Liquid marketplaces provide effective market pricing for assets. As a result, the markets that are the most liquid are often spot markets. This is because spot markets provide users with the easiest and quickest means to get exposure to an asset, and they are settled promptly.

The use of derivatives, as opposed to spot trading, may confer various benefits on investors that have more complex trading techniques. When buying or selling a derivatives contract, there is no actual trade of the underlying asset. Instead, the contract follows the price of the underlying asset as it moves up and down. As a result, dated futures contracts or perpetual futures contracts may be established, provided that there is a structure for pricing that is mutually approved by both parties.

Traders may protect themselves against the possibility of incurring losses in an underlying asset by using derivatives to take a position that balances out the price risk of the asset. In addition, more experienced traders may utilize derivatives to speculate on assets while using leverage, which magnifies the profits or losses of a deal. In the end, derivatives provide traders with more freedom about the trading tactics they use, and they play an important role in both traditional markets and the cryptocurrency sector.

Users of cryptocurrencies have the option of trading derivatives on either centralized or decentralized exchanges. CEXs and DEXs are abbreviations for "centralized exchange" and "decentralized exchange," respectively. In the realm of decentralized cryptocurrency derivatives exchanges, SynFutures is competing against a wide variety of alternative protocols.

How does SynFutures work?

SynFutures is now in the race to become one of the most prominent decentralized crypto derivatives exchanges. Several distinct value drivers are included within this ecosystem. These value drivers include traders, liquidity providers, and liquidators.

Traders

The first thing that traders do is deposit their chosen kind of collateral into the protocol. The following cryptocurrencies are accepted by SynFutures: USDC, USDT, DAI, FRAX, ETH, wBTC, and MATIC. In the future, depending on the level of demand shown by the community, other tokens may be accepted as collateral. When determining the total margin required for an underlying, if a trader has provided liquidity as an LP, both that liquidity and any PnL for positions that already exist are factored into the calculation. There is one perpetual futures market in addition to the two dated futures markets for each underlying.

A trader may trade with up to 10 times the normal leverage for any of the underlying assets after paying the required margin, provided there is enough liquidity. If the change in fair price is less than 10%, the trader is required to pay a charge of 0.3% to initiate a deal. If the change in the fair price is higher than 10%, there will be an additional fee of 1.2% added. Following the opening of a position, a trader's position may be subject to liquidation if the value of their collateral drops to less than 5% of the total size of the position.

In contrast to traditional perpetual futures contracts, in which traders are required to pay the funding rate out of their margin account on a predetermined timetable, the funding rate for SynFutures is included in a trader's margin account. The price differential that exists between the spot price and the price of the perpetual futures contract is what drives the funding rate used by SynFutures. The funding rate is applied each day at 8 am UTC to assist in bringing the price of futures contracts closer to the current value of the index spot price.

>>> Read more: A Deep Dive Into Perpetual Futures

Liquidity providers

The traders' counterparty in the system is comprised of the liquidity providers in the system. LPs have the option of providing liquidity for any of the underlying that are now listed or of providing liquidity without approval for an underlying that is maybe not yet listed. This option provides liquidity providers with freedom over the level of risk they choose to assume. The insurance fund receives the remaining 1/6 of the overall costs of the protocol, while liquidity providers get 5/6 of the total fees on the protocol.

When it comes to the user experience, all the LPs need to do to provide liquidity is click the deposit button, but behind the scenes, a lot is happening. For instance, if an LP were to provide liquidity to the BTC/USDT market, all that would be required of them is to deposit USDT. After that, the synthetic automated market maker (sAMM) would hold half of the deposit in USDT and use the other half to open a long position in BTC 1x. Because the liquidity provider only has exposure to USDT and not BTC, the sAMM would additionally create a BTC 1x short position as a means of hedging the risk associated with the long position.

The primary advantage of the sAMM is that it enables LPs to deposit liquidity in one token while simultaneously enabling the automated creation of a synthetic version of the other token. This is a far more user-friendly approach than the classic AMM model, in which the LP is required to deposit an equal quantity of both assets. It is important to note that the impermanent loss is the same whether LPs are providing liquidity to an AMM or an sAMM.

Liquidators

The protocol's overall health depends heavily on the performance of its liquidators. They are accountable for taking control of accounts if the required margin has been reached or exceeded. A liquidator may be anybody, and if numerous liquidators are vying for the same position, the norms of "first come, first served" will be put into effect. Because of this dynamic, the liquidation becomes a gas bidding war: the liquidator whose transaction goes through earliest has the opportunity to seize control of the account.

