In the traditional economic model, a derivative is a type of contract whose value is derived from the performance of the instrument or underlying asset. This underlying "thing" can be an asset, a commodity, an index or an interest rate, for example, and sometimes even another derivative.
DeFi vs. CeFi
It should be noted at the outset that, given the enormous importance of derivatives contracts in well-known and proven financial systems, it should come as no surprise to anyone that derivatives are starting to play an increasingly important role in digital currency markets. Derivatives and a number of decentralized DeFi protocols are no less popular than in classical economics and prove to be equally important in the cryptocurrency sector. It is obvious that any type of developing financial market that carries risk creates great opportunities to multiply capital. With the development of new branches in the financial architecture, there is a need to secure transactions. In turn, the natural course of things then usually creates the possibility of speculation, which stimulates the development of derivatives markets in order to meet the investment needs of traders. Moreover, the rate of innovation and development in the derivatives ecosystem most often perfectly reflects the rate of development of the underlying market. While CeFi Markets and their derivatives are strictly regulated by relevant government agencies around the world and have taken many years to evolve, cryptocurrency derivatives can be generated by almost anyone. This is happening completely openly and without any permission, and derivatives in the area of decentralized finance are evolving at a pace that faithfully reflects the incredibly rapid development of all kinds of other assets based on blockchain technology.
To put it simply, the reasons for the creation, development and use of derivatives in the DeFi sector are very similar to those found in traditional markets. These include, in particular, hedging the price risk associated with exposure to cryptocurrency assets, as well as using opportunities for speculation or leverage.
Understanding how DeFi derivatives work and what function they serve in comparison to CeFi can be most effectively acquired by looking at various examples of their use.
Futures contracts
It is generally accepted that futures contracts are one of the simplest forms of derivatives ever developed under CeFi. One of the most fundamental features of CeFi futures is that they are finite. This means that they have a predetermined maturity date and expire at the scheduled date and time. In turn, one of the most important and revolutionary developments in the field of decentralized finance are Perpetual Futures or "Perps", which are traded on multiple platforms (DEX) and recently also on centralized exchanges (CEX).
