Stablecoins have a hegemonic hold over the crypto derivatives space. Most of the perpetual contracts across the CEX.IO cryptocurrency exchange are priced in stablecoins, and all contracts on the FTX exchange are USD margined. Likewise, all perpetuals on decentralized finance (DeFi) derivative protocols like Perpetual Protocol and DYDX are USD linear contracts. This is the […]
Stablecoins have a hegemonic hold over the crypto derivatives space. Most of the perpetual contracts across the CEX.IO cryptocurrency exchange are priced in stablecoins, and all contracts on the FTX exchange are USD margined. Likewise, all perpetuals on decentralized finance (DeFi) derivative protocols like Perpetual Protocol and DYDX are USD linear contracts. This is the stablecoin standard in the derivatives market.
But a new protocol from Qilin allows altcoins to be used in crypto derivative deals, which will rapidly expand the utility of altcoins. We believe that just as fiat money supply exploded once we came off the gold standard, so altcoin demand will explode as the crypto markets move off the stablecoin standard. And a key driver for this move will be the development of derivative markets priced and traded in altcoins.
Derivatives generate critical volatility, which is likely to be the engine of growth for altcoins. Volatility creates critical trading opportunities for a cryptocurrency. Derivative availability leads to more volatility which leads to more trading opportunities, which in turn leads to more value.
However, as a cryptocurrency expands in market capitalization, it becomes more difficult to generate volatility. The lack of volatility generation tools further restricts the growth of a cryptocurrency. Altcoins need coin-margined derivatives for token-native value accrual. Stablecoin-margined derivatives hijack the value created by altcoins for stablecoins.
Coin-margined (inverse) derivatives accrue the value created by altcoins for altcoins. Perpetual contracts are index products that do not require underlying asset settlement, making them the most capital-efficient capitalization expansion tool.
A critical reason for the lack of traction in the decentralized derivatives market is because the typical business model fails to attract users. Most derivative protocols today are based on the spot market model of Uniswap V2. This means they have one uncapped liquidity pool and an automatic market maker model. However, without an effective liquidity provider (LP) risk management system or an LP reward premium, LPs have no incentive to provide liquidity for derivatives, which have a higher risk profile.
Qilin Protocol has changed all this with its permissionless, crypto-denominated perpetual trading protocol for all crypto assets. At the core of Qilin Protocol’s design is its understanding of the LP business, having been an active market maker for both projects and exchanges since 2017.
Qilin’s key innovation is to create peer-to-tranches liquidity pools that have different risk-reward profiles, based on an understanding of the end users, be they market makers, traders or yield seekers.
For market makers, the liquidity pools have a primary liquidity tranche, a customizable tranche cap and a preferable annual percentage yield (APY). Yield seekers can access the reserve liquidity tranche, an uncapped public access as well as a secondary APY.
Meanwhile, traders can access peer-to-pool liquidity that has single-side margins for altcoin or stablecoin-settled contracts, counterparty liquidity for measurable risk exposure and a multi-pool liquidity to allow LP-generated volatility as well as LP risk protection.
Qilin Protocol also has an incentive structure that does not inflate the value of the tokens that are offered. Instead of the traditional incentive mechanisms based on a predetermined tokenomic pool with pre-allocated reward tokens, Qilin uses a rebate structure. This is a community-owned, non-inflationary front end with customizable rewards, asset pair marketplaces, trading fee settings, rebate settings and a referral link
These innovations dramatically increase the use cases for holders of altcoins, offering a new way to increase their yields through participation in these liquidity pools. Qilin Protocol can also form the foundation for a new suite of tools that other market participants can use to build their own crypto derivative platforms. Increasing the utility of altcoins in the derivative markets will massively increase their value. In the process, this will allow the market to move away from the hegemony of stablecoins and the dominance of bitcoin.