The spot trading and swapping market in decentralized finance (DeFi) has grown exponentially over the past year, but the DeFi derivatives market is still small in scale and hasn’t attracted many users. Fundamental differences between the spot market and the derivatives market suggest there are additional challenges to be solved before decentralized derivatives are more widely used.
A critical reason for the staggered traction of the decentralized derivatives market is because of the lack of a viable business model. Most derivative protocols today take their inspiration from 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 are disincentivized to provide liquidity for derivatives given their higher risk profile.
But a solution is on the horizon: Qilin Protocol, a 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.
The first pro-LP feature in Qilin Protocol is the peer-to-tranches liquidity model. This liquidity model enables LPs to own private liquidity tranches so they can control their risk exposure and manage their token inventory to their own advantage. They can even have their own front end developed based on Qilin’s periphery contracts. These LP-owned liquidity tranches serve as the primary liquidity in Qilin’s peer-to-pool counterparty model and therefore have a higher reward profile. Yield seekers, on the other hand, can have access to publicly uncapped tranches to supply reserve liquidity.
Another pro-LP feature on Qilin is permissionless, coin-margined contract listings. This feature means that LPs no longer have to convert their altcoins to stablecoins to trade in index marketplaces. Inverse contract pools margined in the token itself can be created in Qilin’s permissionless system. This increases capital efficiency and value accrual for the LP’s altcoin inventory.
On the protocol level, Qilin has liquidity protection mechanisms based on the current LP risk exposure from unmatched contract positions. This includes a rebase funding rate that sends funding rate payments to the liquidity pool. In the future, there will also be a matching engine including market risk updates.
Qilin’s technical team has been active in the crypto markets since 2017. It has extensive experience of public blockchain development in multiple major blockchains and has been developing in DeFi since 2018. Another part of the team behind Qilin Protocol comes from a market making background. Over the years, having served over 400 crypto projects, Qilin has ascertained key business cases for crypto assets and the importance of business models for an exchange. Ultimately, Qilin Protocol will be the Uniswap for derivatives, based on both the business services that it can offer its users and protocol-level research.