It's not hard to believe that any financial instrument in the existing financial system will be created in crypto (and then some). An early and successful example is dYdX, a popular derivatives decentralized exchange (DEX).
In dYdX’s original whitepaper, they propose two products: margin trading and options for crypto. Through their journey, they ended up with margin trading and perpetual futures being their core products.
Margin trading is when a trader borrows money to execute trades, the amount borrowed must be repaid usually with additional interest at a later date. Note, this is a legacy feature as dYdX is now going all in on perpetual futures.
How does decentralized margin trading work:
Lenders have deposited various tokens into their respective pools
A trader gives a buy order to a dYdX margin smart contract. The trader’s margin deposit (which is over collateralized by 125%) is added to the pool, and the contract then fulfills the trader’s buy order (at the leveraged rate the trader requests)
The trader closes the position by giving a sell order to the margin contract with enough tokens to cover the amount owed to the lender (including interest)
dYdX offers isolated and cross-margin trading: isolated allows the trader to leverage one asset while cross allows them to leverage all assets in their account
Perpetual futures are a type of futures contract (an agreement between a trader and an exchange to transact an asset at a specific price and time), except perpetual futures don’t ever expire (these don’t exist in tradfi).
dYdX offers 4 types of orders: market order (trader chooses buy or sell and leverage amount), limit order (like a market order with a limit price), stop limit order (a limit order is placed once the index price touches the stop price), and trailing stop (instead of a set stop price, the stop price will update to trail the index price based on a trailing percent if prices are moving in favor of your trade, this is to protect profits)
Perpetual futures on dYdX are not available to US traders
Very interestingly, dYdX is a mix of decentralized and centralized. While the core exchange protocol is built on Ethereum smart contracts and STARK rollups, the orderbook and matching engine are centrally run by dYdX Trading Inc (in order to accommodate primarily the throughput and finality speed needed for futures).
As part of their efforts to fully decentralize, they announced in June 2022 the creation of their own chain which will power their decentralized (decentralized node operators) yet off-chain (meaning not consensus-driven) orderbook and matching engine.
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