DeFi Boom Boosts Trading Volumes on Binance Futures

DeFi Boom Boosts Trading Volumes on Binance Futures

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Decentralized Finance (DeFi) is currently the fastest-growing sector within the cryptocurrency market, as the crypto community does its best to integrate traditional financial services into decentralized infrastructures. The impressive ascension of DeFi projects resembles the initial coin offering (ICO) boom of late 2017. Still, DeFi supporters claim that the current trend will have a genuine impact by acting as a bridge between traditional banking services and blockchains.

The astronomical return of several DeFi tokens has sparked interest from both retail and institutional investors, triggering a potential altcoin season. Binance Futures has also benefited from the hype, as the platform saw record trading volumes in July. It also launched new products to reflect the new trend.

Bitcoin has been bullish in July-August, even though it has slightly given up at the end of August. However, the largest cryptocurrency by market cap is nowhere near as bullish as Chainlink, Aave or Band Protocol. Here is the performance of several DeFi-oriented tokens compared to that of Bitcoin (blue line):

TradingView - DeFi Bullish: Bitcoin, Chainlink, Aave, and Band Protocol
Source: TradingView – DeFi Bullish: Bitcoin, Chainlink, Aave, and Band Protocol

If you’re still confused about what DeFi is all about, here is a short definition – in a nutshell, DeFi is a movement that promotes the use of blockchain-based, decentralized networks and open-source software to provide all kinds of traditional financial services and products. You can think about lending, issuance of money, trading, asset management, and insurance, among others.

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Here is another way to look at it – DeFi is the movement of banking services to blockchains so that the community could enjoy the decision-making powers rather than the banks’ management, governments or regulators.

The DeFi ecosystem includes financial apps developed on blockchain networks. The so-called decentralized applications (dApps) are built on public blockchain infrastructures and similar peer-to-peer (P2P) systems. As of today, the DeFi market revolves around Ethereum, which offers a trustless network that can be accessed by any entity. Ethereum has an essential feature that empowers DeFi projects – it is the smart contract, which can execute automatically when predefined conditions are met.

Best Performing DeFi Tokens So Far

Now let’s analyze several DeFi-related tokens and see what’s behind their bold rally:

  • Chainlink (LINK) – LINK surged over 760% year-to-date (YTD) and has managed to become the fifth-largest cryptocurrency after Bitcoin, Ethereum, Ripple, and Tether’s USDT. The token has surged over 350% against Bitcoin since January of this year.
    So what is Chainlink and why do investors jump on its bandwagon? In fact, the blockchain network is not a DeFi project per se but it does help the DeFi space indirectly. Chainlink is a blockchain-based oracle network that enables the secure transfer of data between different blockchains and from the real-world to blockhain. Previously, many use cases of smart contracts couldn’t be adequately materialized because they cannot precisely determine whether the off-chain data, i.e. the information coming from the real world, is genuine and accurate. Chainlink solves this thanks to its oracles, which are third-party services that provide smart contracts with external information that is verified. Information providers are incentivized for sharing relevant data and penalized for offering false information. Thus, smart contracts can reach their full potential.
    In the last few months, Chainlink has partnered with several reputable companies and blockchain-oriented projects, which boosted the LINK’s price. Nevertheless, the rally has been driven by the fear of missing out (FOMO) as well.
  • Aave – Aave is another project that has experienced astronomical returns. Aave’s token, called LEND, has surged over 4,300% since the start of the year. Aave is a DeFi protocol that allows users to lend and borrow a wide range of cryptocurrencies. It uses both stable and variable interest rates. It incorporates several exclusive features, such as rate switching, uncollateralized loans, and unique collateral types.
  • Compound – Compound is another blockchain lending platform. Launched in June of this year, COMP triggered the actual DeFi boom thanks to the so-called yield farming. This is a relatively new mechanism in which users of a DeFi application are locking their cryptocurrency for a while to provide liquidity. In exchange, users receive a decent return in the native token, also called governance token, which allows them to vote on the future upgrades and propose changes to the protocol.
    As for the price-performance, COMP used to make waves in June, but has lost ground as of August, leaving room for other DeFi projects that continue to thrive.
  • Band Protocol – Band Protocol is a competitor of Chainlink. Band is a public blockhain that acts as a decentralized data oracle platform. Its goal is to connect smart contracts, especially DeFi-related ones, with real-world data and APIs.
    The project came out at the end of 2019, but it has managed to become a leader in the oracle space quite recently. Band Protocol uses a Delegated Proof of Stake (DPoS) consensus algorithm integrated on its blockchain called BandChain, whose mainnet is about to be launched by the end of this year.
    BAND has skyrocketed by over 5,000% YTD, mainly thanks to the DeFi boom. Most of the gains came in August, when BAND surged about $4 to over $13 at the time of writing.
  • Synthetix Network – Synthetix is a blockchain platform that allows users to tokenize real-world assets, like company shares, commodities, foreign exchange pairs, etc. and trade them on a decentralized exchange. The native token, SNX, can be locked as collateral to create synthetic assets, called Synths. The native token can also be staked to receive rewards.

Since most DeFi projects are based on Ethereum, the price of ETH has also benefited from the hype. Ethereum has outperformed Bitcoin this year so far, but the bullish trend is also driven by the protocol’s transition from Proof of Work (PoW) to Proof of Stake (PoS).

DeFi Rally Helps Binance Futures

July was a great month for Binance Futures, as the exchange saw another record high in trading volumes. While this has to do with the DeFi boom, the trading activity has also been driven by Bitcoin, which exceeded the $12,000 level for the first time in almost a year.

