Cryptocurrency analyst. Founder and editor at btcpeers.com
The crypto market has evolved significantly since Bitcoin’s whitepaper was conceived 12 years ago, shortly after the U.S Financial Crisis which devastated the global economy. Today, this space enjoys a cool $400 billion in market capitalization with Bitcoin taking the lion share at a 62.4% dominance. Unlike like in the past where Bitcoin was the main narrative, dynamics are now shifting as crypto innovators pivot towards decentralized products and ecosystems.
This year has been particularly eventful for the upcoming Decentralized Finance (DeFi) niche, although most of the price action was initially driven by speculation. Well, the DeFi concept may sound a bit complex on first interaction, but it is actually very simple. The whole idea is to decentralize traditional finance through blockchain ecosystems, hence eliminating intermediaries such as banks, brokers and investment firms. There already exists a number of DeFi protocols which offer financial products such as lending, decentralized exchanges and derivatives.
Being a nascent market, I have been following the growth of crypto derivatives and most importantly the paradigm shift to decentralized protocols. For now, the most liquid crypto derivative markets are still centralized exchanges with the latest stats indicating a $600 billion yearly turnover from the major players. However, it appears tides are changing in favor of decentralized ecosystems; over $800 million is locked in derivative smart contracts as collateral. Notably, the space has only been active for a few months, but is now one of the most promising niches for both retail and institutional crypto investors.
To get first hand insights on the decentralization of derivatives, I reached out to the CEO of Dymmax, Dmitry Filyaev. Dymmax is a decentralized protocol that is designed to facilitate decentralized option trading without collateral. Options are basically derivative instruments which derive value from an underlying asset; the only difference with futures is that option holders have the right but not obligation to execute their contracts upon maturity. Therefore, they are more flexible when it comes to hedging the market in both uptrends and downtrends.
With the industry gaining traction, quite a number of DeFi protocols have launched derivative products to meet the market demand. Nonetheless, there still some challenges when it comes to accommodating the settlement risk involved in derivatives.
Having broken down the market outlook, let’s take dive into some more insights that I gathered during the interview with Dymmax CEO.
Andrey Sergeenkov: Thank you for taking time to have this interview, Dmitry. What would you say motivated your debut into the decentralized crypto derivatives niche?
Dmitry Filyaev: In our opinion, the market has reached the stage at which there is a need for derivatives. Although there are already derivatives trading platforms on the market, we see this as the best time to launch DYMMAX. If we recall the history of contextual advertising, Google was not a pioneer in the field, but having launched a product at the right time, it became the leader. A similar situation is occurring in the cryptocurrency market - the market for decentralized services for derivatives trading is still in an early phase of development, and it's no coincidence that many projects are striving to occupy this niche.
Andrey Sergeenkov: Given the underlying potential, do you think that the global traditional finance markets will eventually shift to decentralized ecosystems?
Dmitry Filyaev: The idea behind creating digital currencies is to reduce total control over money markets, and we can see today that the crypto-industry has achieved significant success in its development. It's still too early to put the volume of the digital asset market on the same level as the world's leading economies; its evolution is not a fast process. At the moment, many services are still too complex, do not have a user-friendly ecosystem, and are unusual as well. But in the future, they will be modernized, they will become faster, more reliable and will develop to the point where they will be able to replace typical centralized services.
Andrey Sergeenkov: I understand that Dymmax is a decentralized option trading protocol. Could you kindly explain how this is different from traditional Vanilla options?
Dmitry Filyaev: As we know, options are a convenient speculative instrument that has nonlinearities in relation to the price of the underlying asset, and which allows you to profit from a market decline or stagnation. Many investors trade options and have already forgotten what's actually under the hood of this convenient tool. There, you find market-makers and the risk management system of the trading organizer, which allows participants to trade with minimum collateral amounts, called initial margin and requirement margin. However, in a decentralized market, we cannot create a system like this, as it assumes a centralized trading organizer with direct access to users' wallets. And with DYMMAX we strive to create a system that is comparable in usability to traditional vanilla options, but without the risk of a trusted third party.
Andrey Sergeenkov: Currently, there are a couple of DeFi derivative projects built on Ethereum, what is the value proposition of Dymmax protocol compared to peer innovations?
Dmitry Filyaev: Projects appearing on the Ethereum network allow the conclusion of an option-type contract between two participants with the security of a contract, but we are creating a protocol for speculative trading in derivatives, which intrinsically performs the task of transferring activity from centralized organizers to a decentralized protocol. Projects that appeared in 2020 on the Ethereum network are being used to evaluate the Black-Scholes model, and of course, for many, it's fine, but its applicability to digital currencies that are an unhedged asset is inherently very conditional. We use our own development based on the parimutuel with fixed odds model, which allows us to create tools whose behavior is completely analogous to Vanilla options, with guarantees of payments in any market scenario. And at the heart of this guarantee is a common pool of money which is located in the smart contracts ecosystem. This model allows you to solve problems with liquidity, guarantees, and ensuring contacts while observing full decentralization. It offers participants conditions similar to centralized exchanges with regard to the minimum collateral for trading in derivatives.
