Derive: The DEX For Pro Traders

Michael Spain -

Despite comprising the vast majority of the decentralized crypto options market, trading over $1.5bn in notional volume, more than all other options DEXes combined, Lyra V1 was not fine-tuned for the discerning demands of smart money. The time is ripe for that to change.

Enter Derive, a fully redesigned, feature-complete, self-custodial, highly capital-efficient, on-chain options, perpetuals, and spot exchange with a CEX-like user experience. The melding of self-custody with advanced features is a distinguished achievement, setting Derive apart in a product category marred by compromises.

In the coming months, Derive will be turbocharging the derivatives trading experience with a series of upgrades, including:

  • Portfolio margin
  • Capital efficient spreads
  • Multi-asset collateral
  • Loss-minimizing partial liquidations
  • A frictionless user experience — snappy execution, gasless transactions, deep liquidity, and advanced order types

Lyra V1 echoes the spirit of the Wright Flyer — a pioneering innovation, remarkable but foundational in nature. Derive, in turn, symbolizes the transition to high performance and feature-rich sophistication, much like the F-35 in modern aviation. Similar to how the F-35 is designed to give pilots air superiority, Derive is designed to give pro traders market superiority.

Portfolio Margin

Portfolio margin offers unparalleled capital efficiency by assessing the risk of your positions holistically rather than in isolation. This translates to:

  • Increased buying power and leverage resulting from the netting of positions and consideration of the overall risk in your portfolio
  • More dynamic and responsive risk management; the risk-engine recognizes when traders mitigate risk through strategic hedging, reducing their margin requirements
  • Enhanced risk-analysis capabilities; a more nuanced approach to calculating risk enables traders to better understand overall portfolio health and fine-tune trading strategies with more precision

Capital Efficient Spreads

Unlike the bi-directional, linear payoff functions conferred by perps, options offer traders:

  • Convex payoff functions
  • Passive-income opportunities
  • The ability to trade volatility
  • Implicit leverage
  • A litany of strategies that can be employed to profit in any market context

Trading options strategies without capital efficient spreads results in painfully exorbitant capital outlays, as each leg of your trade is margined in isolation.

Alternately, with Derive’s capital efficient options spreads, you never post a penny of excess collateral or pay excess premiums upfront, as the margining system recognizes maximum loss thresholds and partially offsetting premiums.

For spreads with an even ratio of expiry-aligned long and short options, collateral requirements are $0 for long spreads and equal to the width of the spread for short spreads. Examples:

  • A $1800/$2000 ETH long call spread would require you to post $0 in collateral, and the strategy’s upfront cost would be partially funded by the sale of its short leg
  • A $1800/$2000 ETH short call spread would require you to post $200 in collateral with some of this collateral coming from the premiums received.

Multi-Asset Collateral

Multi-collateral will be supported in V2 to increase flexibility and reduce friction for traders. You will be able to collateralize your perpetual and options positions with a multitude of base assets, marking a departure from the industry standard practice of borrowing USDC against various assets in a separate lending protocol.

This is novel for options and perps in DeFi — a first-of-its-kind feature offering. You could, for example:

  • Long a BTC perp with ETH as collateral
  • Short an ETH call with BTC as collateral
  • Borrow against stETH to sell ETH covered calls

Multi-collateral is the lynchpin of a robust trading experience. Advantages include:

  • Enables traders to begin trading without converting their holding into a specific quote asset, such as USDC
  • Increased asset utilization; spot exposures can be maintained and used as collateral, offering traders increased buying power
  • Streamlined pair trading; traders can establish market-neutral positions that speculate on the relationship between two assets
  • Diversified collateral pooling allows traders to increase the durability of their portfolios

Loss-Minimizing Partial Liquidations

Partial liquidations were an essential aspect of the V2 overhaul. They swiftly remove risk from the system and ensure a maximally beneficial user experience for traders. Other advantages include:

  • The market impact of liquidations is reduced by closing over-extended positions incrementally, decreasing the likelihood of insolvency
  • PnL preservation; liquidating positions incrementally allows traders to maintain a portion of their exposures and redeploy released capital
  • Staggering liquidations across price levels can reduce the risks of incurring costs as a result of depressed liquidity at any one particular price level

Frictionless CEX UX

Derive will run in a performant, dedicated execution environment (the OP stack) with an institutional-grade order matching engine. It will feel so much like a CEX that we’ll have to remind users that it’s a DEX. Standout features include:

  • Snappy, low-cost execution, instant confirmations, gasless transactions, and a seamless deposit/withdrawal flow with Ethereum-inherited security
  • Deep liquidity, fostered by bespoke trading rewards and liquidity programs with targeted incentives
  • Advanced order types, including market, limit, TIF (e.g., good-till-time orders: gtc/fill, kill/immediate, cancel limit), post only, reduce only, stop-loss, and take-profit orders, with more in the pipeline

Scalability is imperative when building with professional and institutional traders in mind. V2 will support up to 15x more volume per dollar of TVL than V1. This will spur liquidity and result in tighter spreads and two-sided depth.

Scaling Crypto Options by 100x

Perpetual trading volumes typically overshadow spot trading volumes by 400% or more, while options trading volumes lag behind spot trading volumes by multiple orders of magnitude. This is in stark contrast to traditional financial markets, where options volumes regularly eclipse spot volumes. To date, crypto exchanges have been hamstrung by glaring deficiencies:

  • Pedestrian user-experiences
  • Parched liquidity and wide spreads
  • Precambrian margining systems
  • Single-instrument-focused approaches (they promised us flying cars, and we got 280 perpetual exchanges)

Options are the most versatile and potent instrument in finance and we don’t see their lack of adoption as an indictment of their utility. Instead, we see it as a call to action.

To be a professional, you have to take every advantage. Derive ensures that pro traders can do just that. Trade on Derive.

Derive is the infrastructure layer for DeFi derivatives, visit derive.xyz.