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Unlocking opportunities for advanced financial instruments and trading strategies
While derivatives have long been invaluable instruments in traditional finance, the market for derivatives in DeFi is still in its infancy despite the plethora of financial products and services that have sprung up. This is because L1 blockchains that currently dominate the DeFi space were not built with the intention of supporting complex programs such as sophisticated financial constructs.
As a scalable blockchain solution, Carbon can support almost any financial asset from derivatives to synthetic assets without compromising security, speed or cost. Currently, Carbon already supports spot markets and dated futures on Demex, its reference UI, with up to 50x leverage. With perpetual swaps live on the protocol, Carbon is positioned to be the only perpetual decentralized exchange (DEX) with cash-settled futures that allows for a risk-free cash and carry trade in the Cosmos ecosystem.
Dated futures are derivative instruments with fixed settlement dates.
As with any other derivatives, the underlying asset is never traded, granting traders complete self-custody of their digital assets. This allows traders to gain exposure to an asset’s price movements without having to actually hold the asset itself, which can be time-consuming to set up securely (e.g. additional wallets required).
Futures enable traders to take advantage of markets that are falling in price as well as those that are rising i.e. the ability to short-sell (bet on downward movement of asset prices) without having to borrow the underlying asset. This is a particularly important feature for hedgers, who need to be able to protect themselves against declining assets.
Perpetuals share the same features listed above. However, unlike dated futures, perpetual swaps do not have expiration dates. This enables traders to hold the futures contract for as long as they want, without the need to constantly roll over expiring contracts.
This eliminates the need to constantly re-establish trade positions. For this reason, the price of perpetual contracts are anchored to and closely track the spot prices of their underlying assets with the help of a pricing mechanism known as funding rates.
Oracles are services that feed blockchains with off-chain data such as price feeds from external sources.
For Carbon's derivative markets, underlying price feeds can be created through oracles via governance which allows for trading of assets with USD settlement, without needing to support the actual token itself. This allows for a variety of markets such as indexes, stocks, commodities and non-digital assets to be traded via the CFD market.
Contract for Differences (CFD) markets is a financial contract that pays the differences in the settlement price between the open and closing trades.