How to Scale DeFi Derivatives Market

The three major areas of the decentralized finance (DeFi) market are permissionless trading, permissionless marketplace creation, and permissionless market making. These last two are essential for a DeFi derivatives market to develop effectively and increase liquidity provider yields.

Due to the development of on-chain Web 3.0 wallets and the acceptance of these wallets by almost all DeFi protocols, permissionless trading has so far received the most widespread adoption. In contrast, the development of decentralized marketplaces and market making are more recent developments made possible by automatic market makers (AMMs).

AMMs have not, however, resulted in the establishment of equally decentralized marketplaces for the spot and derivative markets. Any asset is able to be traded on the spot with any other asset, even though a marketplace for that combination doesn't yet exist, a swap can still be performed by routing through a third-party asset such as USDC. As a result, the market is very composable and simple to incorporate for tokens.

However, this is more difficult in the derivatives market. Different protocols have been developed in response. In order to establish a constant product that can supply both long and short liquidity, one solution is to generate on-chain perpetual liquidity. By completely eliminating the function of the liquidity provider (LP), this model eliminates the risks associated with it. Nevertheless, doing so shifts the risks from the LP to the protocol.

A liquidity provision mechanism that LPs can and want to use is the foundation of permissionless derivatives. A protocol would address the liquidity problem for derivatives if it could determine whether a product and its market match. Inverse contracts would be one such perpetual outcome. These enable merchants to exchange their own tokens for other ones instead of obtaining stable coins. In a similar manner, liquidity can come from LPs.

The DeFi derivative market can grow with inverse perpetual. Given a price oracle, they allow the creation of perpetual contracts denominated in any asset, including stablecoins, cryptocurrency assets, LP tokens, and index assets. Protocols and decentralized autonomous organizations (DAOs), for example, have seen enormous success in DeFi 2.0 by creating a use case for LP currencies. The inclusion of all cryptocurrency assets in derivatives exhibits a comparable development vector.

How to Enhance Yield?

The market for DeFi derivatives will also be scaled up using higher and improved yields for liquidity providers.As liquidity availability on the derivative protocols is made more decentralized, a new derivative yield market, in addition to loans as well as swap-yield pools, will emerge.

Derivative liquidity pools will compete with swap and landing pools, which will increase asset-holding values and provide new opportunities for yield hunters. As market makers and limited partners (LPs) in derivatives take on relatively higher risk profiles, the competitive annual percentage yield (APY) is made critical in attracting liquidity.

In the landing market, LPs can profit from a passive yield of their liquidity.As counterparty traders in the derivatives market, LPs are constantly exposed to risk. Due to the inherent risk associated with providing derivative liquidity, a model for providing liquidity that is as effective as possible and only includes one participant must include a risk adjustment design that automatically balances the risk-reward ratio.

It is practical to accomplish this risk-reward balance for the provision of derivative liquidity using a rebase funding rate. A rebase funding rate has been a paid-to-LP funding rate strategy that gets funding rate payments via the pool for trading leverage for a liquidity pool through rebase according to its present liquidity risk exposure calculated by a ratio of mismatched trades to the liquidity pool value.

How to Connect to Qilin Protocol?

These ideas have already been well received by those trying to expand the DeFi derivatives market. On November 16, Qilin's V2 Public Testnet went live after a two-month closed beta testing phase. It is a significant accomplishment before the launch of Qilin's V2 manner.

During the initial week of testing, 743 distinct addresses as well as six market pairs were engaged in 4,156 trades. These were all outside of Qilin, demonstrating the interest in the DeFi derivative market across the globe.


For the DeFi derivatives market to grow successfully and to increase yields for liquidity providers, permissionless market making and permissionless marketplace creation are very important. More recent developments, such as the creation of decentralized markets and market-making, were made feasible by automatic market makers (AMMs). Permissionless derivatives are based on a technique of liquidity provision that LPs can and want to use.Inverse perpetual can help the DeFi derivative industry to grow. All cryptocurrency assets included in derivatives represent a comparable development vector.

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