Following a relatively modest 2023, the decentralized finance (DeFi) market experienced a remarkable resurgence during the first half of 2024.
As of Aug. 16, the total value locked (TVL) within the ecosystem stands at $82.67 billion, up from $54.4 billion at the beginning of the year — representing a robust growth of 51.9%.
One of the primary drivers behind this substantial uptick has been the growing adoption of onchain derivatives. In fact, since the beginning of the year, the average daily trading volume for crypto derivatives has skyrocketed from $1.8 billion in 2023 to $5 billion.
Onchain derivatives activity during the first half of 2024. Source: Binance Research
Onchain derivatives activity during the first half of 2024. Source: Binance Research
Ran Hammer, vice president of business development for Orbs, a layer-3 blockchain designed for onchain trading, attributes this growth to several factors.
He told Cointelegraph that the recent bull market and major improvements in user interface (UI) and user experience (UX), as well as lower latency and better tracking tools for copy trading and wallet monitoring, have helped create an ideal environment for leveraged trading.
The first half of the year not only witnessed increased volumes but also brought forth new innovations, such as pre-market crypto offerings, allowing investors to trade tokens before they are officially launched or publicly released.
Increased competition is fueling the derivatives market
The growth in onchain derivatives this year seems to have been propelled by intensifying competition from new market entrants as well as a resurgence in volume among established players.
Derivatives platforms by percentage volume market share. Source: Binance Research
While dYdX remained the clear market leader for most of the first half of 2024, it faced growing competition from emerging protocols such as SynFutures, Hyperliquid and RabbitX.
The latter three projects benefitted from the absence of native tokens, allowing their respective dev teams to focus solely on product development and user acquisition rather than managing elaborate token structures.
Hyperliquid — a layer-1 order book-based perpetual futures decentralized exchange (DEX) — performed particularly well. The platform’s daily trading volumes regularly exceeded $1 billion, overshadowing dYdX.
Its competitive edge seems to lie in its ability to match the performance of centralized exchanges (CEXs) with competitive fees while maintaining fully onchain operations.
Similarly, SynFutures emerged as the second-highest performing perpetual DEX of Q2 2024, registering a cumulative trading volume of over $98 billion.
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One of the platform’s most notable features is its use of its Oyster AMM, which departs from traditional automatic market maker (AMM) models by integrating aspects of an onchain order book. This hybrid setup enhances capital and liquidity efficiency, addressing some of the limitations of conventional AMMs.
Moreover, the growth of blue-chip derivatives projects like Jupiter on non-Ethereum Virtual Machine blockchains also marked a new milestone for the derivatives sector.
Also, with the surge in airdrop campaigns that seem to have captured significant attention and liquidity, a new market type seems to be rapidly emerging — perpetual futures products for unlisted tokens.
Even though this space is still fairly nascent, it has shown promise as a potential barometer for initial market reactions and investor sentiment.
Institutional impact on the sector is growing
Institutional and retail investors alike have had an impact on the growth of onchain derivatives.
Rachel Lin, CEO and co-founder of decentralized derivatives exchange SynFutures, told Cointelegraph, “The change in institutional mindset toward onchain derivatives has been remarkable over the past few years, though it’s still skewed toward crypto-native institutions.”
Lin attributed this shift to three major factors. Firstly, she highlighted traditional finance and governments’ growing acceptance of cryptocurrencies.
A Moody’s report from Q1 2024 shows that government-backed tokenized fund issuance on public blockchains grew to over $800 million in 2023, up from around $100 million at the start of the year.
Lin also believes that there’s increasing trust in stablecoins among major institutions. Since onchain derivatives often rely on stablecoins as the quote asset, she believes institutional traders need to trust stablecoins not to depeg in order to enter the DeFi derivatives market, adding:
“Currently, around $1.4 trillion worth of transactions happen every month through stablecoins, and most large institutions are now comfortable using them as part of their DeFi transactions.”
Lin said that active outreach attempts from the DeFi derivatives industry have also played a crucial role in luring institutions into this space.
Onchain derivatives still face several challenges
Despite the aforementioned growth and advancements made by the crypto derivatives market, a few bottlenecks continue to constrain the space.
Yongjin Kim, CEO of the cryptocurrency derivatives platform Flipster, told Cointelegraph that DEXs still suffer from several inefficiencies when compared to their centralized counterparts:
“Centralized exchanges offer a better user experience with faster execution speeds and lower slippage. Liquidity also remains concentrated on centralized exchanges, making it difficult for traders to execute large trades on decentralized exchanges.”
Lin echoed a somewhat similar sentiment, noting the persistent issue of capital and liquidity inefficiency in DeFi, which often limits the effectiveness and appeal of decentralized derivatives products compared to their centralized counterparts.
She added, “AMMs, while innovative, have struggled with issues like slippage, impermanent loss, and capital inefficiency, making it difficult for DeFi to match the trading experience and liquidity depth found on centralized crypto exchanges (CeFi).”
High gas fees and scalability limitations have further constrained the accessibility and usability of DeFi platforms, especially during periods of network congestion — thereby deterring both retail and institutional users while also potentially slowing down adoption.
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That said, Lin believes the emergence of AMMs (capable of integrating order book models into existing structures) could help alleviate many of the aforementioned issues.
“Order books are known for providing deep liquidity and precise pricing, which are crucial for sophisticated trading strategies, while AMMs excel in offering decentralized, permissionless trading. This not only enhances the user experience but also makes DeFi derivatives more competitive by reducing slippage and improving price discovery,” she said.
Capital influx to DeFi subsectors during the first half of 2024 Source: Binance Research
As the DeFi derivatives market matures and grows, it stands poised for further growth and innovation. The increasing institutional adoption, coupled with ongoing technological advancements, suggests that onchain derivatives could play an increasingly significant role in the broader financial ecosystem.
