The Evolution of Derivatives within the Financial Landscape | Tortle Ninja

Understanding Derivatives in DeFi

Tortle Ninja
3 min readOct 30, 2023

In traditional finance, the term “derivatives” often conjures images of intricate financial transactions. At its core, derivatives are financial contracts whose value derives from an underlying asset, similar to wagers or agreements based on the future price of said asset. This underlying asset can encompass stocks, commodities, interest rates, or, pertinent to our discussion, cryptocurrencies. While the term “derivatives” might initially seem complex and deeply rooted in traditional financial systems, the financial landscape is rapidly changing. These financial instruments are now smoothly transitioning into DeFi and cryptocurrency.

The rise of DeFi derivatives began in 2018–2019, and by the conclusion of 2022, the upward trajectory of DeFi derivatives platforms became undeniable. Numerous projects introduced decentralized futures and options platforms, affording users the opportunity to engage in complex financial transactions within a permissionless and trustless environment.

But why are derivatives crucial within the DeFi landscape? Derivatives in DeFi serve as a pivotal tool, providing users with a potent means not only to manage their positions but also add leverage to their bets, opening a wide range of opportunities.

Here are some key reasons why derivatives are indispensable in DeFi:

1. Hedging: Investors can employ derivatives to shield themselves from the price fluctuations that are characteristic of the crypto market. This risk mitigation strategy allows them to minimize potential losses during market downturns.

2. Speculation: Traders can engage in speculative activities by betting on price movements without the necessity of owning the actual cryptocurrency. Derivatives enable traders to profit from both rising and falling markets, enhancing their trading opportunities.

3. Liquidity: Derivatives possess the potential to augment market liquidity, thereby simplifying the process of trading. Increased liquidity is advantageous as it ensures that there are more buyers and sellers in the market, reducing the risk of large price swings and improving overall market efficiency.

What are the main challenges associated with derivatives?

  1. Volatility: Crypto derivatives markets are inherently volatile, which can be both advantageous and a significant threat to users.
  2. Liquidation Risk: In DeFi, liquidations occur automatically, potentially resulting in users losing all their funds during certain market swings.

To address these issues, Tortle Ninja has developed a series of tools designed to avoid liquidations and set entry and goal prices for derivatives. This enables users to time their positions effectively and automatically exit them as liquidation approaches or when specific price levels for the underlying assets are reached.

For more information about how these tools work, visit: docs.tortle.ninja/learn/troubleshooting#how-does-try-to-avoid-liquidation-work

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About Tortle Ninja

Tortle Ninja offers users an advanced DeFi algo-trading experience, allowing them to execute spot and derivatives strategies with ease, measure their effectiveness using real-time data, and adapt swiftly to ever-changing market conditions.

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Tortle Ninja

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