The Complete Guide to Derivatives

  • November 17, 2022
  • 2 Min Read

When it comes to the legitimacy and maturity of different financial instruments, derivatives have proven time and time again to be a crucial piece of infrastructure necessary to support the long-term growth of any asset class.

As it relates to the realm of cryptocurrencies like Bitcoin ($BTC) and Ether ($ETH), the introduction of future, forwards, options and swaps provided a vital opportunity for investors to short and hedge risk against historically volatile assets.

What are derivatives?

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks.

Derivatives are inherently secondary securities as their value is derived from the value of the primary security that they are linked to. In and of itself, traditional derivatives have no value. Examples of derivatives commonly include futures contracts, forward contracts, options, swaps and warrants.

Thanks to the advent of smart contracts, tokenized derivatives can be created without the need for a third party. Counterparty agreements are programmatically encoded, drastically reducing the risk for malicious activity. This trend has allowed retail investors to take advantage of opportunities previously restricted to those with brokerage accounts or specialized knowledge.

Top picks


As the leading derivatives platform in the DeFi sector, Synthetix allows for permissionless synthetic asset creation tied to the value of real-world assets.

With a vast range of Synths representing various fiat currencies, bonds, commodities and cryptocurrencies, the platform offers exposure to traditional markets directly with cryptocurrencies. To interact with different Synths, we recommended visiting Mintr. It’s important to note trading on the platform required the usage of Synthetix native stablecoin – sUSD.

Why Synthetix?

  • Synthetix utilizes a native ERC20 token – SNX – as collateral to mint Synths. All Synths are overcollateralized to the tune of 800%, meaning every derivative is backed by significantly more collateral than it’s outstanding market cap.
  • Transaction fees on Synthetix’s non-custodial DEX go to SNX holders and Synth minters, incentivizing Synth creation and giving value to the underlying collateral.
  • Synthetix offers incentives to those providing liquidity on Uniswap and Curve for sETH and sUSD pools.


As a hybrid platform offering DEX, lending and leverage, dYdX is a unique provider of permissionless derivatives. Traders can use dYdX to open up a position with up to 5x leverage on Ether, with the expectation of other assets being added in the near future.

Why dYdX?

  • Assets supplied to the exchange constantly earn interest, even while being used on an open position
  • dYdX fronts transaction costs on behalf of their users, making the only transaction cost the initial deposit and withdraw
  • Anyone can participate in liquidation auctions to purchase liquidated collateral at a discount.


Uma is a rising protocol allowing for the permissionless creation of synthetic tokens. Unlike Synthetix, anyone can create a synthetic token which tracks whatever asset, information or index they see fit so long as there is a proper way of monitoring that information.

Why Uma?

  • Uma introduced priceless tokens which help aid against oracle manipulation
  • Anyone can contribute liquidity to a synthetic token and earn fees when it is traded.

Final thoughts on derivatives

Derivatives play a vital role in ensuring the long-term stability and growth of the digital asset ecosystem at large. With mechanisms in place to go long or short on different assets and information, these instruments provide a solid foundation for traditional players to gain unique exposure using cryptocurrencies.

Frequently asked questions

Are derivatives safe?

On all the aforementioned platforms, all derivatives are well overcollateralized. While the degree of over-collateralization varies across different platforms, there are incentives in place for actors to profit off identifying undercollateralized assets.

What can of assets do I need to buy derivatives?

Most derivatives require the use of stablecoins like Dai, USDC, or sUSD (in the case of Synthetix). Similarly, most derivatives can be purchased and issued using Ether as collateral.

Where can I trade derivatives?

Most derivatives can be traded directly on the platform’s native exchange. In the event this is not an option, derivatives are commonly exchanged on DEXs like Uniswap.