Perpetual Protocol Takes Flight

Contrary to the prevailing opinion among a certain Reddit community (looking at you Wall Street Bets), financial derivatives are designed to manage risk, not gamble.

Look no further than the growing popularity of DeFi derivatives projects to understand that risk and finance are inseparable. One thing r/WSB got right is that risk management tools are ideal for gaining leverage to boost returns. Over the past year, capital flooded centralized digital asset futures exchanges. Decentralized derivatives projects show early potential to take a growing market share.

As financial capital continues to flow into DeFi, on-chain derivatives make sense for digitally native risk takers and managers alike. Projects like Synthetix, UMA, and Perpetual Protocol create blockchain-based financial derivatives for the new financial system. Each uses unique methods to capture value from rapidly expanding derivatives demand. Despite an unproven revenue model, unparalleled volume growth on Perpetual Protocol points to significant earning potential.

Financial Derivatives Primer

A financial derivative is a contract to exchange an asset at an agreed upon date and price. If a contract can be bought and sold, its price derives from the underlying asset's price.

An asset owner can insure the value of their asset by purchasing the right to sell it at a fixed price in the future. In this case, the derivative works like insurance to guarantee a lowest price at which the asset can be exchanged. Like insurance, this requires a premium, typically calculated with dynamic pricing models that incorporate the probability the asset’s price will be above or below the contract price on it’s expiration date.