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Crypto Derivatives in Decentralised Exchanges – A Developer’s Guide

As the cryptocurrency market matures, a new wave of financial instruments is gaining traction — crypto derivatives. These products, which derive their value from underlying digital assets like Bitcoin or Ethereum, are offering both institutional and retail investors innovative ways to gain exposure to the crypto space, hedge risks, and amplify potential returns.

But what exactly are crypto derivatives, and why should investors pay attention to them? In this article, we’ll dive into the fundamentals of crypto derivatives, explore their various types, and discuss how they are shaping the future of digital finance. Whether you’re a seasoned crypto trader or just starting to explore the world of digital assets, understanding derivatives could be the key to unlocking new opportunities in this fast-evolving market.

Centralised Vs Decentralised Crypto Exchanges

Centralised exchanges are the most common type of crypto trading platform. Examples include Binance, Coinbase, Kraken, and Bitfinex. These platforms function much like traditional stock exchanges, where users can buy, sell, and trade assets through a centralized authority or intermediary.

Advantages include High Liquidity, User-friendly with proper customer support as it has intermediaries which share profits in the process and also proper KYC verification is done by the exchange.

Decentralised exchanges, such as Uniswap, SushiSwap, and PancakeSwap, operate without a central authority. Instead of relying on a middleman to match orders, DEXs allow peer-to-peer trading through smart contracts on a blockchain.
It has low liquidity and no customer support but is more secure and private as you may not be required to share any form of KYC details.

Why is this important for developers?

On DEXs (Decentralized Exchanges), these derivatives are typically built using smart contracts that automate the trading, settlement, and execution processes. The decentralised nature of these platforms ensures that users have control over their funds and transactions without the need for an intermediary to manage them.

Automated Market Maker (AMM) Smart Contracts

Most DEXs today operate on the Automated Market Maker (AMM) model. The AMM algorithm eliminates the need for an order book and instead relies on smart contracts that provide liquidity through liquidity pools.

Etherum Tokens on Decentralised Exchanges (DEXs)

Ethereum tokens are central to DEX trading, as most DEXs operate on the Ethereum blockchain and facilitate the trading of Ethereum Tokens. Popular decentralised exchanges like Uniswap, SushiSwap, Balancer, and 1inch rely heavily on ERC-20 tokens for their liquidity and trading pairs.

Smart Contract Oracle and Its Role in Decentralised Exchanges

An oracle is a service or mechanism that connects a smart contract to external data sources. It fetches off-chain data and delivers it to the contract in a minimised and secure way.

Oracles are particularly important in decentralised finance (DeFi) applications, prediction markets, insurance platforms, lending protocols, and many other use cases where the smart contract logic needs to be triggered based on real-world events.

Oracles help in Access to Real-World Data,Triggering Contract Execution,Enabling Decentralised Finance (DeFi),Increasing Trust and Security,Improving Smart Contract Functionality.

Liquidity Pools

A liquidity pool is a collection of funds locked in a smart contract that provides liquidity to a decentralised exchange (DEX) or a decentralised finance (DeFi) protocol. It is a crucial concept in DeFi and enables users to trade assets, earn rewards, or borrow/lend assets in a decentralised manner, without relying on centralised intermediaries like traditional exchanges or banks.

In simple terms, a liquidity pool is a shared pool of assets that allows decentralised markets to function. By providing liquidity to these pools, users contribute to the availability of tokens on a platform, ensuring that traders can easily buy or sell assets without having to wait for someone else to match their orders.

Taking It Further…

While I shared you all some initial insights on the underlying principles of DeFi technology. It is important to note that we require this understanding to work on interesting projects in the DeFi space. In further few articles we will understand more on Automated Market Maker models and try to get a hands on the providers for these exchanges and look at Swaps through Ethereum blockchain. As it provides scope for developers. Stay tuned!

The involvement of Senior Leadership varies from organization to organization and the industry type. However, in general best practices recommends that since the landscape of Cyber Threat keeps evolving, we need to keep educating our leaders so that they understand the importance of Cybersecurity Awareness and Training in order to train the entire organization so they act as the first line of defense.

A new trend has been observed recently in the Cybersecurity pitch that senior leaders are taking initiative in hiring Cybersecurity consulting firms and vCISO services to address the policy gap that is arising because of the fast-pacing evolution of IT technologies, specifically AI based services in all segments of IT services and tools.

It is recommended that each organization that is onboarding new technologies, IT solutions, applications and tools to service their business needs should have a mandatory cybersecurity awareness program with focus on top-down approach. Cybersecurity should be discussed in every Department meeting to ensure that Cybersecurity is not only IT/Security responsibility but everyone’s responsibility.

University of California, Riverside (UCR) has published a paper that recommends leaders to leverage various leadership styles to an advantage when it comes to combating cybersecurity challenges in their organizations. Some of the leadership they recommended are:

  • Collaborative leaders promote cross-functional communication and cooperation, breaking down silos that may impede the sharing of crucial information. This open communication facilitates a more comprehensive understanding of potential threats and vulnerabilities, enabling a more robust cybersecurity strategy.
  • Transformational leadership In the context of cybersecurity, this style encourages a proactive approach towards identifying and addressing potential threats. Such leaders foster a transformational environment to instill a sense of responsibility and accountability among team members, promoting a collective effort to safeguard sensitive information.
  • Transactional leaders In the cybersecurity context, adhering to established protocols and compliance measures is the priority. Such leaders ensure that team members follow standardized security practices, reducing the likelihood of human error and exploitation of vulnerabilities.
  • Situational Leaders adapt an approach based on the specific challenge at hand, whether it’s a sudden breach or a sophisticated attack, these leaders guide their teams through effective crisis management and response strategies.
  • People-first leaders can contribute to a strong cybersecurity posture by prioritizing the well-being and development of team members. In the context of cybersecurity, this can translate to a workforce that is more vigilant and committed to upholding security best practices.

Apart from these leadership practices to develop a healthy and effective cybersecurity culture, it is important that an effective Cybersecurity program and tool is implemented to educate every employee, contractor and consultant who has access to the organization’s assets at any capacity.

Author

Jathiswar Bhaskar | Software Engineer, Application Services, GS Lab | GAVS

Jathiswar is a seasoned software developer with expertise in blockchain technology, decentralized finance (DeFi), and cutting-edge software development. Holding a Professional Certificate in Blockchain from IIT Kanpur, Jathiswar has been instrumental in advancing DeFi applications, predictive analytics, and operational intelligence, with a particular focus on Ethereum-based smart contracts and decentralized ecosystems.

With over two years of experience in crafting scalable, user-focused applications, Jathiswar has successfully merged his proficiency in frontend frameworks like Angular and React with backend technologies like Node.js. He excels in integrating blockchain solutions using Web3 technologies, including Solidity, Web3.js, Truffle, and HardHat.

Jathiswar’s technical repertoire extends to advanced visualization libraries such as HighCharts, Chart.js, Kibana, and Vis.js. His work in predictive analytics and cybersecurity has consistently delivered actionable insights and enhanced decision-making processes. He has also made significant strides in blockchain-enabled applications, focusing on tokenization, flash loans, and crypto derivatives, exploring their potential to democratize financial access and optimize trading strategies.

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