Evolution of the Encryption Derivation Market: From Basic Contracts to the Era of Capital Efficiency

Recently, established cryptocurrency exchanges have sparked a wave of acquisitions, vigorously expanding their derivation business landscape: an established exchange has acquired NinjaTrader for $1.5 billion, while another well-known platform is in talks for a multi-billion dollar acquisition of Deribit. These two significant transactions not only demonstrate the industry's giants' firm positioning in the derivation market but also reflect the increasing strategic importance of the encryption derivation sector.

In the early days of Bitcoin, spot trading was the main trading form for encryption assets. As the market size expanded and participants diversified, simple buying and selling could no longer meet the complex needs for risk management, investment, and speculation. Just as traditional financial markets require derivation tools for price discovery, risk hedging, and leveraged trading, the encryption field also needs these tools to improve market efficiency, expand capital utilization, and provide diverse strategies for professional traders.

In the past decade, the crypto derivatives market has undergone great changes from scratch and from fringe to mainstream, and its development process can be divided into four stages: the initial (v0) derivatives, the rise of perpetual contracts, and (v1) Unified margin model (v2) and automatic borrowing and lending of interest-bearing derivatives (v3). Every technological and product innovation has brought significant improvements in capital efficiency, transaction experience, and risk control mechanisms, and profoundly reshaped the industry landscape. At the same time, in the process of the evolution of centralized exchanges, the fields of decentralized finance (DeFi) derivatives have also risen rapidly, such as dYdX, GMX, Hyperliquid and other projects have carried out a variety of innovations in the on-chain contract model.

v0 Phase ( 2014～2015 ): The Beginning of Encryption Derivation

Stage Characteristics: Initial Transition from Traditional Futures to Encryption Futures

Before 2014, cryptocurrency trading was mainly limited to the spot market. Bitcoin prices were highly volatile, and miners and long-term holders faced the need for hedge risk, while speculators were eager to use leverage to obtain higher returns. In 2014, a major trading platform was the first to introduce the margin system, expiration delivery, and clearing mechanism of traditional futures into Bitcoin trading, launching Bitcoin futures products. This allowed holders to hedge against future price declines and provided speculators with high leverage opportunities. Subsequently, other exchanges also followed suit by launching similar contract products, and encryption derivation began to take the historical stage.

Representative Platform

The v0 stage is typified by currency-based settlement contracts: delivery occurs weekly or quarterly, with fixed expiration dates, similar to traditional commodity futures models. For miners and investors, this is the first risk hedging tool that can be used directly; for speculators, it also means leveraging greater returns with smaller capital.

Market Impact

The fixed expiration date design at that time seemed insufficiently flexible in the extremely volatile encryption market. If sudden market fluctuations occurred, traders could not freely adjust their positions before expiration. In addition, the early risk control system was not well-developed, and incidents of margin calls occurred from time to time: once market fluctuations led to the liquidation of some leveraged positions and insufficient margin, the platform would deduct profits from the profitable accounts to cover the losses, causing dissatisfaction among users. Nevertheless, the v0 phase laid the foundation for the encryption derivation market and accumulated valuable experience for subsequent innovations.

Phase v1 ( 2016～2017 ): The Rise of Perpetual Contracts and Market Explosion

Stage Characteristics: Perpetual Contracts + High Leverage = Explosive Growth

As the market evolves, traders need more flexible and efficient derivatives tools. In 2016, an innovative exchange launched the Bitcoin perpetual swap contract (Perpetual Swap), and the biggest innovation was that the expiration date was eliminated and the contract price was pegged to the funding rate. This allows both long and short sides to hold positions in the "never deliver" mode, avoiding the pressure of rolling positions when futures are close to delivery. The platform has also increased the leverage to 100x, which has sparked great interest among traders. During the crypto bull market in 2017, perpetual contract trading volumes skyrocketed, setting a staggering one-day trading volume record. At this time, the Bitcoin perpetual contract was widely imitated by the industry and became one of the most popular financial products in crypto history.

Representative Platform

• BitMEX: Quickly seized market dominance with perpetual contracts, utilizing an insurance fund and forced liquidation mechanism, significantly reducing the probability of customer profits being shared.

