in the DAO fund, regularly buy-backing DERI from the secondary market and burning it.
3.5. Risks
a. Oracle risk
Decentralized derivatives projects have the highest reliance on the oracle among all major DeFi protocols. If the oracles cannot transmit data accurately and in real time, risks are very likely to occur. In the history of Deri, there have been problems with oracles. The team actively collaborates with oracles service providers (sponsoring Chainlink) to provide oracles with a smaller quotation gradient, thus such risks will be reduced especially with the improvement of the overall service capabilities of oracles. However, they are unavoidable fundamentally.
b. Risk of insufficient promotion
Currently, Deri mainly provides services on BSC and Polygon. However, these two public chains have been at a disadvantage in the recent public chain competition, and the derivatives transactions on the chains are relatively inactive.
However, with BSC’s US$1 billion fund plan to provide liquidity support to the BSC derivatives trading platforms on October 12, and Deri being named MVBiii Star of the month for two consecutive months, this risk should be reduced.
c. Security risk of smart contracts
Smart contract security risk is an inherent risk in all DeFi projects. The perpetual futures and everlasting options products of the Deri team have been audited by Peckshield. The latest perpetual futures contracts have also been audited by Certik. Thus, smart contract risk is relatively small.
d. Risk of first-mover disadvantage
Deri’s everlasting option is currently the first perpetual option product to be implemented, so it has a first-mover advantage. However, in commercial practices, the first mover may not be able to continuously gain advantages. Instead, the latecomer has made targeted improvements to the first mover’s strategy to achieve corner overtaking. For example, Bancor was the first to achieve AMM, but Uniswap is the one to carry it forward. At present, Deri’s everlasting option code has been open source, and there is the possibility of being forked and integrated, so there is a risk of certain disadvantages as the first mover.
4. Preliminary valuation
4.1. Five core questions
What business cycle is the project in? Maturity stage or the early and middle stage of development?
Everlasting options, as the new core product of the project, is a brand-new trading product, that is in the early stage of development. In general, the entire track of decentralized derivatives is also in the early stage.
Does the project have a solid competitive advantage? Where does it come from?
The competitive advantage of the project mainly comes from the product mechanism and the team, and the product mechanism ultimately comes from the team too. The team has a very good sensitivity and understanding of DeFi and derivatives. They designed perpetual futures products with a well-functioning mechanism and good operation, and further successfully launched everlasting options products in a very short time.
Is the medium and long-term investment logic of the project clear? Is it in line with the industry trend?
The medium and long-term investment logic of the project is clear. The decentralized derivatives track has become hot with the launch of DYDX. The new everlasting options product of the project is also the first perpetual option product in the world. Moreover, Deri pays special attention to composability in product desin, which is in line with the general trend of open finance.
What are the main variables in the operation of the project? Are these variables easy to quantify and measure?
At present, it is mainly concerned with the operation of the project mechanism, the changes in the LP share of perpetual futures and everlasting options (indicating the stability of the system), and the growth of trading volume. Externally, we need to focus on whether there are strong competitive imitations of everlasting options, or products that are not imitations but can meet the same needs, as well as the actual diverting situation.
What is the management and governance of the project? What is the level of DAO?
The DAO module has been launched, but generally speaking, it is still led by the founding team. For a professional derivatives trading platform such as Deri, DAO is not suitable for key decisions related to product evolution path, parameter setting, trading pair setting, etc. It is only suitable to adopt DAO in matters such as fund allocation, which Deri is currently doing.
4.2. Preliminary valuation
We are unable to obtain accurate information on Deri’s transaction fee income. After the everlasting options went online, Deri’s core product has become everlasting options from the perspective of trading volume, which is equivalent to a change in the main busines. So, we are currently unable to conduct a vertical valuation assessment (after more data is available for everlasting options later, we will follow up Deri’s vertical valuation comparison in the subsequent bi-weekly reports, and everyone is welcome to continue to pay attention).
4.2.1. Horizontal valuation comparison
The development of projects including decentralized perpetual futures and decentralized options is at an early stage. Therefore, we do not use revenue data for valuation. Instead, we calculate the average daily trading volume and market capitalization of perpetual futures and options projects. Then we use the index of “average daily trading volume/circulating market capitalization” to conduct horizontal valuation comparison.
In the above table, Hegic is an option project, and the others are perpetual futures projects. The trading volume of Deri includes the trading volumes of perpetual futures and everlasting options.
As you can see, the “average daily trading volume/circulating market capitalization” is between 0.12 and 0.22 for projects without trade mining. This index will be higher for projects with trade mining (Deri also announced trade mining plan, and we will follow up on the progress of its trade mining).
At present, there are different opinions on the trade mining boom triggered by dYdX in the market. The author believes that for trading platforms, even in the long run trade mining still contributes to the growth of its main business. Trade mining is essentially an IDO positioning (exchange for project tokens through transaction commissions). However, because the trade mining mechanism is naturally sticky, it is easier for users to continue trading on platforms with trade mining. Users acquired through the trade mining mechanism are likely to become long-term valuable users of the trading platform even after the incentives cease.
Of course, the trade mining mechanism will distort the platform’s core data such as trading volume and revenue, which will have a great impact on valuation analysis.
In general, based on the extensive horizontal valuation comparative analysis, we conclude that Deri’s valuation is moderate.
4.2.2. Summary
Deri’s perpetual futures product has bold design and perfect mechanism among similar products, and its everlasting options product is an extremely excellent innovative product, which is expected to disrupt other options trading platforms.
We compare Deri with other perpetual futures and options projects and conclude that Deri’s current valuation is moderate.
With the general trend of decentralized derivatives track and the strong support of short-term BSC, coupled with the upcoming trade mining, Deri is expected to usher in the Davis double-fold effect (i.e., performance growth and valuation increase).
5. Reference
https://github.com/Deri-finance/whitepaper/blob/master/Deri_everlasting_options_whitepaper.pdf
https://www.chainnews.com/articles/851199049188.htm
https://www.paradigm.xyz/2021/05/everlasting-options/
*This article is not considered as financial advice. If you find that there are errors in facts and data in this research report, please give me feedback and I will revise the research report.
