Derivio is a structured derivatives ecosystem that provides synthetic derivatives that offer risk-adjusted rewards to traders through smart leverage and deep liquidity pools for effective hedging by cryptocurrency operators. ^[1]

Overview

Derivio is a structured derivatives ecosystem offering synthetic derivatives that provide risk-adjusted rewards for traders through smart leverage and deep liquidity pools for effective hedging by cryptocurrency operators. It aims to create an ecosystem of on-chain derivatives for all expertise levels. Speculators can access a variety of derivatives and options, such as perpetual futures, options, interest rate derivatives, and stablecoins, which serve as the basis for more complex derivatives. This allows for leveraged and structured price exposure on decentralized infrastructure, covering independent or aggregate token prices, APY, volatility, and more. ^[1]

Operators pay fees to maintain the net expected value of their positions, ensuring reliable cost projections and providing another source of organic yield. Derivio seeks to offer value to operators looking to hedge against market volatility, aiming to make DeFi efficient for Web3 projects by managing operational risks. ^[1]

Derivio focuses on productive and sustainable yield sources through organic market behavior, algorithmic risk protection for liquidity providers, a fully decentralized architecture with non-custodian trading and asset management, innovative and composable products with high capital efficiency and diverse market offerings, and community ownership and governance. Derivio is designed to meet the evolving needs of DeFi users, offering a user-friendly experience and a broad range of products for retail and institutional participants across various experience levels. ^[1]

Derivio Network

On May 23rd, 2024, Derivio unveiled their Derivio Network, a custom blockchain designed to enhance Ethereum’s functionality and integrate with the Solana Virtual Machine (SVM). This new network addresses the limitations of previous blockchain infrastructures by offering superior scalability, performance, and cost-efficiency. Secured by Ethereum’s optimistic ZKVM fraud proofs, Derivio Network supports trustless bridges and incorporates advanced cryptographic protections like ZK+MPC and Fully Homomorphic Encryption (FHE) to safeguard sensitive trading data. ^[2]

The Derivio Network is tailored for high-performance financial applications, providing a foundation for developers to create and deploy innovative trading solutions. It features modular architecture, parallel execution capabilities from the SVM, and unmatched performance metrics. For traders, the network offers a refined and responsive trading experience with robust security and minimal latency. The transition to Derivio Network aims to enhance trading capabilities while ensuring a seamless upgrade for existing users. This initiative positions Derivio Network as a novel implementation in blockchain-based trading, supporting various financial applications and innovations. ^[2]

Trading

Derivio's initial products include perpetual and digital options trading in a Liquidity-as-a-Service model with a fully decentralized architecture. It offers a range of derivatives and unique markets for traders. The market-neutral liquidity model provides market makers with a simplified process for engaging in various long-short derivatives markets without the risk of exposure to sustained directional market movements. This model ensures instant trading liquidity, optimal capital efficiency, and aggregated organic yield sources. ^[3]

Derivio achieves programmable market neutrality for its liquidity pools, allowing liquidity providers to engage in market-neutral market-making for perpetual and options trading easily. The platform aims to support a variety of structured derivatives, enabling traders to access diverse payout curves and unique tradable markets tailored to meet the risk-reward preferences of novices, veterans, retail, and professional traders alike. ^[3]

Perpetual Futures

Perpetual futures are widely used in crypto trading for hedging and speculation. At Derivio, the novel Universal Margin System allows trading between two tokens in the pool. Traders can use any asset in the pool as collateral and trade with up to 50x leverage. ^[4]

Universal Margin System

At Derivio, any market can be opened if the tokens ETH-BTC, USDC-USDT, UNI-ETH, CRV-UNI, and stETH-ETH are listed in the pool. This provides traders with a variety of options for making trades. The liquidity pool remains unified, preventing liquidity fragmentation and addressing issues related to stablecoin depegging. Derivio’s margin system treats all tokens equally: if you are longing  ETH-BTC, you are shorting BTC-ETH. Traders deposit the "long" token, and equity is accounted for in the "short" token. ^[5]

