Decentralized finance (DeFi) has seen explosive growth over the past year and decentralized exchanges (DEXs) like Uniswap have emerged to challenge centralized finance (CeFi) or centralized cryptocurrency exchanges such as Coinbase and Binance.
Unlike conventional cryptocurrency exchanges, decentralized exchanges facilitate direct peer-to-peer transactions and eliminate the need for intermediaries. Last month, US$173 billion in transactions took place on DEXs, up from around US$1 billion one year ago, according to Dune Analytics.
Uniswap, the largest decentralized spot exchange, saw US$1.4 billion in 24-hour daily trading volume on June 17, compared to that of the two largest centralized exchanges, Binance’s US$15.9 billion and Coinbase’s US$2.1 billion, according to CoinGecko.
Alongside DeFi’s rapid growth, new users and players continue to enter the space.
Singapore-based decentralized derivatives exchange SynFutures announced this week the completion of a US$14 million series A round. The fund raise was led by Polychain Capital with participation from Framework Ventures, Pantera Capital, Bybit, Wintermute, CMS, Kronos and IOSG Ventures. This follows an earlier US$1.4 million seed round in January from Standard Crypto and Dragonfly Capital, bringing SynFutures’ total funding to US$15.4 million.
“In traditional financial markets, derivatives trading volume far eclipses that of spot trading and we’re now seeing a similar shift in crypto, especially in centralized exchanges,” said Olaf Carlson-Wee, founder and CEO of Polychain Capital. “As DEXs increasingly gain market share, we see a unique opportunity for SynFutures to become the leading futures marketplace of the decentralized economy.”
See related article: Report: 1.7 million DeFi users now on Ethereum, 50% more since Jan. 1
Lowering entry barriers to the derivatives market
The SynFutures platform is focused on derivatives — financial instruments such as futures contracts or options based on the values of their underlying assets — and supports a variety of assets, including Ethereum-native, cross-chain and off-chain real-world assets, traded against ERC-20 tokens as margin.
SynFutures has launched its platform to users who pre-register (in a “closed alpha”) and the platform will go live on Ethereum’s mainnet and Polygon, an Ethereum layer 2 scaling platform, next month.
“We’re aiming to level the playing field for the average investor by cultivating a free and open market for derivatives trading,” said Rachel Lin, SynFutures’ founder and CEO, in a statement.
“We’re targeting investors who are exploring new ways to hedge risk and create arbitrage in the market with derivatives. This includes both retail investors and asset managers like family offices, hedge funds, etc, many of whom likely have some exposure in the spot markets and are now looking to make more sophisticated trades,” added Lin, who ran structured derivatives sales at Deutsche Bank and co-founded Matrixport, one of Asia’s largest digital asset neobanks, prior to founding SynFutures. “We also see a lot of opportunity in emerging markets where there’s a lack of financial infrastructure and some assets may not be accessible to the average investor.”
Why decentralized exchanges?
With a decentralized exchange, asset custody, settlement and market-making are automated by smart contracts, which creates a more efficient and open trading environment, Lin told Forkast.News in an interview.
In contrast, for centralized exchanges, the exchange is the trading matching engine and also plays the counterparty role for the trader. “For users, it actually poses a huge risk because centralized exchanges are a black box. You don’t know how the order was executed, if another centralized exchange may have issues fulfilling the trade, or if the quote is incorrect,” Lin said.
“What’s great about a decentralized system is that everything is automated… everything is written in code, which brings a sense of openness and transparency,” Lin added. “You can use an automated market maker (AMM) model to quote the price,” said Lin, adding that an AMM could be thought of as “a robotic market maker that is always ready to quote prices for two assets with a pre-set algorithm.”
“And with that, market making, which used to be dominated by a handful of large institutions and funds, can be as simple as making a deposit and walking away,” Lin said.
AMMs completely revolutionized the market-making business and now DeFi users can easily create a new asset pair market, provide liquidity and earn fees, Lin said. There was greater transparency as “everything — the price, the profits, loss, the liquidation — is transparent and traceable.”
“Now we’re expanding this model with rigid financial product design and risk management to the derivatives market,” said Lin, adding that the SynFutures platform had been designed to incorporate risk management mechanisms such as setting a maximum price slippage within one block, to protect users’ positions and avoid unintended price volatility for example through the manipulation of oracle index prices by flash loans.
“DeFi is at its early stage and lots of people who are building protocols do not come from a traditional financial background and they are not aware of such limitations and that such designs have been incorporated into the traditional finance systems,” Lin said, “So we bring those in.”
CeFi versus DeFi — which will prevail?
Lin sees DeFi and CeFi co-existing for “quite a long time” due to DeFi’s issues with user experience, increased anti-money laundering/know-your-customer (AML/KYC) requirements, and infrastructure capacity, especially with the Ethereum network.
Comparing DeFi now to the early days of the internet, where what companies like Amazon and Alibaba did was to lower the entry barrier for people to open a shop, Lin said: “We want to bring more varieties of assets on chain and lower the entry barrier for people to supply these services to the platform, and the infrastructure and the user experience will improve with increasing demand.”
“If you focus on the user experience from day one, it’s very hard because you don’t have any demand,” she added. “But I believe that this will come, just give it time.”