The Evolution of Onchain Derivatives

Transcript

[applause] >> Hey everybody. It's great to be here. My name's Cole and today I'm going to talk about the history and the evolution of on-chain derivatives. On-chain derivatives have become ubiquitous in crypto. Um things like Lyra Hyperliquid and uh the entire ecosystem has has been built around these these protocols. And so today I'm going to talk about the evolution from the early days to where we're at today and where we're headed. So my name's Cole. I'm the founder of Volmex Labs. Um at Volmex we are the premier benchmark index company for uh crypto. We've built the BVOL index and a

number of leading uh volatility indices. Um I was a early employee at a company that's now part of Kraken and uh I've been following DeFi since the early days of 2018 um and doing some research and so uh I have a unique perspective about where this industry is has has kind of came from and where it's heading. So quickly um Volmex is as mentioned a benchmark index company. We have pioneered uh crypto volatility indices, specifically the BVOL index, the EVOL index um which are kind of analogous to the VIX index but for for Bitcoin, Ethereum and other assets. We also have families of other indices including rates and other things coming soon. Um our indices are available on Bloomberg terminal, uh

Polymarket Refinitiv Bybit Bitfinex TradingView, CoinMarketCap and others. Um uh we have some great investors and we've been working on this for the last number of years. So um what are on-chain derivatives? So really it's you know, you you know, an on-chain platform which makes derivatives like perps, futures, options tradeable in a DeFi context. Um you know, so on-chain markets are 24/7, they're global, they're frictionless and permissionless, and they're fully transparent. So, these are some of the pros of of on-chain derivatives. You know, to the to the side, you know, there's also some cons. Um things are very public, liquidations, uh

thresholds are public, and they have higher latency typically than centralized exchanges or TradFi. So, a wise man's once said, "Pioneers get slaughtered, settlers get rich." Um so, these are some of the the different verticals of of on-chain derivatives before going into the different generations. Um perpetual futures are, you know, things like lighter, hyperliquid, uh other other different platforms, variational, that basically have been pioneered by exchanges like Bybit, Bif um BitMEX, uh Binance into this perpetual swap format, which has kind of become the most ubiquitous type of derivative in the crypto market. Now, these are available on-chain. You have other uh form factors like options, prediction

markets, and real-world asset derivatives, trading stocks, commodities, FX in a perpetual wrapper. And so, really in my mind, there's there's kind of four generations of on-chain derivatives. You have gen one, which is kind of 2017 to 2019 vintage cohort. You have gen two, which is 2021 2023. Uh you have uh gen five gen um you know, gen gen three, which is uh 2023 2025, and then you have gen four, which is kind of perhaps where we're at today. So, you know, some of the pioneers of the early days of DeFi derivatives are companies like uh dYdX, Synthetix, Open, Augur.

Um you know, this, you know, early protocols um had directionally a lot of the right ideas, but were just too early. And so, you know, they had order books and synthetic tokens, prediction markets. Um notably Augur was, which I'll touch on in a moment, was kind of an earlier version of like Polymarket or Kalshi. And so, despite, you know, significant uh innovations, a lot of these kind of didn't make it to the next phase of growth. Um dYdX was a good example. It was directionally correct at an order book, a chain-specific uh you know, application chain. Um it started with a Bitcoin and Ethereum margin protocol, migrated to perpetuals, but ultimately it's still around today and you know, they're doing um some solid work, but

it's not the biggest protocol. They were they were very early and um you know, it was a a little bit ahead of its time. But ultimately, its idea with a perpetual uh focused chain, um it was sort of its own L1, was actually the right idea, which is kind of what Hyperliquid or or Lyra or other things look like today. Um and so, now a couple of other protocols from Gen 1, uh you have Synthetix, which was uh sort of a a synthetic uh stock trading and and commodities protocol, which was very capital inefficient, but was very early to this RWA sector. And then you have things like Augur, which was effectively uh Polymarket before Polymarket, which had done an ICO, which is one of the first ICOs on Ethereum, um was very

