Derivative Tokens

Overview

Derivatives are a common concept in traditional finance (TradFi) and decentralized finance (DeFi). Derivatives have existed for many decades in TradFi and many years in DeFi, most prominently on Ethereum. Derivatives are assets that represent another asset in a defined ratio.

JewelSwap is using derivatives to bring new possibilities to MultiversX, such as revenue sharing from different modules, access to new markets and new investment opportunities.

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What are derivatives

We have seen that many people struggle understanding what derivatives are, therefore we have decided to add this section, to explain what derivatives are. If you already know what derivatives are, you may skip this section.

Super short introduction to derivatives

A derivative is a financial instrument whose value is derived from the value of an underlying asset, index, or security. This can include a variety of assets such as stocks, bonds, commodities, interest rates, market indexes, or cryptocurrencies. Derivatives are used for various purposes, including hedging (to reduce risk), speculation (to bet on future price movements), and gaining access to otherwise inaccessible markets or assets.

For example, it is currently not easily possible in TradFi (Traditional Finance) to buy Bitcoin. One of the only ways in TradFi to buy Bitcoin right now is to buy GBTC, Grayscale Bitcoin Trust. 1 GBTC is backed by 1 BTC, but due to rising and falling interest into GBTC by the open market, the value of 1 GBTC is varying. Sometimes, GBTC trades at a "premium" compared to BTC (GBTC price > BTC price) due to high interest by TradFi into Bitcoin. On other days, it trades at a "discount" due to more selling pressure and less buying pressure, also known as loss of interest in the asset by investors. GBTC is not redeemable for BTC either, as it is a derivative. Ranging from 44% premium to a 50% discount, GBTC is even more volatile than BTC itself.

Common forms of derivatives include futures, options, swaps, and forward contracts. In TradFi, derivatives are typically traded on exchanges or over-the-counter, and in DeFi, they are often executed through smart contracts on blockchain platforms. The versatility and complexity of derivatives make them an important tool in both TradFi and DeFi for managing financial risk, leveraging positions, and portfolio diversification. However, they also carry risks due to their complexity and reliance on the future performance of their underlying assets.

In both traditional finance (TradFi) and decentralized finance (DeFi), it's quite typical for derivatives to be non-redeemable. This is because derivatives are financial instruments that derive their value from an underlying asset, such as stocks, commodities, or cryptocurrencies, but do not necessarily confer ownership of these assets.

In TradFi, many derivatives, like futures and options, are often settled in cash rather than through the physical delivery of the underlying asset. Similarly, in DeFi, derivatives often exist as synthetic assets or contracts that replicate the value of other assets, providing exposure to their price movements without actual possession or redemption. The essence of derivatives is not in owning the underlying asset but in leveraging their value for purposes like hedging, speculating, or gaining market exposure. Therefore, non-redeemability aligns with the fundamental nature and usage of derivatives in both financial realms, focusing on value derivation and risk management rather than direct asset acquisition.

One more example of a derivative: When an investment app advertises the possibility of being able to invest into any stock with just 1$, then you are usually not buying the stock itself, but a derivative of that stock. This is because you can buy stocks only in whole pieces. You cannot buy a part of a stock. By buying 1$ worth of stock in these applications, you are possibly buying derivatives.

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Basic Mechanism: Generic Explanation

1. Initial Deposit - Minting

   • Primary Token: Users deposit a primary token (e.g., ASH). The primary token is being staked or sent to a protocol to earn rewards.

   • In return, they receive a derivative token (e.g., JWLASH) on a 1:1 value ratio with the deposited primary asset.

2. Earning Rewards - Staking

   • To earn staking rewards, users then stake their derivative tokens on JewelSwap.

   • Any derivative tokens not being staked thus increase the rewards for those who do stake their derivative tokens.

3. APR Calculation

   • The APR for staking is dynamic and depends on the revenue of the underlying JewelSwap module and on how many tokens are being staked. For example, JWLASH is powering all AshSwap related modules on JewelSwap and is therefore enjoying a revenue share from these modules.

   • Not all primary tokens are used for revenue generation. Some are used for liquidity provision. To learn more about this, check out the individual docs page for the JWL-token you are interested in and the POL mechanism.

4. Unstaking

   • Unstaking the derivatives from JewelSwap can happen anytime after the initial wait time has passed.

     • Example: You deposit JWLASH into staking on JewelSwap. You may not unstake the JWLASH for the next 7 days. After these 7 days have passed, you can keep them in staking or unstake them at any time.

As mentioned earlier, derivative tokens cannot be redeemed. However, they can be traded once listed on a DEX like Ashswap.