Thus, Binance Futures saw a new ATH in trading volume on July 28, when the figure hit $13 billion. Also, open interest exceeded the $1 billion mark at the beginning of August, the highest level on record.

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Binance has added 22 new derivatives products in July and August. Now you can trade 37 USDT-margined futures contracts, 6 Coin-margined futures, 12 BLTVs, and 4 options.

Besides this, Binance Futures launched inverse perpetual futures, which is a new type of trading products that are offered under the category of COIN-margined futures.

Trading volumes and open interest surged on other cryptocurrency futures exchanges as well, including BitMEX, CME, and Bakkt, among others.

Skew - BTC Futures Aggregated Open Interest
Source: Skew – BTC Futures Aggregated Open Interest

Binance Futures Launches DeFi Index

Binance couldn’t ignore the impressive rally of decentralized finance tokens, so it decided to develop a unique product that would give users better exposure to the new sector. On August 26, Binance Futures announced the launch of a new USDT-denominated perpetual contract that tracks the proprietary DeFi composite index. The contract has a leverage of up to 50x and gives traders direct exposure to the DeFi space.

The DeFi Index is a composite of DeFi tokens listed on Binance’s spot platform. It is calculated based on the weighted averages of live prices of the listed tokens. The index tracks the following DeFi tokens: BAND (Band Protocol), COMP (Compound), KAVA, KNC (Kyber Network), LEND (Aave), LINK (Chainlink), MKR (Maker), SNX (Synthetic Network Token), SXP (Swipe), ZRX (0x).

Aaron Gong, vice president of Binance Futures, commented:

Binance Futures has been at the forefront of developing new products for users, and we now offer nearly 50 futures pairs, the most in the market by quantity and variety. Response to our range of DeFi derivatives has been continuously positive and it is clear that there is growing demand. We are excited to offer the USDT DeFi Index that enables users to more easily access DeFi and further diversify how they trade.”

The DeFi Index’s composite of tokens and their weighted averages are rebalanced week-by-week using CoinMarketCap data that touches upon market conditions such as trading volume and capitalization. On a side note, Binance acquired CoinMarketCap earlier this year. As for the index, it helps investors to capture trends in the DeFi market and is designed similarly to traditional index futures.

Binance founder and CEO Changpeng Zhao (CZ) explained:

“As innovators of our ecosystem, we are always thinking and building strategically to improve adoption and benefit our users. Our USDT DeFi Index combines ease of exposure to the blooming range of DeFi projects with the familiarity and popularity of a traditional product. This is a step forward in how cryptocurrencies can be utilized as well as boosting the important DeFi sector.”

The initial value of the DeFi index is set to 1000. Here is the weightage of components as of August 26, 2020:

Binance - Weightage of DeFi Index
Source: Binance – Weightage of DeFi Index

As you can see, LINK has the highest share of the index, accounting for almost a third of the total weight. This is because LINK has the highest market cap from this list, being the fifth largest cryptocurrency. LEND, ZRX, and SXP come next.

Binance Smart Chain to Join DeFi Trend

Besides offering DeFi-related trading products, Binance wants to get involved in the DeFi space in a more direct way. The company is now working on the development of Binance Smart Chain, a new blockchain network that will enable its users to operate smart contracts. Its testnet was launched recently and now Binance is working on the mainnet. The blockchain protocol will be based on Binance Chain, Binance’s main blockchain network that has been built from scratch. Here is how Binance explained the functionality of its new product:

“Binance Smart Chain is a sovereign smart contract blockchain delivering programmability that’s compatible with the Ethereum Virtual Machine (EVM). Designed to run in parallel with Binance Chain, Binance Smart Chain retains the former’s fast execution times and low transaction fees while adding Smart Contracts functionality to support compatible dApps.”

Recently, Binance Smart Chain’s testnet blockchain has integrated Chainlink oracles. This will help users to bring real-world data from outside the Binance network into Binance Smart Chain. The exchange of data will be secure and seamless. Binance explained that the integration would empower developers to build smart contract apps that link to relevant real-world data feeds provided by Chainlink. Thus, developers can generate new use cases related to derivatives – including futures, cryptocurrency payments, automated asset management, and more.

Developers will be able to build the following types of applications on Binance Smart Chain with Chainlink oracles:

  • DeFi – developers can build DeFi apps like lending/borrowing and derivatives. These apps can source market prices or make settlements based on data from Binance DEX – the decentralized exchange offered by Binance.
    DeFi apps have to refer to reliable price feeds to trigger contract functions like issuing a loan, settling a futures contract, or liquidating collateral. Thanks to the integration of Chainlink oracles, these functions will be carried out automatically in a secure manner.
  • Asset Management – Binance Smart Chain enables the creation of smart contracts that can automate trades and portfolio management strategies that leverage specific market events. The asset management strategies can be linked to the dynamic of technical indicators on Binance Chain or relate to external events like government statistics and macroeconomic statistics.
    Chainlink oracles enable Binance Smart Chain to dive into a wide range of reliable data sources to help the asset management on the Binance Chain.
  • Crypto Payments – Currently, Binance DEX provides several payment options for settling smart contracts. The accepted tokens for payments include BNB – Binance’s native token, BUSD – the Binance-backed stablecoin pegged to the US dollar, and other BEP2 tokens. Binance Smart Chain can turn any of these payment options into a form of on-chain settlement thanks to its smart contract capability.

Binance has realized the potential of DeFi from an early stage, so it is poised to benefit from the rapid growth of the new sector. The crypto exchange has been one of the fastest-growing crypto-oriented companies, and it will continue to expand in the DeFi space.  

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