BTC With an increase in the number of retail investors dabbling in derivatives trading and investors jumping into decentralized exchanges (DEXs) due to regulations in the US and China, there has been an increase in users using DEXs. of derivatives, with Bitcoin (BTC) whales moving in derivatives and a increase in the purchase of shares in derivative contracts.
This has created a surge in daily trading volume for derivatives protocols, leaving them to take over centralized finance platforms like Coinbase, sparking interest from retail investors in moving into derivatives trading. in decentralized finance (DeFi). However, without a proper introduction to derivatives in DeFi, new investors are likely to abandon derivatives trading as quickly as they did.
5 years ago I left @coinbase and finally founded dYdX
— Anthony | dYdX (, ) (@AntonioMJuliano) September 26, 2021
But is this the case in the current DeFi sector?
Derivatives on DEX: Is it worth the risk?
Derivatives in DeFi bring the rewards but leave behind the inefficiencies traditional finance offers. However, the crypto market is volatile, not to mention the complexity of trading derivatives on DEXs, where retail investors have to learn how to trade on their own. These investors require guidance and knowledge of both DeFi and platform navigation when they first enter derivatives.
Related: Decentralized and traditional finance tried to destroy itself but failed
If you used DeFi apps in 2020, you probably feel like the user experience is outdated compared to their centralized exchange counterparts. Now, to incorporate new waves of users, especially those who used to use centralized exchanges, protocols now need to deal with simplicity and experience. By guiding new users through the protocols, users are given a space in which to understand the program, which encourages them to stick around. Otherwise, the stain left behind by users who had bad experiences in derivatives could cause future traders to avoid DeFi derivatives trading altogether.
From the user’s perspective, derivatives could be just a tool to achieve a certain goal, be it accessing leverage or hedging existing position. As developers of derivatives protocols, what we can do is provide a clear explanation of the user interface as well as the risks involved in trading derivatives. For example, we may provide “tooltips” to explain complicated features on the app site to new users, hosting onboarding calls every two weeks to provide new users with guidance on how to use the platform and otherwise respond any concerns you may have. Have Apart from that, having a testnet where users can make paper transactions can act as a means for them to get familiar with the platform and trading experience before investing real money in the protocol. The DeFi protocol itself should not be an obstacle to derivatives trading if users are well informed about the risks and well educated.
Related: 5 ways derivatives could change the crypto industry in 2022
DeFi redefining derivatives trading
Most of the new investors are not DeFi derivatives experts and as such the protocols are actually trying harder to welcome these new investors in such a way that they are not too ill-equipped to handle the pair in derivatives. . There is more educational content about derivatives trading today, whether it be on Twitter, YouTube, Medium or Discord. Therefore, it is much easier to learn more about derivatives trading on DEX now than it was in the DeFi summer of 2020.
Aside from that, DeFi protocols are replicating traditional finance to drive growth. For example, there are fintech apps, like Robinhood, that make option trading easy by detecting the strategy a user might want to use and allowing users to execute that strategy with a single tap. Similar strategies have been adopted in the DeFi space. In fact, more and more protocols are offering derivative structured products such as Ribbon Finance and Stake DAO, allowing newcomers to enjoy the benefits of using derivatives without hassle.
Experience more adoption by creating more experiences
Protocols focuses on various methods by which you will improve the usability of your protocols. The road to widespread adoption of cryptocurrencies is hampered by one major hurdle: lack of usability. By increasing ease of use and providing a simple and straightforward interface, users are more easily onboarded, leading to faster adoption of derivatives trading.
Related: Mainstream Crypto Adoption: Is It Here Yet? Answer from the experts, Part 1
Today, most derivatives protocols are extremely easy to use, allowing new investors to jump in and start trading right away without any confusion. However, not all protocols are embracing user experience as their priority, leaving many investors unable to reliably assess the value and risks of their derivative products, causing the government to create more regulations on derivatives. Without a positive user experience for retail investors, this can end up creating a negative stigma for derivatives trading.
Related: How should DeFi be regulated? A European approach to decentralization
Retail investors can expect derivatives trading to become commonplace in the future, allowing anyone with a decentralized wallet to easily participate in trading. The popularity of derivatives trading will continue to grow, and derivatives protocols must be demanding in the experiences they will provide to users to keep up with demand. In fact, the increasing use of derivatives trading in DeFi will create more competition between each protocol to create better products that end up benefiting end users, shaping a healthier ecosystem in the future where decentralized derivatives trading can truly take off .
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should do their own research when making a decision.
The views, thoughts and opinions expressed here are solely those of the author and do not reflect or represent the views and opinions of Cointelegraph.
yenwen feng is the co-founder of Perpetual Protocol, a decentralized perpetual contract protocol for each asset, made possible by an automated virtual Market Maker, with the aim of creating an accessible and secure decentralized derivatives trading platform. Yenwen has over 17 years of diverse knowledge and experience in the financial and technology industry, having co-founded companies such as Cubie Inc. and Cinch Network. Yenwen also has a master’s degree in computer science from National Chiao Tung University.