• Deribit: Launched its encryption options products in 2016. Although early trading volumes were limited, it provided institutions and professional traders with new derivation strategy choices and indicated the future potential of the options market.

• Traditional institutions entering the market: At the end of 2017, the Chicago Mercantile Exchange ( CME ) and the Chicago Board Options Exchange ( CBOE ) launched Bitcoin futures, gradually bringing encryption derivation into the regulated spotlight.

Market Impact

The emergence of perpetual contracts has propelled encryption derivations into a period of explosive growth, with derivation trading volumes even surpassing some spot markets during the 2017 bull market, becoming an important venue for price discovery. However, the combination of high leverage and high volatility has also led to a chain reaction of liquidations, with some exchanges experiencing outages or forced liquidations, sparking controversy among users. This serves as a reminder for platforms to enhance their technical infrastructure and risk control capabilities while innovating. At the same time, regulatory agencies have also begun to focus more on high-leverage encryption derivations.

v2 Phase ( 2019～2020): Unified Margin and Multi-Asset Collateral

Phase Characteristics: From "Are there any new products?" to "How to improve capital efficiency?"

After the bear market in 2018, the derivation market became active again in 2019, with user demand shifting towards improvements in trading efficiency, capital utilization, and product diversity. A new exchange, which launched in 2019, was the first to introduce the concept of a "unified margin account": users could participate in various derivation trades using the same margin pool, with stablecoins serving as universal margin. Compared to the previous model where each contract required separate deposits and cumbersome transfers, this greatly simplified the operational process and improved capital turnover efficiency. The platform also enhanced its tiered clearing mechanism, effectively alleviating the long-standing issue of "loss sharing".

Representative Platform

• FTX: Favored by professional traders due to its stablecoin settlement and cross-margin mechanism; it has launched leveraged tokens, MOVE contracts, and a wide range of altcoin futures, making its product line extremely rich.

• Other mainstream exchanges: have also successively upgraded their product lines, launching USDT-based perpetual contracts or unified account systems, with risk control mechanisms more mature than in the v1 phase.

Market Impact

The v2 phase witnessed further expansion and mainstreaming of the derivation market, with trading volumes continuously rising and institutional funds entering the market in large numbers. As the compliance process advanced, traditional financial platforms saw significant growth in encryption derivation trading volumes. Although this phase reduced issues such as liquidation sharing, during the extreme market conditions of March 2020 known as "312", several exchanges still experienced significant price volatility or temporary system outages, highlighting the importance of risk control and matching system upgrades. Overall, the most notable feature of the v2 phase is the popularization of "unified accounts + stablecoin settlement", coupled with the diversification of product types, making the encryption derivation market more mature.

v3 Phase ( 2024～to present ): The new era of automatic lending and interest-bearing derivation.

Stage Characteristics: Further improve capital utilization, margin is no longer "sleeping"

On the basis of unified margin, the market still faces a long-standing pain point: idle funds in accounts usually do not generate returns. In 2024, Backpack proposed the "automatic lending (Auto Lending)" and "interest-bearing perpetuals (Interest-Bearing Perpetuals)" mechanisms, integrating margin accounts and lending pools. Specifically, idle funds in accounts and floating surpluses can be automatically lent to users in need of leverage, earning interest; if there is a floating loss, interest must be paid. This innovation allows the exchange not only to serve as a matching venue but also to play a role in lending and interest management functions. Coupled with Backpack's recently launched point incentive mechanism, users are expected to obtain passive income that meets different risk preferences.

In March 2023, two established American exchanges also accelerated their布局 in the derivation business. One acquired NinjaTrader for $1.5 billion; the other is negotiating to acquire Deribit, which had an estimated valuation of $4 billion to $5 billion earlier this year. The acceleration of large compliant exchanges entering the derivation field indicates that there is still significant growth potential in this sector.

Representative Platform

• Backpack: Its perpetual contract will unify unused margin and floating profits as "lendable funds", bringing interest income to holders, while users with floating loss positions will automatically pay interest to the lending pool.

• The platform uses a dynamic interest rate model to respond to market fluctuations; floating profits from positions can be partially withdrawn and continue to be lent out, achieving dual returns of "simultaneously going long and short, while earning interest".

