A derivative is a big word created by Wall St that simply means: a financial security with a value that is reliant upon, or derived from, an underlying asset or group of assets. In other words, it’s trading a thing that represents the price movements of the underlying asset.
According to the Bank for International Settlements (BIS), for the first half of 2019, the total notional amounts outstanding for contracts in the derivatives market was an estimated $640 trillion.
The most common underlying assets for derivatives are stocks, bonds, commodities, currencies, interest rates, and market indexes.
So if the only thing derivatives require are two or more parties transacting based on the price of an asset, DeFi has all the money legos to rebuild the derivatives market, but in a permissionless, trustless, peer-to-peer manner.
The most well known DeFi derivatives trading pioneer is Synthetix. Launched in late 2018, Synthetix aims to be “the backbone for derivatives trading in DeFi, allowing anyone, anywhere to gain on-chain exposure to a vast range of assets.”
Synthetix enables traders in DeFi to trade synths, which are overcollateralized derivatives of:
- commodities like oil and gold
- equities and indexes like the FTSE100 and Nikkei 225
- forex like JPY, CHF, EUR and AUD
- and cryptocurrencies, including those not on Ethereum like BNB, XRP, and even TRX.
You can go long or short with any of these asset classes, but what Synthetix is working to enable is much bigger. Imagine connecting your Ethereum wallet in one click to suddenly have access to trading GOOG or AAPL stocks. What was once considered a fantasy, where stock markets would be rebuilt on blockchains, is now being accelerated by the reality that DeFi may provide an alternative to the New York Stock Exchange, the Dow Jones, and more.
For many across the globe, the ability to gain exposure to these blue chip stocks and asset classes would be life changing.