Prediction

Prediction allows traders to bet on price movements' true/false outcomes. It provides an intuitive tool for hedging risks and adjusting exposure. The prediction price can be seen as akin to the traditional option Delta, while the Delta of prediction resembles the traditional option Gamma. This tool offers limited profit and stop-loss capabilities, helping users avoid excessive losses from market fluctuations. It also enables limited hedging while holding currency positions, preventing missed opportunities in volatile markets. ^[6]

Payout Curve

Derivio uses a dynamic long-short ratio-based payout curve to ensure fairness and balance risk for liquidity providers (LPs). By tracking the percentage of long positions at each block, the system adjusts payouts according to market conditions. The long-short ratio is capped at 80%/20% to mitigate extreme fluctuations and prevent sudden shifts or manipulation, especially during low liquidity periods. ^[7]

A regularization constant is used in calculating long percentages, aiming to provide a more stable payout structure by reducing the impact of outliers. This involves introducing a fixed amount on both sides of the trade. Traders can also monitor their projected payouts, which assumes the current long-short ratio remains constant until settlement, reflecting favorable outcomes for the trader. ^[7]

Liquidity Provision

In phase one, Derivio offers two DeFi Super Derivatives Vaults: DLP-M (Main) and DLP-B (Blue Chip). Liquidity providers should be aware of the following: ^[8]

1. LPs hold a share of the asset basket and can swap assets within the pool anytime.
2. LPs receive some revenue from derivatives traders, including profits and trading fees.
3. Liquidity pools benefit from Derivio's market-neutral liquidity design, which protects against volatile market conditions.

Derivio aims to generate sustainable yield for LPs through the turnover of trading activities, optimizing capital efficiency and risk. ^[8]

Super Derivatives Vaults (SDVs)

Derivio introduces Super Derivatives Vaults (SDVs) to create a synthetic DeFi derivatives system. SDVs allow traders to engage in spot trading, perpetuals, options, and higher-order derivatives within a multi-asset pool, such as long/short volatility. This approach addresses liquidity fragmentation across different derivative types and markets. Liquidity providers stake tokens into a single vault, employing these assets in market-neutral strategies across various derivatives. This design enhances capital efficiency and yield generation for liquidity providers. ^[9]

Market Neutral Liquidity

Market neutrality in finance involves managing long and short positions to mitigate risk and ensure gains in various market directions. This strategy helps maintain stability in trading models, especially in volatile conditions where oracle-based systems might struggle due to inaccurate funding rates and potential exploitation risks. ^[10]

Derivio addresses these challenges with its market-neutral liquidity pools, which balance long and short positions to avoid extreme imbalances and protect liquidity providers. Derivio's approach uses dynamic funding rates for perpetual futures to incentivize arbitrage and maintain equilibrium in the long-short ratio. Similarly, its digital options use a flexible payout curve that adjusts with market conditions to ensure fair payouts and mitigate risks from market imbalances. By implementing these mechanisms, Derivio enhances the efficiency of liquidity pools and supports a variety of markets with minimal manual intervention. ^[10]

Derivio DAO

Governance is crucial to the decentralization and autonomy of the Derivio ecosystem. It oversees all aspects and decisions, including development, fee structures, integrations, tokenomics, and the distribution of emissions to liquidity providers. DRV holders have ultimate ownership and decision-making power over Derivio. ^[11]

Derivio Whale NFT

The most active community members hold Derivio Whale NFTs and offer benefits like free trading coupons and increased governance voting power. Community members can mint a regular Derivio NFT for 200 $DRV or a rare Derivio NFT for 1000 $DRV. Each month, 35 rare Derivio NFTs are available to claim by top traders, liquidity providers, and $DRV stakers. ^[12]

The $DRV used for minting is burned, establishing a floor price for the NFTs. Staking Derivio Whale NFTs grant holders free monthly binary options trading coupons, token emissions, greater governance voting power, and eligibility for a premium liquidator position, among other potential benefits decided by the Derivio DAO. ^[12]