In the case that a certain account is not liquidated quickly enough and a deficit is incurred, an insurance fund is utilized to make up the difference to balance the account. If the insurance money is insufficient, the surplus loss will be distributed evenly among all open positions on the other side of the transaction. For instance, if a short position incurs a loss and there are insufficient insurance funds, the loss will be covered by the PnL of all long positions stemming from the same underlying.

Price oracles

syn oracle
Source: SynFutures

Chainlink and the LWAP (liquidity-weighted average price) from spot DEXs are the two distinct price oracles that SynFutures uses in its trading operations. The Chainlink oracle is utilized whenever SynFutures needs information on an asset that is not native to the chain. SynFutures will employ an LWAP from spot DEXs if the asset being traded is a native one. The LWAP oracle requests price data from DEXs where the target asset is listed and then gives weight to those pricing data points depending on the liquidity of the DEXs. The maximum amount that the spot index price may fluctuate in one minute is 1% with either oracle. Since the marked price, which is used to calculate the unrealized profit and loss of positions, follows the spot index price, this smoothing mechanism is used to reduce the impact of price manipulation on the spot DEXs. It is important to keep in mind that the smoothing method does not have any impact on the fair price, which is determined by the sAMM inventory and follows the price of the actual transactions that take place on Synfutures.

Insurance fund

One-sixth of the fees that are collected by traders on the protocol are allocated to the insurance fund. There is an insurance fund for each underlying asset that is used to make up for the loss caused by traders whose accounts aren't liquidated quickly enough. When it comes to protecting against bad debt, the first line of protection is provided by liquidators, then the second line of defense is provided by the insurance fund, and the third and ultimate line of defense is provided by socialized loss.

Notable functions and features

The DEX that SynFutures has developed has several innovative new features.

Trading long-tail cryptocurrency derivatives

To publish additional assets for trade does not need a vote by the DAO or a decision by the SynFutures team. Rather, the number of assets that are accessible is solely limited by the amount of liquidity that is given by LPs. As a result of SynFutures' one-of-a-kind dual-oracle infrastructure and stringent precautionary protocols, the company is in a position to list almost any cryptocurrency asset. The integration of Chainlink and LWAP oracles was an essential component in the process of increasing the number of underlying assets that could be traded on V1 to 257.

synfutures pairs

Source: Synfutures

Even with these oracles, trading long-tail crypto assets might be dangerous and calls for the implementation of a handful of extra system safety measures. The first criterion is a predetermined minimum level of liquidity that must be met before an asset may be made available for trade. This level is presently fixed at $10,000. In addition, the rate of price fluctuation of the spot index for an underlying asset has been limited to 1% per minute to lessen the danger of price manipulation for tokens that have a lower level of liquidity.

Trading in futures and perpetual contracts

Every underlying asset that is traded on SynFutures is available in three different markets. One futures contract is for the current quarter, while the other one is for the quarter that will come after this one.

In addition, there is a kind of futures contract known as a perpetual futures contract. This type of futures contract does not have a termination date. A method known as a funding charge is used in perpetual futures contracts to accomplish the goal of maintaining a degree of price parity with the underlying spot pricing. In the case of SynFutures, the profit and loss states of traders are revised every day at eight in the morning (UTC) to reflect the funding rate that is determined by this equation.

The system of shared margin

The margin requirements of a user are often compartmentalized according to each position on the vast majority of crypto derivative exchanges. In other words, if a trader posts their margin and creates a long position on ETH, the system will compute the trader's liquidation price based purely on the margin posted for that position. This means that the trader's liquidation price is dependent on the trader's decision to take a long position. When using SynFutures, each underlying asset will share its margin account across all three of the markets that were just described. The user's collateral, their long position, and even their profit and loss from open positions in that market are all included in the margin account. As an example, a user may use the same margin to establish two positions that counterbalance one another, such as a short position for $1,000 ETH on a Q1 futures contract and a long position worth $1,000 ETH on a Q2 futures contract. Both of these positions would be open. Because of this shared margin structure, a trader's margin efficiency might eventually grow by up to 200%, which makes it possible to take on more complex positions.

Fees

Every transaction executed on SynFutures is subject to a trading fee that is calculated as a percentage of the price impact. The cost of a trade is 0.3% of the total value of the transaction if it moves the fair price by less than 10%. When the percentage of change in the fair price is larger than 10%, the charge on the transaction increases to 1.2%. A ratio of 5 to 1 is used to determine how the charge is distributed between the insurance fund and the liquidity providers. Because of the changing nature of the fees, this model incentivizes liquidity providers to focus on assets that have lesser liquidity, even though these assets often carry a higher level of risk.

