BTC As more retail investors engage in derivatives trading and investors jump into decentralized exchanges (DEXs) due to regulations in the US and China, there has been a rise in users using DEX derivatives, with Bitcoin (BTC) whales moving into derivatives and an increase in buying Interest in derivative contracts.
This increased the daily trading volume of derivatives protocols, allowing them to briefly take over centralized finance platforms such as Coinbase, which sparked interest in retail investors regarding the move toward derivatives trading in decentralized finance (DeFi). However, without a proper introduction to derivatives in DeFi, new investors are likely to move away from derivatives trading as quickly as they jump.
5 years ago you left Tweet embed He eventually founded dYdX
– Anthony | dYdX(,) (AnttonioMGuliano) September 26, 2021
But is this the case in the current DeFi sector?
Derivatives in DEXs: Is it Worth the Risk?
Derivatives in DeFi bring rewards but leave behind the shortcomings that traditional finance offers. However, the cryptocurrency market is volatile, not to mention the complexity of trading derivatives in DEXs, as retail investors have to learn how to make the trades themselves. These investors need guidance and knowledge about both DeFi and navigating the platform when they first enter derivatives.
Related: Decentralized and traditional finance tried to destroy each other but failed
If you are using DeFi apps in 2020, you will likely feel that the user experience is outdated compared to their central exchange counterparts. Now, in order to accommodate new waves of users, especially those who used to use centralized exchanges, protocols now have to focus on simplicity and experience. By directing new users to the protocols, users are given space to understand the software, which encourages them to stay. Otherwise, contamination left by users with poor derivatives experiences may cause future traders to avoid trading derivatives in DeFi altogether.
From the user’s perspective, derivatives can only be a tool for achieving a certain goal, whether it is to reach leverage or to hedge an existing position. As developers of a derivative protocol, what we can do is give a clear explanation of the user interface, as well as the risks involved in derivative trading. For example, we can offer Tooltips to explain complex functionality on the app’s website to first-time users, host bi-weekly internal calls to provide guidance to new users on how to use the platform, and answer any concerns they may have. Other than that, having a test network through which users can fiat trade can serve as a way for them to get familiar with the platform and experience trading before putting real money into the protocol. The DeFi protocol itself should not be an obstacle to derivatives trading if users are well aware of the risks and have a good education.
Related: 5 Ways Derivatives Can Change the Crypto Industry in 2022
DeFi Redefines Derivatives Trading
Most new investors are not experts in DeFi derivatives, and as such, the protocols actually do more to welcome these new investors in a way that makes them ineligible to handle derivatives torque. There is more educational content about derivatives trading nowadays, whether on Twitter, YouTube, Medium or Discord. Therefore, it is much easier to learn more about derivatives trading in DEXs now than in the summer of DeFi in 2020.
Regardless, DeFi protocols replicate traditional finance to drive growth. For example, there are financial technology applications, such as Robinhood, that make options trading easier by figuring out which strategy a user might want to use and allowing users to make one click to implement that strategy. Similar strategies have been adopted in the DeFi space. In fact, there are more protocols that offer regulated products with derivatives, such as Ribbon Finance and Stake DAO, that allow newcomers to enjoy the benefits of using derivatives seamlessly.
Experience more adoption by creating more experiences
Protocols focus on different ways in which the usability of their protocols can be enhanced. There is one big obstacle impeding the mainstream path to cryptocurrency adoption: the lack of usability. By increasing usability and providing a simplified and straightforward interface, it becomes easier to engage users, allowing for faster adoption of derivatives trading.
Related: Adoption of mainstream cryptography: does it really exist? Experts Answer, Part One
Today, most of the derivatives protocols are very easy to use, allowing new investors to get in and start trading immediately without any confusion. However, not all protocols embrace user experience as their priority, which has resulted in many investors not being able to reliably assess the value and risk of derivative products, which has led the government to introduce more regulations on derivatives. Without a positive user experience for retail investors, this may create a negative stigma for derivatives trading.
Related: How should DeFi be regulated? European approach to decentralization
Individual investors can expect derivatives trading to become popular in the future, allowing anyone with a decentralized portfolio to easily participate in the trading. The popularity of derivatives trading will continue to rise, and derivatives protocols must focus on the experiences they offer users to keep up with demand. As a matter of fact, the increasing use of derivatives trading in DeFi will create more competition between each protocol to create better products that end up being beneficial to end users, forming a healthier ecosystem in the future in which decentralized derivatives trading can truly take off.
This article does not contain investment advice or recommendations. Every investment and trading move involves risks, and readers should do their own research when making a decision.
The opinions, ideas and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Yuen Feng He is the co-founder of the Perpetual Protocol, a decentralized perpetual contract protocol for every asset, made possible by a virtual automated market maker, with the goal of creating an accessible and secure decentralized derivatives trading platform. Yenwen has over 17 years of diversified experience and expertise in the financial and technology industry, having co-founded companies such as Cubie Inc. and Cinch Network. Yenwen also holds a master’s degree in computer science from National Chiao Tong University.