The Future of Speculation ft dYdX, FutureSwap
What perpetual swaps mean on Ethereum and how they compare to securitisation and pure synthetic assets as a medium for speculation
Introduction
It was only 2 weeks ago when I wrote a piece around the upcoming derivative primitives on Ethereum and some players that were competing. Turns out plenty changes in 2 weeks since both dYdX and FutureSwap went live with their future markets!
Before we carry on, quick recap on what futures are:
Future markets traders to trade an asset with it's delivery at a point in the future
The trade can be settled in another asset to the one being traded. For example, you can have ETH/USD futures which mean that when assets are settled, the amount is paid in USD.
Another piece of information we need to know is how perpetual markets work. For background, perpetual markets are one of the most popular speculation instruments in crypto. It's literally what drives Bitmex's popularity and trade volumes in the billions daily, trillions yearly. Okay so how do they work and why are they needed?
Once upon a time, traders would get frustrated about the fact that their positions would expire (futures have a settlement date) and they'd need to open another one
Bitmex realised this and created something that would become the holy grail of speculators: perpetual swaps
The idea is simple, you have futures contract that renew every 8 hours. At the end of the 8 hours there will be a difference between the price of the future and the actual current price (spot price).
The difference, if positive, will mean shots will need to pay longs (the price in the future turned out to be greater than the current price). If negative, longs will need to pay shorts (the price in the future turned out to be less than the current price).
Bitmex takes a cut between this difference and makes plenty of money. The kind of money where the only round needed was a seed round and the rest is the history.
Futureswap and dYdX's new product both are aiming to be the decentralised version of Bitmex with the value proposition being non-custodial and no KYC. Whether this market share is big enough compared to centralised Bitmex competitors is to be seen but also a worthwhile bet in my opinion.
FutureSwap
Started approximately in late 2019, FutureSwap raised a pre-round from Framework Ventures (+ others) in November 2019. They further closed a seed round in March 2019. The systems works as follows:
Users can deposit $100 worth of DAI and $100 worth of ETH and receive 100 Liquidity Tokens. This liquidity provided will let them earn trading fees and FST tokens as an added incentive.
A trader would like to go long on ETH, therefore he'd borrow stable coins from the liquidity pool
Another trader would like to go short on ETH, therefore he's borrow ETH from the liquidity pool instead
The fee paid to borrow these assets is based on the ratio of longs versus shorts. The side with a greater amount of interest is effectively paying the other side - just like the Bitmex model
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