The State of Cryptocurrency Trading and Problems Faced

The evolution of cryptocurrency trading has been notable, progressing from its nascent stage marked by security challenges to the emergence of key platforms like Coinbase and Binance, which have enhanced market stability and innovation. However, despite these advancements, critical deficiencies in on-chain infrastructure persist, particularly in the absence of essential financial instruments in a capital efficient form including futures and options.

Lack of Critical Derivative Infrastructure on-Chain

While decentralised platforms like Uniswap and Automated Market Makers (AMMs) have democratised token exchanges and improved capital efficiency in spot trading, they have notably left a significant void in the market—the absence of sophisticated financial instruments like futures and options. These instruments, pivotal in traditional markets for risk management and portfolio optimization, are crucially absent in the crypto world. Perps and the small number of futures that exist hold a volume that barely registers compared to traditional financial markets instruments. This gap exposes investors to systemic risks, especially considering the high correlation of project tokens with dominant cryptocurrencies.

The Need for Advanced Financial Instruments

For the decentralised Web 3.0 ecosystem to reach its full potential and facilitate efficient capital flow, the integration of advanced financial instruments becomes imperative. This necessity amplifies with growing competition for capital, driven by technological advancements in other verticals like Artificial Intelligence and autonomous operating entities.

Inadequacies of Current DeFi in Bridging TradFi

Despite attempts by centralised platforms such as (former) FTX and Binance to introduce derivative products, challenges persist, including trust deficits, inefficient margin requirements, and unclear regulatory frameworks. These hurdles impede these offerings from fulfilling the decentralisation goal of the blockchain world and providing these capabilities in a scalable manner. Consequently, the inability to bridge this gap remains apparent, hindering the convergence of traditional finance (TradFi) onto decentralised platforms.

Limitations in Ecosystem Development

Furthermore, the underdevelopment of the cryptocurrency market's ecosystem, encompassing brokers, structured product providers, and builders, has restricted its growth. The maturation of these supplementary services is crucial for transforming the speculative nature of the blockchain ecosystem into a platform that empowers decentralised growth.

Liquidity Development

Although not strictly related to protocol design, the presence of strong, deep, and efficient liquidity is a key factor distinguishing successful from unsuccessful DeFi protocols. This aspect is even more critical in Futures and Options platforms. Many existing models across DeFi exhibit weaknesses regarding liquidity provision. A major issue is that market makers and liquidity providers often struggle to profit directly from their services. Instead, they tend to depend on token-based incentive schemes or external payments. Critical elements like tick size, contract notional size, and nuanced transaction fee structures, which could help make liquidity provision profitable, are often missing. Instead, these models typically rely on blunt tools like maker/taker fees.

To address these challenges, it's crucial to develop a specialized market maker program that offers substantial incentives. This program should intelligently combine token rewards with well-calibrated adjustments to instrument tick sizes, contract sizes, and transaction fees. Such a strategy is vital to attract not only designated market makers but also regular market makers, scalpers, and other participants. A strategic focus on nurturing and developing liquidity is fundamental to the success of any platform. Providing liquidity should pay when the market is active, and providing liquidity across less active options contracts needs to be rewards disproportionally.

In Conclusion

While advancements have been made in cryptocurrency trading, the lack of critical derivative infrastructure on-chain continues to impede the full potential of decentralised finance (DeFi) and its ability to integrate traditional finance, reinforcing the need for sophisticated financial instruments and the development of a robust ecosystem to drive decentralised growth.