User:StardustX Derivative Exchange/sandbox

The argument for IOU’s

Derivatives are financial contracts between 2 or more parties with prearranged details for a transaction - or a right to a transaction - in the future. They derive their value from an underlying asset but are traded as financial instruments in their own right. They are used extensively in financial markets as they offer a wide range of benefits to participants and to the wider capital markets as a whole.

The primary function of derivatives is to manage risk. They provide an instrument for the transfer of risk between hedgers and speculators which in turn allow for more efficient capital allocation, promote capital flows and assist in portfolio diversification. When participants in a marketplace are able to adequately price and take-on risk, the overall stability and capacity of a financial system is increased.

Derivatives can also serve to promote price discovery. Often, derivative markets with large capitalizations can be more active than spot markets and can actually lead spot prices due to having superior liquidity. It is also often easier to short-sell derivatives since restrictions are sometimes placed on securities. As a corollary, greater liquidity and ease of trading lead to lower transaction costs and greater transaction speeds.

These advantages mean that a strong derivatives market encourages arbitrage activities, spurs liquidity and helps attract sophisticated and cross-border investors to the market – including to the spot asset – further improving the efficiency of the marketplace and help reflect the true economic value of the underlying asset.

Therefore, a thriving derivatives market is essential for the development of mature and efficient capital markets as well as a pre-requisite for economic growth of the asset in question.

Size of global derivatives markets

As a market matures and grows in size and number of participants, a robust derivatives market becomes not only beneficial but a necessity.

This has been seen time and again throughout history with all asset classes. The FX derivatives market came into existence in the 1970s when risk and volatility rose as a result of countries adopting floating exchange rate mechanisms after the collapse of the Bretton Woods system. This would also spur greater fluctuations in the growing interest rate markets, leading to the listing of derivatives on interest rate products on the CME in the early 1980s.

These days, derivatives markets dwarf their spot counterparts. According to statistics published by the Bank of International Settlements (bis.org), as of 1H 2021 the notional value of the OTC global derivatives markets was in excess of $600 trillion with a gross market value of ~$12.5T and exchange traded futures and options – in FX and interest rate instruments alone – amounted to ~$34T. Furthermore, derivatives trading has generally shown consistent annual growth. In the year 2020, trading volumes in derivatives rose by more than 40% yoy with the majority of increases stemming from futures and options – according to a derivatives survey carried out by the World Federation of Exchanges.

By comparison, according to a report by TokenInsight, the transactional volume of cryptocurrency derivatives was ~$2.7T as of Q3 2020 with spot crypto currency market cap also hovering around the $3T mark according to statista.com.

Crypto derivatives growth

While the crypto derivatives market remains relatively small, trading volume and open interest has shown tremendous growth in the last 12 months. In June 2021, a review carried out by CryptoCompare found that derivatives trading volume exceeded that of cash for the first time in the history of crypto derivatives.

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Open interest in BTC options (across all exchanges) doubled from June to August 2021, reported coinglass.com (formerly Bybt). Ether options has shown even more explosive growth with open interest growing by over 800% year-on-year.

A study carried out by the Carnegie Mellon University’s CyLab showed that daily volume of traded crypto derivatives peaked at over $100 billion and was 5x greater than volume traded in the corresponding spot markets.

The CME Group – the largest financial derivatives exchanges in the world – has also reported steady growth in volume in their listed crypto derivatives. The average daily volume of BTC futures has risen ~30% since 2020 while open interested has also jumped nearly 20%. CME’s Ether futures, launched earlier in 2021, has also recently seen record traded volumes and open interest.

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Factors hindering growth

Despite the growth in crypto derivatives trading already seen, there remain factors impeding the further growth of these markets.

1)     Age: the crypto derivative markets are still very young - with notable volumes only being seen in the last few years

2)     Offering: the instruments offered remain rather underdeveloped

3)     Institutional scepticism: institutions remain reluctant to enter fully into this marketplace due to uncertainty regarding regulatory/legal stance

4)     Infrastructure: participants are anxious about inadequate market infrastructure with regards to security and reliability

5)     Pricing and volume: high volatility and unpredictable liquidity make for a difficult trading environment where risk cannot be adequately priced or managed

6)     Legal framework: regulatory oversight is ambiguous and subject to change

All of these obstacles are interlinked in some way to one another and together act as barriers of entry to investors who are interested in trading crypto derivatives.

StarDust Barricade’s solution – StardustX.com

StardustX.com is the market evolution of cryptocurrencies by providing a complete solution for cryptocurrency derivatives trading. It is being built to address the various factors hindering the further growth and industrywide acceptance of crypto derivatives as a fully-fledged asset class. With StarDustX.com, StarDust Barricade aims to fulfil our vision of making cryptocurrency derivatives trading fair and accessible to all. It will consist of:

StardustX.com Exchange

Stardust Barricade will build a standalone crypto derivatives exchange. The StardustX.com exchange will provide a secure, reliable, and efficient marketplace on which traders can transact crypto derivatives. StardustX.com exchange will feature the newest price-matching engine and industry best-practices order-routing to ensure a fair and orderly trading environment. The exchange will be built upon the latest decentralized blockchain technology which ensures the highest level of accountability and transparency for all users. Backed by the auditable SDX chain, StardustX.com will fulfil all regulatory and compliance requirements.

Volatility Plotting & Estimation

Stardust Barricade will plot and estimate volatility of all the currently listed crypto assets on the StardustX.com platform. Volatility calculations for cryptocurrencies are especially challenging due to the unconventional skews that are common in the crypto marketplace. This means inaccuracies will arise when using models that were designed for traditional asset classes, leading to errors when pricing derivatives. Stardust Barricade will plot volatility curves using models built upon an architecture using the SDX ledgering system of the past; current; and future price matrix, considering the unique attributes of cryptocurrencies.

Blockchain Relational Databases for Derivative Layers

We will archive a tokenized, on-chain database that records all relevant trading variables for each strike price and exercise date of the StardustX.com listed cryptocurrencies in the past, present, and future. This results in an ongoing chain for all variables, prices and volatilities that is being transparently displayed. In-depth and historical information is accessible in the form of data packages via SDB tokens.

StardustX.com Analytics & Trading Platform

StardustX.com will provide a token-accessed fully featured derivatives analytics and trading platform to help traders plan, analyze and execute their crypto derivative trades. From classic strategies to sophisticated multi-leg trades, the platform will enable users to custom-build such strategies and visualize the potential outcome, thus improving accuracy and ease of execution. Not only does this facilitate dynamic hedging but also the ability to roll expiration dates effectively.

Stardust Barricade API gateway

Stardust Barricade provides a path by which other cryptocurrency exchanges can gain access to the StardustX.com exchange as well as StardustX.com derivatives platform and its benefits – through the Stardust Barricade API gateway.

StarDust Token

Two utility tokens – StarDust Barricade (SDB) and StarDust Data (SDD) – will be issued. SDB is the utility token required to gain access to the infrastructure of services on the StardustX.com platform. SDD is the token needed to purchasing access to historical data and the StardustX.com research and education platform.

Stardust Barricade believes that when crypto-derivatives trading standards are elevated to a professional level, traders globally can benefit from:

❖           Improved liquidity and tradability of the underlying asset

❖           Effective hedging of investments in a highly volatile environment

❖           Access to crypto volatility trading for profit

❖           Access to strategies that were not previously available

For more information, please visit:

https://stardustx.com/