The success of SynFutures' V1 and its bottlenecks

Even before the derivative DEX story truly got off in the wake of the FTX's collapse in November 2022, SynFutures V1 had a significant amount of success. During the period that V1 was operational, which lasted from October 2021 until February 2023, a total trading volume of $17.6 billion was generated. There were about 75,000 users in total, with almost 50,000 traders present. The fact that there were 257 all-time underlying for V1 is also noteworthy; this kind of variability is often only found on CEXs.

At the end of January 2023, V1 was finally put out of service officially, and several significant enhancements were planned for V2. The first change is the introduction of contracts for perpetual futures. Crypto derivatives traders have shown a preference for using perpetual futures contracts ever since BitMEX introduced them in 2016. Dated futures contracts have fallen out of favor in recent years. Traditional dated futures contracts have several drawbacks that may be avoided by using these alternative contracts. Two of these drawbacks include the need to roll over an existing position and choose a maturity date for trading.

Another issue that was problematic for V1 was the restricted market for tokens. During Version 1, the only DEX that was used to source pricing data for tokens that were native to the chains on which SynFutures was deployed was Uniswap. As mentioned before, V2 is now using an LWAP, which ultimately results in a more robust price feed because it gets pricing data from numerous DEXs.

The User Interface (UI) and User Experience (UX) of the protocol underwent a comprehensive redesign as the last primary emphasis of V2. When compared to V1, V2 places more emphasis on the experience of the trader rather than the liquidity provider. The general appearance and feel of the platform are very similar to that of a CEX, and all markets that are currently open for trade are now featured on the very first page of the site.

Competitors landscape

The failure of the FTX has sparked a proliferation of derivative decentralized exchanges (DEXs), which has been spurred by conversations about the advantages of non-custodial and decentralized trading. As of the time of the writing, the derivatives DEXs still only account for 2.73% of the cryptocurrency perpetual futures markets, which are worth over $75 billion. There will probably be several decentralized exchanges that want to profit from this shift as more of this volume continues to migrate to on-chain trading.

dYdX, GMX, and Gains Network are now the top three derivatives DEXs on the market in terms of the number of trades being conducted. An order book is what dYdX employs, in contrast to the liquidity pools that Gains Network and GMX use. The daily number of transactions processed by all three DEXs is in the hundreds of millions of dollars, with dYdX often processing more than one billion dollars worth of transactions.

Although these DEXs might offer products that are very comparable to one another, they have started to carve out their distinct markets. For instance, more than 50% of the trading volumes on Gains Network are for foreign exchange markets, but the most heavily traded assets on GMX are Ethereum and Bitcoin. The user interface of dYdX is comparable to that of a CEX, which has contributed to the exchange's rise in popularity among institutional traders as an order book venue. The capacity to provide trading for any long-tail crypto asset is SynFutures' unique selling proposition.

Future developments

Looking forward, SynFutures has already started considering additional features that may be included in the next V3 release. Liquidity providers, like ranged liquidity providers, will benefit from the increased flexibility and sophisticated capabilities made available by V3, which are comparable to those found in Uniswap V3.

As SynFutures continues to expand to other chains, V3 also has plans for cross-chain liquidity and margin. The unification of margin and liquidity across chains will provide a significant boost to the overall experience of traders. It ought to lessen slippage and improve the trader's margin's overall effectiveness.

NFT perpetual futures trading is yet another one-of-a-kind feature that will be included. Several collections can trade on SushiSwap or Uniswap just like any other ERC-20 token now that the fractionalization of NFTs is already a reality. The combination of SynFutures' one-of-a-kind LWAP oracle with these fractionalized NFTs makes it feasible to trade certain NFTs in much the same way as tokens. In general, the SynFutures team is moving swiftly to accommodate the needs of traders as well as the requirements of liquidity providers.

synfutures nftures

Source: SynFutures Products

Some bottom lines

SynFutures is in a solid position to continue to profit on this narrative, even as the competition for derivative DEXs continues to heat up. V1 alone achieved over $17.6 billion in total volume and approximately 50,000 traders, providing the team with enough expertise in this area to establish a robust strategy for V2 and additional revisions of the product. Because there is no value-extracting token or DAO governance, the protocol can make improvements quickly and efficiently while at the same time providing more value to the liquidity providers and traders. In addition, SynFutures can provide traders with exposure to a greater number of underlying than any other derivatives DEX because of its innovative dual-oracle architecture. Additionally, the introduction of perpetual futures contracts by SynFutures will be a face familiar to many traders and will reduce the friction that was previously experienced in V1 with dated futures contracts. SynFutures plans to increase its share of the on-chain derivatives trading industry by rapidly responding to customer requests for additional and better functionality as the market for these types of trades expands.

Disclaimer:
This article is intended for and only to be used for reference purposes No such information provided constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific name.

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