Is trading incremental derivatives risky for retail investors?
With the increasing number of retail investors looking to try their hand at derivatives trading and investors getting into regulated decentralized exchanges (DEXs) in the US and China, the number of users using derivatives DEX has increased as bitcoin whales get into derivatives and purchasing power increases These contracts escalated.
Accordingly, daily trading volumes are also higher in derivatives protocols, allowing them to quickly take over centralized financial platforms like Coinbase. The founder of the dYdX protocol has tweet in September 2021:
“Five years ago I left Coinbase and ended up founding dYdX. Today, for the first time, the dYdX protocol is making more trading volume than Coinbase.”
This has sparked retail investor interest in derivatives trading in the decentralized finance sector. Without proper recommendations, however, new investors are likely to give up just as quickly as they started.
Derivatives in DEX: OLDIs it worth the risk?
Derivatives in DeFi not only offer rewards, but also eliminate the inefficiencies of traditional finance. However, the crypto market is volatile, not to mention the complexity of DEX derivatives trading, which requires retail investors to learn how to make their own trades. These investors need to be guided, knowledgeable about DeFi and navigating the platform when they first join.
If you have used DeFi applications launched in 2020, you may feel that the user experience is outdated compared to centralized exchanges. Now, to reach the new wave of users, especially those who used to use centralized exchanges in the past, protocols must aim for simplicity and experience. By introducing new users to the protocols, they are given the space to understand the program, which encourages them to stay. Otherwise, the stain left by users who have had bad derivatives experiences may result in future traders refusing to trade derivatives on DeFi altogether.
From the user’s point of view, derivatives can only be a tool to achieve a specific goal, e.g. B. the use of leverage or the hedging of an existing position. What a derivatives protocol developer can do is clearly explain the user interface as well as the risks involved in derivatives trading. For example, offer “tooltips” to explain complex functionality on the app side to first-time users, conduct bi-weekly demo calls to instruct newcomers on how to use the app, leverage the platform, and address potential concerns one . In addition, it is recommended to build a testnet (test network) so that paper trading users have an opportunity to familiarize themselves with the platform and trading experiences before investing real money in the protocol. The DeFi protocol itself will not be an obstacle to derivatives trading if users are fully informed about the risks and well trained.
DeFi is redefining derivatives trading
Most of the new investors are not experts in DeFi derivatives and so the protocols are really trying harder to welcome these new investors in an accessible and not too far-fetched way so that they can integrate quickly. Nowadays there are many tutorials on derivatives trading on social networks like Twitter, YouTube, Medium or Discord. So, it’s much easier to learn more about derivatives trading on a DEX now than it was in the summer of DeFi 2020.
world market | Source: Swap.Rate
Additionally, DeFi protocols are reinventing traditional finance to drive growth. For example, there are fintech apps like Robinhood that simplify options trading by recognizing a strategy that a user might want to use and allowing the user to execute the strategy with a single tap. Similar strategies have been used in the DeFi space. In fact, more and more protocols are offering structured products with derivatives, such as Ribbon Finance and Stake DAO, allowing newcomers to seamlessly take advantage of these forms.
Increase adoption by creating more experiences
Protocols focus on different methods to improve their usability. Lack of usability is one of the obstacles on the way to mainstream crypto adoption. By increasing usability and providing a simple, easy-to-understand interface, it is easier for users to engage, allowing for faster adoption of derivatives trading.
Today, most derivatives protocols are extremely user-friendly, allowing new investors to start trading immediately and without ambiguity. However, not all protocols prioritize user experience, resulting in many investors not being able to reliably assess the value and risk of their derivatives, prompting the government to create more regulation for derivative products. Without a positive user experience for retail investors, this can result in negative stigma attached to derivatives trading.
Retail investors can expect derivatives trading to become ubiquitous in the future, allowing anyone with a decentralized wallet to easily participate in trading. The popularity of derivatives trading will continue to expand and derivatives protocols need to focus on the experience they offer users to keep up with demand. In fact, the increasing use of derivatives trading in DeFi will create more competition between protocols to create better products, benefit end users, shape an ecosystem, a healthier future where decentralized derivatives trading can really take off.
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