In the traditional finance (TradFi) market, derivatives play a crucial role. They’re a $1 quadrillion industry, worth more than global debt, global real estate, and the entire stock market sector combined. Financial derivatives, also known as synthetics, are contracts whose value is determined by the value of an underlying asset.
They may also represent the underlying asset’s value. The fact that savvy traders can create derivatives products on almost any investment asset is one of the reasons for the derivatives market’s size. As a result, there is a multitude of derivatives available.
Options, futures, and swaps are examples of derivatives. Forwards and futures contracts bind a contract buyer to purchase an asset at a predetermined price on a future date. Contract buyers have the right to trade in an underlying asset at a predetermined price when they purchase options. Swaps facilitate the exchange of cash flow between two parties.
According to legend, the Ancient Greeks were among the first people to trade derivative products. In the sixth century BC, Thales, a Greek philosopher, made a tidy profit by inventing the option contract.
He predicted a bountiful olive harvest in Greece and went ahead and made deposits at local olive presses. As a result, Thales monopolized the olive press market for a small investment. When his prediction came true and the demand for olive presses increased, his bet paid off handsomely because he rented them out for a profit.
Benefits of derivatives
Market fluctuations benefit hedging and speculative investors. To enjoy “returns to scale,” an investor only needs to make a well-researched guess. Derivatives not only have the potential for massive returns, but they also help to diversify global trade.
They improve the trade efficiency of their underlying markets by lowering the unpredictability of the costs and risks associated with outright asset purchase. As an example, investors will find it easier to buy S&P 500 futures than every stock that underpins their value. They can use derivatives to hold multiple assets in their investment portfolio rather than a single asset.
Derivatives also provide investors with access to markets that are otherwise inaccessible. As an example, a company could use interest rate swaps to gain access to lower interest rates in various geographical locations. An investor who purchases a derivative product gains exposure to the asset’s price movement without physically owning it.
All the investor does is speculate or hedge on the product’s potential while transferring the risk of holding that product to a third party.
The massive amount of investment capital and attention poured into derivatives in TradFi demonstrates that speculation and hedging do have massive potential. Derivatives, on the other hand, are high-risk, complex, and speculative products, so they are regulated and difficult to access in TradFi. Furthermore, they have high counterparty risks, necessitating extensive due diligence to avoid party default. Derivative products are only easily accessible to institutional or registered brokers, according to centralized finance regulations.
Fortunately, advances in decentralized finance have the potential to change this status quo. Platforms for synthetic assets, such as Sypool, create blockchain-based representations of derivatives for an intermediary-free, permissionless, and simple trading experience on decentralized exchanges.
Sypool, for example, tokenizes assets that investors can use as collateral in various DeFi protocols to generate passive income. Sypool’s settlements are handled automatically on-chain via smart contracts. Sypool has created low-barrier access to a sophisticated and unique financial instrument by combining derivatives and DeFi.
Crypto derivative platforms hold $3 billion of the $83 billion in DeFi protocols. This amount represents a minuscule portion of the massive derivatives market in the traditional finance market. This large disparity has several positive implications for the DeFi market.
As crypto derivative projects mature, they will provide open access to global investors who have been excluded from derivatives markets by centralized financial institutions. Anyone with an internet connection and a smartphone can invest in synthetic assets, bringing massive amounts of liquidity to the decentralized finance market and aiding in the wealth gap’s closure.
Sypool is a project-based in Solana that creates blockchain-based synthetic assets. Its protocols generate asset derivative packages and use a bi-token system. Because of its scaling capabilities, the Sypool development team chose Solana over Ethereum.
Solana, like the Ethereum network, is a programmable blockchain, but unlike Ethereum, it is extremely fast. We’re talking about base speeds of 60,000 TPS, with a potential future speed of 700,000 TPS as the network expands.
This implies that Solana can outperform Visa, one of the fastest networks in traditional finance. Solana’s development team is led by CEO and co-founder Anatoly Yakovenko, who has previously worked for notable companies such as Dropbox and Qualcomm. Data show that institutional interest in Solana-tracking products has reached an all-time high of $96. As a result, Solana’s token SOL has risen in value, gaining more than 100 percent in a month.
How Sypool works
Sypool brings traditional finance’s structured products system, which restricts access to derivatives, to the Solana blockchain. Structured derivatives are pre-packaged investment assets that payout on maturity. The appeal of structured products is their high level of customization in terms of risk-return objectives.
Sypool is an investment product that combines asset derivatives into a mutual fund-like structure. The Sypool mutual fund product is depicted as a multi-token pool in this illustration. You can buy a share of this fund and share in its profits and losses.
Furthermore, its fund shares represent a minute fraction of a multi-token pool that rewards investors with staking rewards in exchange for the provision of secondary market liquidity. The Sypool token pool manager, the oracle, and the user are the three fundamental structures of the Sypool protocol.
- Sypool’s Synthetic Asset Pool (SAP) protocol puts managers at the helm of its operations. Managers create Sypool pools, and each pool follows predefined strategies. Changes to these rules are voted on by investors and then audited by the Sypool foundation before being enacted.