Andrey Sergeenkov: Could you kindly shed more light on the ‘parimutuel model’ and its role in building a DeFi options trading protocol without collateral requirements?
Dmitry Filyaev: The parimutuel model itself has existed for over 100 years and is used to bet on events with soon-to-be-known outcomes, these being sports events, and of course elections. The model is quite simple, and it works on the principle of an auction, when the betting book is opened before the game and closes during the game. On the basis of a calculation, the coefficients for payments for certain winning events are calculated. But the main difference from options in this model lies in the payments which are unknown until the close of the auction, and as we know, for each price point there is a payment of 1 point on derivative contracts on the expiration date. We use a modernized parimutuel betting with fixed odds model, which was researched by economists at Stanford University, where the creation of exotic options were used as examples of its use. Taking the described model as a basis for the project, we developed a mechanism for matching orders to create auctions with limit orders, and also added the presence of a market maker based on a pool to the model. This made it possible to implement liquidity pools allowing for the leveling of discrepancies in option premiums, and gave investors the ability to receive passive income from investments
Andrey Sergeenkov: Does this mean that the Dymmax protocol eliminates all the risk associated with options trading?
Dmitry Filyaev: Option trading risk is a combined risk. It consists of the risk of movement against the position chosen by the trader and the risk of the trade organizer, or, in other words, the risk of non-payment on profitable option contracts. The risks of price movement in the opposite direction, of course, in any case remain on the shoulders of the trader, but the second risk is solved using the protocol; it is transparent and participants can easily assess the payments in any market scenario based on open data in the Ethereum network.
Andrey Sergeenkov: Being a decentralized project, do you have a governance token and what role does it play in the Dymmax protocol?
Dmitry Filyaev: DYMMAX strives to be a fully decentralized and autonomous project, therefore the governing token has a key role in it. With the launch of the DMX Democracy platform, all the key decisions in the life of the project will be made by the community - such as which tools to use to launch options, what commissions users should pay, on which blockchains to extend the DYMMAX protocol, etc. In the end, if the current team ceases to suit the community, holders of DMX tokens will be able to change it.
Andrey Sergeenkov: Dymmax recently announced a strategic partnership with ProBit crypto exchange. Is this where the Initial Exchange offering (IEO) of the DMX governance token will debut?
Dmitry Filyaev: We have been choosing a platform to begin trading the DMX token for a long time, and in the end we settled on Probit - maybe not a very large exchange, but it’s well-established. Indeed, the IEO of the DMX token will take place on the Probit exchange. However, our partnership is not limited to the listing of the DMX token on Probit. Probit is a full-fledged guide for our project on the South Korean market, forming the local community and telling them how DYMMAX can be used in parallel to speculating on the DMX price. In addition, in the course of its life, the DYMMAX protocol will issue new, freely tradable tokens that can use the Probit infrastructure for easy trading.
Andrey Sergeenkov: Apart from a governance utility within the Dymmax protocol, what other value do DMX tokens hold?
Dmitry Filyaev: We are focused on ensuring that DMX token holders can get the most out of the DYMMAX ecosystem. In addition to DMX rate growth, they can benefit from participation in staking and liquidity pools. For users who have blocked their funds for staking, there is a reward of 10k DMX tokens per month. At the same time, DMX holders who contribute their funds to liquidity pools will share the transaction fees paid by DYMMAX traders during auctions. For active DYMMAX traders, an incentive is also provided - the more DMX tokens they hold on their balance sheet, the lower commissions they will pay.
Finally, we will strive to expand the scope of the DMX token by integrating it into our partners' services and existing cryptocurrency platforms.
Andrey Sergeenkov: Going forward, how does Dymmax plan to contribute towards the growth of decentralized derivative trading and tokenization?
Dmitry Filyaev: Without false modesty, I can honestly say we have far-reaching plans for the expansion of DYMMAX into the decentralized derivatives market. We're looking to tokenize all functions of the ecosystem - options contracts, liquidity pools, governance, etc. - opening up broad opportunities for the development of secondary markets.
Let me also note that the launch of decentralized options on top of the Ethereum network is only the first step in our development. We do not plan to limit ourselves strictly to the options market or the Ethereum network, but we plan to create a large-scale interchain ecosystem for derivatives trading.
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