Evolution of the Encryption Derivation Market: Four Generational Changes from Simple Futures to Interest-Bearing Contracts

In the past week, two well-established exchanges in the encryption industry have successively reported major acquisition news, both pointing to a layout in the derivation market: Kraken has spent $1.5 billion to acquire NinjaTrader, while a large trading platform is in talks for a multi-billion dollar acquisition of Deribit. These moves not only highlight the giants’ strong pursuit of the derivation business but also reflect the increasingly strategic position of the encryption derivation market.

In the early days of Bitcoin’s birth, spot trading was the mainstream in the market. As the industry developed and the structure of participants became increasingly complex, simple buying and selling transactions were no longer sufficient to meet the demands of risk management, investment strategies, and speculation. Just as derivatives play a key role in price discovery, risk hedging, and leveraged trading in traditional finance, the encryption market also needs such tools to enhance market efficiency, expand capital utilization, and provide diversified strategies for professional traders.

Over the past decade, encryption derivations have undergone a tremendous transformation from non-existence to prominence, evolving through four stages: the early derivation exploration led by OKCoin (v0), the perpetual contract revolution brought by BitMEX (v1), the fund utilization enhancement promoted by FTX (v2), and the innovative automatic lending interest derivations by Backpack (v3). Each iteration of products and technologies has brought about evolution in trading efficiency, user experience, and risk control mechanisms, profoundly reshaping the industry landscape.

Parallel to the development of centralized exchanges, the field of decentralized finance ( DeFi ) derivation is also rising rapidly, with projects like dYdX, GMX, and Hyperliquid launching diverse innovations under on-chain contract models. This article will systematically review these four major development stages, and in conjunction with the parallel evolution of DeFi derivation, explore the practical significance and far-reaching impact of product innovation at each stage, thus gaining insight into the potential future direction of this market.

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

Stage Characteristics: Initial Transition from Traditional Futures to Encryption Futures

Prior to 2014, cryptocurrency trading was largely confined to the spot market. Bitcoin is highly volatile, with miners and holders facing the need to hedge their risks, and speculators looking for higher returns through leverage. In 2014, a trading platform took the lead in introducing the margin system, maturity delivery and clearing mechanism of traditional futures into bitcoin trading, and launched bitcoin futures products. This allows token holders to hedge against future price declines on exchanges, and also provides highly leveraged opportunities for speculators. Subsequently, other exchanges followed suit with similar contracts, and crypto derivatives began to emerge.

Representative Platform

The v0 phase is characterized by currency-based settlement contracts: weekly or quarterly deliveries, with a fixed expiration date, similar to traditional commodity futures models. For miners and investors, this is the first directly usable risk hedging tool; for speculators, it also means that larger returns can be leveraged with smaller capital.

Market Impact

Early fixed-expiration designs were inflexible in the extremely volatile crypto market, where traders were not free to adjust their positions before expiration when sudden market volatility was wild. In addition, the early risk control system was not perfect, and the amortization of positions occurred from time to time: once the market fluctuated violently and some leveraged positions were liquidated and the margin was insufficient, the income of the profitable account would be deducted to make up for the shortfall, causing dissatisfaction among users. Nonetheless, the V0 phase laid the groundwork for crypto derivatives and accumulated valuable experience for subsequent innovations.

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

Stage characteristics: perpetual contracts + high leverage = explosive growth

There is an urgent need for more flexible and efficient derivatives tools. In 2016, BitMEX launched the Bitcoin Perpetual Swap (Perpetual Swap), the core innovation of which was the elimination of the expiration date and the use of a funding rate mechanism to anchor the contract price. In this way, both long and short sides can hold positions in the “never deliver” mode, avoiding the pressure of moving positions when the futures are close to delivery. BitMEX has also increased leverage to 100x, which has sparked a lot of interest from traders. During the 2017 crypto bull market, perpetual contract trading volumes climbed rapidly, with BitMEX setting a staggering one-day trading volume. At this time, the Bitcoin perpetual contract was widely copied by the industry, becoming one of the most successful products in crypto history.

Representative Platform

• BitMEX: Quickly gained market dominance with perpetual contracts, employing insurance funds and forced liquidation mechanisms, significantly reducing the probability of users’ profits being diluted.

• Deribit: Launched in 2016, the encryption options product, though with limited early trading volume, provided institutions and professional traders with new derivation strategy options, indicating the future potential of the options market.

• Traditional institutions entering the market: At the end of 2017, CME and CBOE launched Bitcoin futures, allowing encryption derivation to gradually enter the regulated sector.

Market Impact

The emergence of perpetual contracts has propelled encryption derivation into an explosive period, with derivation trading volume even surpassing some spot markets during the bull market of 2017, becoming an important venue for price discovery. However, the combination of high leverage and high volatility has also led to a chain liquidation phenomenon, with some exchanges experiencing system outages or forced liquidations, sparking controversy. This serves as a reminder that platforms must strengthen their technology and risk control capabilities while innovating. At the same time, regulatory agencies have also begun to pay attention to high leverage encryption derivation.

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

Stage Characteristics: From “Are there any new products” to “How to improve capital efficiency”

After the bear market in 2018, the derivatives market heated up again in 2019, and user demand shifted to trading efficiency, capital utilization, and product diversity. After the launch of a well-known trading platform in 2019, it took the lead in introducing a “unified margin account”: users can use the same margin pool to participate in a variety of derivatives trading, and use stablecoins as the general margin. Compared with the previous model of separate deposit and transfer of each contract, this greatly simplifies the operation process and improves the efficiency of capital turnover. The platform has also improved the hierarchical clearing mechanism to alleviate the problem of “sharing losses” that has plagued the industry for a long time.