• The Backpack plan will support multi-asset collateral and cross-chain assets in the future to further expand the coverage and efficiency of capital.

Market Impact

The perpetual interest mechanism further improves capital efficiency, and if successfully promoted and implemented, it may become the next trend in industry development. Other exchanges may consider introducing similar functions or cooperating with DeFi protocols to provide yield opportunities for margin funds. However, this model raises higher demands for platform risk control and asset management, requiring refined management of lending pool liquidity and control of chain risks under extreme market conditions. Additionally, compliant operation becomes particularly important; if the platform experiences an imbalance in asset management, it may amplify risks. Nevertheless, the innovations in the v3 phase undoubtedly bring a new form to the encryption derivation market, further enhancing the deep integration of trading and financial functions.

DeFi Derivation Subline: Diverse Decentralized Exploration

While the (CEX) of centralized exchanges continues to evolve, decentralized derivatives (DeFi) has also formed a parallel development path in recent years. Its core value proposition is to realize futures, options and other trading functions without trusting intermediaries through smart contracts and blockchain technology. How to provide high throughput, sufficient liquidity and perfect risk control under the decentralized architecture has always been the main challenge of this track, which has also prompted the diversification of technical design of various projects.

dYdX initially provided a hybrid model of order book and on-chain settlement based on Ethereum L2 StarkEx, and then completed the migration to the Cosmos ecosystem V4, trying to further improve the degree of decentralization and transaction performance on the self-built chain. GMX has chosen a different path, adopting an automated market maker (AMM) model, where users trade directly with the liquidity pool, and realize the perpetual contract function by sharing risks and obtaining returns from liquidity providers. Hyperliquid has built a dedicated high-performance blockchain to support order book matching, placing transactions and clearing entirely on-chain, and is committed to combining centralized platform-level speed with decentralized transparency.

These decentralized platforms have attracted a user group that prefers self-custody due to tighter regulations or concerns about asset safety. However, overall, the trading volume of DeFi derivations is still much smaller than that of centralized platforms, mainly limited by liquidity depth and ecosystem maturity. As technology continues to improve and more funds enter the market, decentralized derivations are expected to form a deep complementary relationship with CEX if they can achieve a balance between performance and compliance, further enriching the overall landscape of the encryption market.

Integration Trends and Future Outlook

Reviewing the evolution of encryption derivation from v0 to v3, each stage revolves around technological innovation and efficiency improvement:

• v0: Introduce the traditional futures framework into the encryption field, but the flexibility and risk control mechanisms are relatively preliminary;

• v1: The birth of perpetual contracts has greatly increased market liquidity and activity, with derivation beginning to dominate the price discovery process;

• v2: Unified margin, multi-asset collateral, and diversified products further enhance the efficiency of capital utilization and the level of specialization;

• v3: Integrate lending and interest-earning functions into the exchange, aiming to maximize capital efficiency.

At the same time, the DeFi derivation track is also exploring feasible paths for decentralized trading through various technical solutions such as order books, AMM, and dedicated chains, providing self-custody and trustless trading options.

Looking ahead, the development of the encryption derivation market may present several major trends:

1. Integration of centralized and decentralized models: CEX may pursue higher transparency or launch on-chain derivation, while DEX is focused on improving trading speed and liquidity.

2. Risk Management and Compliance Construction: As the trading scale expands, the requirements for risk control systems, insurance funds, dynamic clearing mechanisms, and regulatory compliance will become increasingly stringent.

3. Market size and product diversification: More asset classes and more complex structured products are expected to gradually emerge, and the derivation trading volume is expected to further surpass the spot market.

4. Continuous Innovation: Innovative products such as automatic interest-earning mechanisms, volatility derivations, and even AI-based predictive contracts may emerge. Platforms that can quickly launch innovative solutions to meet market demands will have an advantage in the new round of competition.

Overall, the encryption derivation market is gradually moving towards a mature and diversified development stage. Through continuous innovation in technology, business models, and compliance systems, this field will better meet the diverse needs of institutional and retail investors, becoming an important sector with the most vitality and development potential in the global financial ecosystem.