ahead of its time. I think it did the ICO in 2016. And you know, they launched in 2018, they had a token called REP or Rep. And ultimately, they had built their own oracle, their own infrastructure, they had to build a lot of the tooling, which was not available in in today's market with things like, you know, Alchemy and uh Chainlink and and other platforms. And so, very again, like once um you know, another protocol is just very ahead of its time. Gen 2, I think one of the hallmarks was AMMs, automated market makers and option vaults. So, you had protocols like GMX, Gains Ribbon um which offered unique exposures, uh but were, you know, suboptimal in a lot of different ways. Um you know, GMX

in the GLP model was this really an interesting sort of first foray into uh the perpetuals market outside of a you know, DYDX and and before the time of like Hyperliquid and Lighter. Um, you know, so basically there was this very capital intensive system where liquidity providers could provide collateral and sort of be the counterparty to the traders in the system. Um, you know, GMX was also one of the first sort of bootstrapped protocols. Um, you know, they had no VCs, they had a token and so it kind of got this grassroots movement. Um, but ultimately AMMs, automated market makers, um, for derivatives are very uh you know, they're they're not as scalable as order books and order books have a lot more expressivity for market

makers. You can widen the quotes in times of volatility and ultimately scale outside of just the sort of TVL. Option vaults were another sort of a hallmark of of the gen two sort of cohort. Um, you know, basically there was different option strategies were wrapped in the vaults. I guess vaults are very topical these days, um, but option vaults were uh you know, extremely ahead of their time. Um, ultimately there was uh you know, some some protocols that did quite well for a good good amount of time but didn't end up um you know, making into the next phase of growth.

And gen three I would say is largely uh you know, categorized by things like Hyperliquid Polymarket Lighter. There's really this this ecosystem of scalable derivatives protocols um that have their own chains, they have ecosystems kind of bolted on or sort of you know, adjacent to them like a Hyper EVM or or Lighter's EVM. And really there's been an explosive growth in volume that has done trillions of of volume over you know, tens of trillions over the last uh you know, several years. And I think this is really the you know, the the coming you know, uh you know, the the point where derivatives kind of cross the chasm in DeFi.

And so, let's look at perpetual futures in 2025. A lot of them have dedicated chains. If you look again, like hyperliquid, Lyra, they have a sort of a dedicated environment that gives it sort of more throughput and more, you know, capability than sort of being on a general-purpose chain, perhaps, you know, an L2 or a mainnet. And so, you know, I think these exchange-dedicated chains or rollups have unlocked a lot of scalability for these different protocols. Again, these these protocols also have, you know, kind of ecosystems that are built around them, hyperEVM, Lyra EVM, which allow for adjacent DeFi protocols, lending protocols stablecoins other sort of protocols than DeFi to be

built around the framework and the the primitive of the perpetual futures exchange. And one of the other other big things that has become very popular in sort of this gen 3 is RWA protocols, equity, commodities FX. Centralized exchanges have started started to mirror this. And there's also been some innovations in DeFi, things like pre-market perps, pre-IPO perps. And so, I think that these RWA sort of real-world asset protocols have become very ubiquitous in crypto, and a lot of that started with with DeFi and on-chain derivatives.

So, in the last 24 hours or so, there's been about 20 billion of of volume in on-chain perpetuals. In the last 30 days, there has been about 650 billion. And the current open interest across the various DeFi perpetual protocols is about 14.7 billion. And so, actually saw an all-time high in the market of trading volume in perpetual protocols on October 10th, which was a very volatile day in crypto with a lot of various dislocations, uh but there's about 80 billion dollars of perpetuals transacted on that day. And so, um data from from DeFi Llama, um and so it's a great place to to track things, but you know, it's there's a lot of scale with these protocols. There's,

uh you know, thousands and tens of thousands of traders trading on chain, and these systems have really started to rival the likes of the Binances, the Coinbases, and, you know, the stratified exchanges. So, as mentioned, there's uh 78 billion, 80 billion of uh volume transacted on October 10th. Um this was uh a major milestone for uh for DeFi. Obviously, it was a very volatile day to like the downside, but um you know, it's a notable notable milestone nonetheless, and a lot of these these protocols stood the test of the volatility.

