FTX, one of the world’s leading crypto derivatives exchanges, recently announced that it has become a member of the International Swaps and Derivatives Association (ISDA). The US subsidiary of FTX will work with the ISDA to build up the crypto derivatives markets in the US and around the world.
The ISDA Master Agreement sets the standards for over-the-counter (OTC) derivatives transactions, making the derivatives markets “safer and more efficient.” Most importantly, the admission into the organization enables greater liquidity by making it easier for members to do business with one another.
A popular crypto derivatives exchange joining the ISDA is just another sign that the crypto derivatives are going mainstream. The ISDA has more than 960 members including corporations, banks, and investment managers from 78 countries.
Earlier this year, a study by Carnegie Mellon University showed that the crypto derivatives markets are “incredibly popular.” More than $100 billion worth of derivatives are traded on a busy day, rivaling the daily trading volume of the New York Stock Exchange.
The average trading volume of the crypto derivatives market is five times higher than the regular crypto spot markets. Nicolas Christin, the co-author of the study, said that the crypto derivatives markets have begun to dwarf the normal markets.
It will affect not just the crypto industry, but the traders and assets outside the crypto world as well, driven by the decentralized derivative exchanges and synthetic assets. For the uninitiated, synthetic assets are tokens minted on the blockchain that derive their value from an underlying asset like stocks, stock market indices, bonds, NFTs, cryptocurrencies, commodities, currencies, and interest rates.
Future trends
FTX is a centralized exchange (CEX), just like Coinbase, Kraken, and Binance. They currently dominate the crypto derivatives market. However, Binance CEO Changpeng Zhao strongly believes that the future belongs to decentralized exchanges.
The DEXes will have to provide better liquidity, reduce fees, and offer a user-friendly interface to compete with centralized exchanges.
They are innovating at a breakneck pace. SynFutures, for instance, has introduced a synthetic Automated Market Maker (AMM) that allows users to list and trade crypto majors, altcoins, NFTs, indices and real-world assets with one single token. It also offers user-generated markets where anyone is free to list any trading pair with just a few clicks. Other innovative features coming out of SynFutures’ stable include fixed margin futures, shared margin futures, and even cross-margin futures.
Why would derivatives traders move from the centralized exchanges that provide liquidity, stability, and low fees to decentralized ones? Because the decentralized protocols offer advantages that CEXes can’t match, said IOSG Ventures in a recent report.
Unlike centralized exchanges that can ban any user anytime they want, the decentralized exchanges are censorship resistant. There’s no centralized authority to abuse their power. SynFutures aims to become a fully Decentralized Autonomous Organization (DAO). But it’s decentralizing decision-making even before turning a DAO by forming a pre-DAO committee called the FutureX. The committee interacts with the community, seeks ideas, and involves the community members in setting the future direction of SynFutures.
The composability of smart contracts in DeFi allows digital assets to flow seamlessly across different chains. As a result, traders can use LP tokens from AMMs, lending protocols, and yield aggregators as a margin to trade derivatives.
According to the IOSG Ventures report, the fusion of NFTs and DeFi has opened many more possibilities. Fractionalized NFTs could be used as a margin on derivatives DEXes. Thanks to these innovations, the decentralized derivatives protocols have a much larger Total Addressable Market (TAM) than their centralized peers.
Closing thoughts
The global derivatives market is estimated to be worth well over $1 quadrillion, though a vast portion of derivatives trading still takes place in traditional finance. As decentralized protocols continue to grow, we’ll see a greater part of this value move to the DeFi ecosystem. The interesting part is that the derivatives DEXes are not just restricted to crypto. They enable users to tokenize real-world assets as well.
