As the usage of Decentralised Finance platforms continues to slump, investors looking for new yield return opportunities seem to be looking at decentralised legacy finance’s derivative products like, options, perpetual contracts and tranches as the new frontier for generating gains in DeFi.
Following a sharp decline that started in May, the digital assets market has continued on its sideways trajectory – with on-chain activity and token prices well below their peaks. This has prompted many traders and investors in search to begin scanning for more fertile ground in which to sow their capital.
As a result, some of the quieter offerings in the DeFi space are starting to gain the attention of investors. These are the same financial products that investors would regularly encounter in the traditional finance sector that have been adapted to suit DeFi. These are options, tranches and perpetual contacts.
TradFi Going DeFi
A good number of these products have been available to investors for a while now, however, platforms that offer these specific products have enjoyed the same level of user participation as the rest of the DeFi space.
Nonetheless, the DeFi environment is constantly evolving at a rapid rate, and a continuation of the prevailing market conditions could trigger a positive change for these product’s rate of adoption and user participation.
Options are a prime example of a TradFi product that has been available in DeFi for a long time without getting the necessary user attention in order to gain traction and make an impact. The vast majority of blockchain based options platforms are plagued by poor liquidity and excessive gas fees.
Regardless, a savvy investor might be able to spot themselves a diamond in the rough if they keep an eye out for key features that set a platform apart from others.
One noted example of such a DeFi protocol is Ribbon Finance. The platform gives users a simplified means of setting automated cover calls and put selling. Furthermore, the report by Glassnode indicates growing demand for this variety of financial products.
As the mainstay of DeFi – liquidity providing – remains in the somewhat sedated state it is currently in, the contraction of potential gains is already benefiting protocols that are derivatives focused.
One such example is DyDx, who’s perpetual contracts have seen consistently strong volume for nearly three months running. Furthermore, perpetual contracts have been some of the most in-demand derivatives.
Tranches are a relatively more complex derivative that has not gained as much traction in DeFi as the aforementioned two.
However, tranches are an interesting investment option because they give investors the option of exposure to an asset while being able to avoid part of the associated risk.
In a simple tranche configuration like the one employed by Barnbrige, which consists of a senior and a junior tranche. When the investor offloads risk from the senior to the junior tranche, the former will assume less risk but at a cost of a decrease in yield – it might be worth noting that Barnbridge junior tranches have yielded up to 20% APY on Aave, BOND and COMP.
As DeFi and the rest of the digital assets market continue to adapt, staying up to date with new developments is one’s only hope of thriving in this fast-paced environment.