Um and so, again, real-world asset sort of equity, commodities, FX, perpetuals um have become very popular. Um Hyperliquid now has uh sort of uh protocol built on top of it called Trade XYZ, which is largely a equity um, you know, uh and real-world asset uh trading protocol as exchange that's built on sort of the Hyperliquid back end. And they currently have uh six markets that are in the nine-figure of daily volume uh range, and they have um uh the S&P official S&P 500 perpetual contract with over 500 million dollars of a volume over the last 24 hours or so. There's also FX perpetuals. Lighter has seen

um large growth um in the space. Um you know, 200 million of daily volume has transacted at different times. And there's kind of a broad expansion into different types of uh equity, commodities, FX perpetuals. And one of the other hallmarks of this Gen 3 is prediction markets. Polymarket, Kalshi, other prediction markets have become ubiquitous. There's they're everywhere. They're in they're spanning culture to prices to sports. And so it's these things like binary markets, yes no markets, multiple choice sort of categorical markets, uh range numerical markets.

And you know really at the end of 2024 with the presidential election, you saw that these prediction markets really crossed the chasm in terms of what they were you know what they were able to do and and what the information was you know coming out of these these platforms. Um there's a lot of signal from the 2024 election. So this is one of the famous markets on Polymarket which is on uh Polygon and so it trades on chain. Um there was you know at this point at the screenshot was taken there was 2.7 billion dollars of uh volume transacted on this market and it gave a lot of signal where the US presidential election was headed. No longer did you need to look at the polls but you could look at um

you know markets and money was really staked and you know putting money where where the user's mouth is. Um you know there's also other types of markets that span different economic events, uh Fed decision is is a popular uh type of market on Polymarket and some of the other platforms. And there's also things like Bitcoin price markets, Ethereum price markets, other asset price markets um that really abstract the user experience of typical traditional options contracts into a simple green and red button with a question. And uh this is a really intuitive wrapper for for retail investors, institutional investors um you know to to access and and trade sort of optionality and

different things. And of course uh Volmex has some markets on Polymarket. We have a BVIV and EVIV contracts sort of a monthly tenor and a yearly tenor. Um so this is a screenshot of that. And so where does where do on chain derivatives go? I think we're kind of at this um inflection point where we're really at the kind of a Gen 4 and what comes next. I think we'll see you know, more privacy, you know, more expressivity with these different contracts, perhaps some that new types of derivatives contracts which didn't exist prior to to to crypto and on chain stuff.

And ultimately, I think we'll see yeah, just a lot of innovations and it's a very interesting time in crypto to be a builder, to be an investor, trader. There's a lot different types of you know, market participants in the audience here and so really interested to see where the market is headed and there's been a ton of innovation in the last couple of years and we're really excited to be playing a part of this at Volmex. And so key takeaways DeFi on chain derivatives are global. They're always accessible. They're transparent. The systems are real time.

You know, everything is is real time auditable on the blockchain. And you know, there's really this convergence of various different designs specifically with with chains that are more high throughput and different architectures that enable this this innovation and the scalability. And so again, you have the Gen 1 pioneers, you have the Gen 2, you have Gen 3 and then you have the next frontier which is kind of where we're at today and I'm excited to see what gets built and where things are headed. And it was great to be here. My name's Cole. You can follow me on on Twitter or a company at Volmex Finance.

Our website's Volmex Finance and if you want to send me an email, I'm Cole at Volmex Finance. So Thanks to Eth EthCC and Kardia for having me and it was really a pleasure. Cheers. >> [applause]