Are you a bitcoin maximalist? Convinced that EOS is the “Ethereum killer?” Soon, you’ll have the opportunity to put your money where your mouth is, thanks to a new ethereum derivatives product from decentralized fintech startup dYdX.
The open-source platform, built on top of decentralized exchange (DEX) protocol 0x, uses smart contracts to allow investors to trade ether for tokens that function as options contracts tied to the price of ETH.
Traders who are bearish on ethereum can purchase short tokens that rise in value when the ethereum price goes down, while bullish investors who are comfortable with a high degree of risk can purchase leveraged tokens that multiply profits when the price goes up. These options tokens are backed by ether locked in smart contracts by lenders, who earn interest in exchange for depositing their ETH as collateral for the DEX.
A number of cryptocurrency exchanges already offer derivatives contracts for altcoins, but they predominantly require users to deposit funds into exchange-controlled wallets, creating a central point of failure and providing hackers with high-value targets. DYdX, on the other hand, is “governed by code,” meaning that it as secure as the smart contracts that undergird it (This, as CCN reported, can lead to its own set of problems).
Speaking with TechCrunch, dYdX founder Antonio Juliano said that he believes there is a “big opportunity” for a derivatives market built using a DEX rather than a centralized order book.
“The main use for cryptocurrency so far has been trading and speculation — buying and holding. That’s not how sophisticated financial institutions trade,” Juliano, formerly a software engineer at Coinbase and Uber, told the publication. “The derivatives market is usually an order of magnitude bigger than the spot trading or buy/sell market. The cryptocurrency market is probably on the order of $5 billion to $10 billion in volume, so you’d expect the derivatives market would be 10X bigger. I think there’s a really big opportunity there.”
“We think of it as more than just shorting your favorite shitcoin,” he added, noting that dYdX plans to roll out options tokens for virtually all ERC-20 tokens in the future. “We think of them as mature financial products.”
Notably, dYdX chose not to hold an initial coin offering (ICO), instead raising $2 million through a seed round led by Andreessen Horowitz and attracting investments from Polychain Capital and Coinbase co-founders Brian Armstrong and Fred Ehrsam.
The dYdX protocol is currently in late-stage testing and is scheduled to go live in less than two months.