Representative Platform

• An innovative trading platform: favored by professional traders for its stablecoin settlement and cross-margining; it has launched leveraged tokens, MOVE contracts, and numerous futures for small-cap cryptocurrencies, with an extremely rich product line.

• Other mainstream exchanges: have also successively upgraded, launching USDT-based perpetual contracts or unified accounts, with a risk control system that is more mature than the v1 phase.

Market Impact

The v2 phase witnessed further expansion and mainstreaming of the derivation market, with trading volume continuing to rise and institutional funds entering in large numbers. With the advancement of the compliance process, trading volumes on traditional financial platforms like CME have significantly increased. Although this phase reduced issues such as liquidation sharing, several exchanges still experienced significant price fluctuations or temporary outages during the extreme market conditions of “312” in March 2020, highlighting the necessity for upgrades in risk control and matching systems. Overall, the most notable feature of the v2 phase is “unified account + stablecoin settlement,” coupled with a variety of new products, making the encryption derivation market more mature.

Phase v3 ( 2024 to present ): The new era of automated lending and interest-earning derivation products.

Phase Characteristics: Further improve capital utilization, margin no longer “sleeps”

On the basis of unified margin, there is still a long-term pain point: idle funds in the account 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 the account and floating surpluses can be automatically lent to users in need of leverage to earn interest; if there are floating losses, interest rates must be paid. This allows the exchange to not only serve as a matching venue but also play a role in lending and interest management. Combined with Backpack’s recently launched points mechanism, users are expected to obtain passive income with various risk preferences.

In March 2024, two major American exchanges accelerated their layout in derivation trading. Kraken acquired NinjaTrader for $1.5 billion; another trading platform is in talks to acquire Deribit, which had an estimated valuation of between $4 billion and $5 billion earlier this year. The rapid development of large compliant encryption exchanges in the derivation field indicates that there are still enormous opportunities in this area.

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 cope with market fluctuations; the floating profit of positions can be partially withdrawn and continue to be lent out, achieving “long and short while earning interest”.

• The Backpack plan supports multi-asset collateral and cross-chain assets, further expanding the coverage of funds.

Market Impact

The perpetual interest mechanism enhances capital efficiency, and if successfully implemented, it may become the next industry trend. Other exchanges may consider introducing similar functionalities or collaborating with DeFi protocols to provide returns on margin funds. However, this model requires higher demands on platform risk control and asset management, necessitating meticulous management of lending pool liquidity and controlling chain risks during extreme market conditions. Additionally, compliance and prudent operations are crucial; if the platform becomes unbalanced in asset management, it may amplify risks. Nevertheless, the exploration in the v3 phase undoubtedly brings a new form to the encryption derivation market, further strengthening the integration of trading and financial functions.

DeFi Derivation Subline: Diverse Exploration

While centralized exchanges continue to evolve, decentralized derivatives (DeFi) have also formed a parallel development path in recent years. Its core requirement 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 core challenge of this track, and it has also promoted 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 later completed the migration to the Cosmos ecosystem V4, trying to further improve the degree of decentralization and matchmaking performance on the self-built chain. GMX takes a different route, using an automated market maker (AMM) model, where users trade directly with the liquidity pool, and realize the perpetual contract function in the way that liquidity providers share risks and obtain returns. Hyperliquid has built a dedicated high-performance blockchain to support order book matching, placing all matching and clearing on the chain, striving to have both centralized exchange-level speed and decentralized transparency.

These decentralized platforms attract users who prefer self-custody due to regulatory considerations or asset security needs. However, overall, the trading volume of DeFi derivation remains significantly smaller than that of centralized exchanges, primarily constrained by liquidity and ecological maturity. As technology improves and more capital enters the market, decentralized derivations could deeply complement centralized exchanges if they can achieve a balance between performance and compliance, further enriching the overall landscape of the encryption market.

The Fusion of Centralization and Decentralization and Future Outlook

Looking back at the journey of encryption derivation from v0 to v3, each stage revolves around technological innovation and efficiency improvement:

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

• v1: The birth of perpetual contracts has greatly increased liquidity and market enthusiasm, with derivation starting to dominate price discovery;

• v2: Unified margin, multi-asset collateral, and diversified products further enhance capital efficiency and professionalism;

• v3: Integrates lending and interest-generating functions into the trading system, aiming to maximize capital utilization efficiency.

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

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

1. The integration of centralization and decentralization: Centralized platforms may become more transparent or launch on-chain derivations, while decentralized platforms focus on enhancing matching speed and liquidity.

2. Risk Management and Compliance: The larger the trading scale, the higher the requirements for risk control, insurance funds, dynamic clearing, and regulatory compliance.

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

4. Continuous Innovation: Innovative products such as automatic interest-generating mechanisms similar to Backpack, volatility derivations, and even AI-integrated prediction contracts are likely to emerge. Whoever can be the first to launch products that meet market demands may stand out in the new round of competition.

Overall, the encryption derivation market is developing towards maturity and diversification. Through continuous innovation in technology, models, and compliance, this field will better meet the diverse needs of institutional and individual investors, becoming an important sector with the most vitality and potential in the global financial system.