In 2020, the DeFi market, which had been dormant for more than two years, finally exploded against the macroeconomic backdrop of the global liquidity glut. Bitcoin mining was halved to fuel the bull market for digital assets, as well as micro-innovations like liquidity mining and AMM Automatic Market Maker. Among them, the DeFi room made significant strides with decentralized stablecoins, loans and cash exchanges and gradually spawned a number of leading projects.
The revolutionary core functions of DeFi
The success of these DeFi projects led us to recognize the revolutionary core feature of DeFi:
- The assets not kept and the transparency of transactions: Assets no longer have to be placed in the custody of trusted third-party institutions (not your keys, not your coins), while all transactions are authentically traceable to avoid human harm.
- Trustless: Trust is no longer limited by the brand, but comes from open source and code.
- Disintermediation: the removal of central institutions that provide intermediate information and credits (tax intermediaries), whereby 100% of the income is returned to the supervisors of the decentralized network (value creators).
In the long term, these revolutionary properties will drive a paradigm shift in traditional financial markets. To put it simply: DeFi eats CeFi and TradFi with their competitive advantage and attractiveness and becomes an unstoppable trend in the process.
The DeFi dilemma of derivatives
In the derivatives area, one of the largest financial markets in the world, no paradigm-shifting DeFi products have appeared. To understand why we need to first analyze the user needs of the current derivatives market.
Derivatives are mainly used to cover hedging and speculative needs. The current market for digital asset derivatives is dominated by speculative demand. Years of practice show that the main requirements of users in the speculative market are:
- Positions: to accurately capture the price at which you want to open a position.
- Liquidity: the need for sufficient stock liquidity to guarantee the amount without the transaction slipping.
- Leverage: the need for sufficient leverage to increase the return on investment.
- Expertise: the need for trustworthy individuals to impart the knowledge and strategies to trade profitably.
Based on the current performance of the public chain, the DEX derivatives must lag far behind CEX in this core, just as the 1700’s stream train hit the horse and carriage at only speed.
Here’s a closer look at why this is:
The Shield Protocol: An Innovative Breakthrough
The great success of Uniswap is not based on a better spot trading experience than the current CEX, but on satisfying the demand for long-tail asset distribution that the CEX could not meet with a royalty-free, extremely low-cost offer. The success was largely based on the development of a new unmet need in the market.
The basic solution to cracking this game is just to apply the properties of blockchain technology to meet the requirements that are not met by the traditional financial world. signOne such derivative protocol that follows the same path as the Uniswap outbreak is a risk free perpetual protocol.
From a trader’s point of view:
- Going in the wrong direction with 0 loss of position: You pay little daily financing fee, no loss for opening the unfavorable price direction, but gain profit for opening the correct price direction.
- Unlimited intraday liquidity: The mechanism of the double liquidity pool enables the private pool to hedge the market-making risk, while the public pool with lower risk can raise enormous liquidity in order to ensure sufficient intraday liquidity.
- Ultra high leverage: About 100 times a day, up to 1000 times.
- Decentralized broker system: Allows you to earn commission rates of up to 40% to 100% and encourage more people to take part in trading education.
Take an example here:
- Molly opens a long position on the 1 ETH at $ 2500 and pays a one-time transaction fee of $ 2.50 (1%).
- After that, the system just needs to subtract the daily funding fee (the daily funding fee varies depending on the volatility) and the position can be maintained at any time using the first day funding fee of USD 25 as an example.
- If ETH increases 10% on the same day, Molly’s profit is 2500 * 10% -25-2.5 = $ 222.5. If ETH falls 10% on the same day, Molly will lose only $ 25 in position fees and $ 2.5 in transaction fees.
This is addressing an entirely new demand for trade – a market that has always existed but has not yet been explored.
But why hadn’t such a market been explored? Because such a setup requires highly developed functions for product design in the area of financial engineering and the need to close a large gap in trust. The market could not be activated if the top financial institutions do not intervene.
That was until the advent of blockchain, which broke the trust gap and allowed the talents of financial engineering experts buried at top universities and internet companies to come to the fore.
The Financial Engineering Behind Shield Protocol
The Financial Engineering of the Shield Protocol is the exotic offering with no expiration date. A daily option fee is charged in the form of a financing fee paid by the trader. Unlike traditional Black-Scholes options, the pricing of an option with no deadline, that is, perpetual, remains a difficult academic issue. As seen in the Shield whitepaper, the Shield team successfully derived and solved the exact analytical solution of the partial differential equation for financing fee pricing for the Shield Protocol.
At the same time, in contrast to the traditional non-linear pricing model, Shield uses a linear approximation by cutting off the non-linear process, which enables decentralized, risk-free, ongoing work on the Ethereum blockchain with on-chain processing.
The steam engine trains survived the capacity market in the 17th century by comparing load rather than speed and then continued iterations of optimization revolutionizing the capacity market.
The Shield Protocol fully applies the revolutionary properties of DeFi with innovations in financial engineering (perpetual options) at the academic level to meet a differentiated market need that was not met by CEX today with limited blockchain infrastructure. With the IDO (Initial Dex Offering) planned for the next two weeks, the market will soon see a really innovative offer.
In short, Shield has created a new way for derivatives to break the ice.
Here is a warm welcome to the Shield Community. Follow them on social media: telegram, Twitter, and medium.