If you are a part of the blockchain community, you are familiar with DeFi markets and how hot they can get in a very short time. You are bound to wonder whether they can help you catch upside on asset moves. Decentralized finance has shown over the last few years that it has insane potential, what with the introduction of different decentralized exchange protocols. To be clear, there is a difference between a decentralized exchange and a decentralized exchange protocol. An exchange combines decentralized properties. For example, it could have on-blockchain trade clearing and hosting a decentralized order book. An exchange could run on an exchange protocol. On the other hand, a decentralized exchange protocol defines a combination of a trade order format, has a way to reward people who spread orders, and can complete a trade when you find a match.
Even though decentralized finance has demonstrated its potential, the introduction of liquidity mining may have introduced a new phase for DeFi to grow explosively. The early adopter willing to learn what they need to take on the risk has an opportunity to make a profit from the current growth in the sector; primarily through binary options. Like other financial derivatives that are cash-settled, options are financial products that give exposure to future price movements for an underlying asset without ownership. There are many options in traditional finance, such as vanilla options, fixed initial margin, and cash-settled options. The payoff varies depending on the price of the underlying asset when the option expires. The more expensive the underlying asset, the more the profit for the counterparty.
Binary options work differently, though. They have a steep payoff function. The trader either gets the total margin that was locked in the contract or loses it. There is no in-between – the winner takes all. This simple dynamic makes binary options easy to process and understand, meaning they are an excellent introduction to a person who is trading derivatives in cryptocurrency for the first time.
Binary options in DeFi
As it is, you may use options to speculate on both price increases and drops for a DeFi token even if you do not own the token, a fact that mitigates risk and reduces the capital required. Because of this, trading options, becomes an effective method to speculate on valuation for a token without taking part in the spot market. It also gives you an excellent opportunity to hedge trading risk if you are trading spot markets as well. Of course, this is true of general options, but what of binary options?
Sometimes, professional traders call binary options trading a form of gambling because you either get a high payoff or nothing. However, because valuations and volatility in DeFi can move very fast, traders express their opinion of the market in a ‘binary’ way. Otherwise put, binary options give you a simple way to show when you are optimistic or pessimistic about the value of a DeFi token. And because they are easy to understand, they serve a broad audience, something you may want to try. Of course, prediction markets have always been there. Blockchain technology has simply introduced unrivaled and complete transparency for the whole process, creating room for further development, thanks to decentralized protocols that bring these options to DeFi.