- Oracles, on the other hand, provides real-time asset prices to Sypool smart contracts.
- To participate in Sypool’s derivative products, Sypool users will mint the SAP token using the protocol’s governance token SYP. When cashing out on their investment, these investors may be able to burn their SAP.
Sypool bi-token system
Sypool’s one-of-a-kind bi-token system is based on the use of SYP, its governance token, and SAP tokens. SAP tokens represent various shares in the company’s mutual fund. Every derivative product has its own SAP token.
Unlike TradFi derivative products, which lock in investor funds for a set period of time, you can redeem your SAP at any time for SYP, BTC, USDT, SOL, or ETH. The Sypool exchange will reward investors who hold SYP tokens with liquidity provider rewards. They can also earn more tokens through yield farming.
How is Sypool different from other crypto derivative platforms?
Sypool, as listed below, has four distinct functions that will make it a leading synthetics platform.
The Sypool index-tracking pools
Managers at Sypool select the best asset indices to track and launch pools that hold investor funds. They run the funds in token pools using smart contracts and invest all user funds in a secure, pre-audited derivative product.
By hedging non-systemic risks with a variety of crypto assets, the managers create a low-risk yield-earning product. Smart contracts protect investor funds from rug pulls and other fraudulent activities.
Sypool investor funds are all smart contracts locked and thus secure. These assets can be traded in an exchange by the Sypool manager, but they cannot be withdrawn.
Structured yield earning products
As previously stated, Sypool has implemented a structured derivatives system with a variety of fund share tokens to suit a wide range of investment risk appetites. Buyers of SAP-R1 and SAP-R2 tokens, for example, can act as liquidity providers and earn staking rewards.
SAP1 tokens are low-risk index-tracking tokens, whereas SAP2 tokens are trader-based and exchange-tradable by managers. SAP2 structured derivatives pools return 70% of profits to SAP holders. The remaining 30% of the profit is split between the manager and the Sypool foundation. SAP2 tokens have an investment period of 8 weeks.
SAP3 pools are a type of structured yield fund that combines various Sypool tokens to cater to a wide range of risk appetites. The ABQT-SAP pool is a specialized synthetic assets pool that binds SYP to smart contracts for a period of six months. Managers of ABQT-SAP will be rewarded for their efforts in agriculture.
Synthetix vs Sypool
Synthetix is a first-of-its-kind synthetic assets DeFi platform. It is DeFi’s most important derivatives protocol, and it runs on the Ethereum blockchain. Its products are designed to track fiat currencies, commodities, and crypto-assets. Users of Synthetix create Synths by staking SNX to earn rewards.
Synths can be traded on DEXs such as Uniswap by investors. Unlike Sypool’s Solana blockchain, which is known for its speed and efficiency, traders and stakeholders on Synthetix face high gas charges when the Ethereum network is congested. Trading on Synthetix is thus prohibitively expensive for short-term, small-scale traders.
SNX is used as a collateral token in Synthetix’s token system. SNX holders receive 0.30 percent of all Synthetix Exchange fees in sUSD. Sypool, on the other hand, uses SAP as a collateral token while issuing SYP tokens for staking and yield farming. SYP holders are also included in the protocol’s governance system.
Unlike Sypool, which creates structured pool products with varying levels of risk and reward, Synthetix creates a large debt pool of investor liquidity before issuing SNX tokens against it to ensure infinite shared liquidity for all of its derivative products.
To that end, Synthetix has 750 percent collateralization ratios for all Synth buyers. As a result, Synthetix capital is once again inefficient and unsuitable for small-scale or short-term derivative traders. Sypool’s smart contracts, on the other hand, use a liquidation-auction system.
If a derivative index loses at least 34% of its yields, the protocol will liquidate a pool to protect investor assets. As a result, Sypool users do not have to deal with over-collateralized ratios like their Synthetix counterparts.
SAP’s collateralization rates are currently 300 percent. Managers will be notified if their SAP collateral rate falls below 250 percent. Liquidation begins at a collateral rate of 200 percent, liquidating all investor debt.
Sypool users can also invest in Manager-driven pools. Sypool managers are evaluated based on their performance, risk management abilities, and Sypool community votes. As a reward for their ingenuity, the most successful managers have more pools at their disposal.
Furthermore, Sypool accepts SYP, BTC, USDT, SOL, or ETH as collateral when minting SAP, whereas Synthetix only accepts SNX as collateral when minting synths. Users can now mint their synths with ETH, but they will not receive SNX benefits such as exchange fee rewards or SNX as a yield for providing liquidity.
The final word
Sypool’s decentralized autonomous organization (DAO) is made up of its board of directors, council members, community members, representatives, and the Sypool foundation. Sypool co-founders Jackson Wong and Jason Chen lead the team.
Wong founded Quantum Technologies, and Chen has worked for a number of major financial institutions, including Standard Chartered. Sypool’s quant SAP-R1 and SAP-R2 pools are now available for purchase. Participants who want to participate in their testnet should obtain test tokens from the Sypool testnet.
Official website: http://sypool.io/
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