A Match Made in Heaven: How can Derivatives and LSTs/LRTs Boost Each Other?

We all know how rapidly narratives change in crypto. It seems like every month there’s a new focus – New L2s, Alt L1s, then memecoins get the spotlight, Telegram bots…

While these trends are exciting, projects anchored to short-term narratives often experience a roller coaster ride. They thrive when the narrative is hot, but during different periods, no one uses the product/platform.

Zaros, on the other hand, is strategically positioned in two strong sectors: Derivatives and LSTs/LRTs. While these sectors do benefit from narrative momentum, the key distinction lies in both having achieved product-market fit (PMF). This means there is actual demand, as these offerings fulfill genuine needs regardless of market fluctuations.

This article dives into the strengths of the derivatives and LSTs/LRTs sectors, exploring why they are robust, essential, and poised for future growth. Additionally, we’ll illustrate how we are approaching these two narratives in a way that they both boost each other.

Why On-Chain Derivatives?

Did you know that the derivatives industry is estimated to be a quadrillion-dollar market in TradFi? While this figure is based on Notional Value and may not reflect the actual traded amount between parties due to leverage, it clearly shows how big of an industry this is.

The best part? Bitcoin futures volumes averaged "only" $918 billion monthly in 2023, as reported by The Block. In contrast, the FOREX market witnesses trillions of dollars in daily trading.

Source: The Block
Source: The Block

It’s worth mentioning that most of the volume right now comes from centralized exchanges, with Binance alone getting nearly 50% of the market share. Bybit, OKX, and Bitget also get high volumes.

The only DEX mentioned alongside them is dYdX, which is arguably centralized…

Source: The Block
Source: The Block

If you want to learn more about the killer asset class in crypto – Perpetual Futures – Check out this article we posted a while ago!

Perp DEXs – The Killer App

We’ve always talked about centralization risks. Take FTX, for instance – it's the prime example that hits close to home for many.

FTX used to be the top 2 CEX out there, and loads of people utilized it to trade futures and other derivatives. Then, out of nowhere, everyone who had funds in the exchange ended up losing everything.

While FTX is an extreme case, other exchanges are grappling with centralization issues, even those that are still operational. Recently, a significant number of MEXC users reported issues with frozen accounts—talk about a headache!

The primary factor driving most users towards CEXs is the user experience (UX). Historically, DEXs posed challenges due to their difficulty of use, complexity, and the elevated risk associated with handling transactions independently on-chain. However, with the introduction of features like Account Abstraction, decentralized exchanges are poised to gain market share, and Zaros is well-prepared for it.

Crypto traders love volatility and speculation. What could be better than perpetual futures? It’s not hard to understand why this is a sector that has achieved product-market fit and is constantly printing high volumes, as shown previously.

We identify two catalysts for on-chain derivatives:

1 - Expand Market Share related to CEXs

2 - Onboard TradFi assets and traders into the blockchain.

This is an industry with extremely high potential. Overlooking it is NOT an option.

Source: Artemis
Source: Artemis

From the chart above, we can see that the trading volume across all markets on Perp DEXs throughout the entire year of 2023 didn't even match the average monthly volume for BTC futures on CEXs!

Perp DEXs have ample room to grow. CEXs are already hitting trillions in volume each month. If we were to increase our market share from the current 2% to 10% or 20%— which is very achievable —the industry could experience a substantial 5x to 10x growth from its current standing!

LSTs/LRTs: Money Legos at its Finest

Liquid (Re)Staking tokens address a big economic challenge within proof-of-stake blockchains.

When you stake a token, the need to lock it for yield reduces liquidity in the ecosystem. This lower liquidity leads to decreased demand for lending and other on-chain activities, resulting in lower DeFi native interest rates.

So, there’s a dilemma here: when activity is high, users tend to turn to DeFi yields, leaving the network less secure. Conversely, when activity is low, liquidity decreases and users go after the staking yield, hence securing the network.

Now, with LSTs, we can have BOTH. In fact, thanks to Zaros, a pioneer in this concept, you’re able to boost your LST/LRT yield up to 6-7x with the trading activity on our platform. We’ll talk more about this in the upcoming section.

Back to the liquid staking industry, it's worth noting that despite being a relatively new  sector, it has quickly claimed the top spot among the DeFi categories in terms of Total Value Locked (TVL).

Protocols officially took root after Ethereum's transition to a PoS network during The Merge. Also, in the Shapella Upgrade last year, the ability to withdraw staked tokens enhanced trust in the sector.

Contrary to expectations of widespread withdrawals, users actually allocated even more due to TRUST!

Source: Dune Analytics (@hildobby)
Source: Dune Analytics (@hildobby)

LSTFi/LRTFi: Leveraging LSTs/LRTs to create new products

Following the Shapella Upgrade, the industry has grown a LOT, and the concept of LSTFi/LRTFi gained more popularity. Several projects leveraging LSTs/LRTs in different areas are now appearing, such as:

  • LST/LRT-Backed Stablecoins

  • Money-Markets

  • Yield Strategies

As shown in the previous chart, there are over 29 million ETH ($85B) staked. Without the existence of LSTFi protocols, all this capital would remain idle. In fact, most of it is idle now, as ETH holders are still in the process of understanding more about LSTFi protocols.

Knowing this, we thought: Why not take the deep liquidity of LSTs/LRTs on Ethereum to establish a perpetual futures market? — one of the few sectors that have achieved product-market fit.

This is where Zaros comes into play.

How can derivatives and LSTs boost each other?

By combining two of the hottest narratives in the crypto space, we've crafted a next-generation product on Arbitrum.

Before diving into how derivatives and Liquid (Re)Staking Tokens (LSTs/LRTs) complement each other, let's first explore Zaros' liquidity engine and understand the basics of the protocol's architecture.

Liquidity Engine

You already know that we leverage LSTs+LRTs to bootstrap a perpetual futures market. But the reality is much more than that!

Most of the idle liquidity of LSTs is based on Ethereum, which has a TVL of $43.5 Billion, with Lido alone being responsible for over $27 Billion (as of 02/16/2024).

However, a perpetual futures market cannot be built on ETH, it’s too expensive and inefficient.

The Intersection Between LSTFi/LRTFi and DeFi Perps

Now, to answer the question of how on-chain derivatives and LSTs can boost each other, the process is simple.

If you’re an LST/LRT holder, you’re getting your yield by contributing ETH to a validator stake, thereby securing the network. With a token representing this action in hand, the next natural step is to explore ways to boost your rewards.

To accomplish this, you can re-stake it on Zaros! This liquidity will be utilized by traders on our leverage trading DEX. By contributing liquidity, LPs will earn 70% of the Perpetual DEX’s trading fees in the form of real-yield.

Traders and LPs should adopt a bullish stance on each other’s narratives.

What do we mean by that?

Traders seek liquidity, they want to trade in a place with favorable prices and a healthy infrastructure.

Where does the majority of liquidity come from?

LSTs/LRTs! Derivatives traders on Zaros should be bullish on the LSTFi/LRTFi narrative!

On the other hand, where do the rewards of LPs come from?

Derivatives trading! LPs on Zaros should be bullish on the growth of on-chain and decentralized perpetual futures markets. Greater volume translates to higher yields.

Final Message

In the constantly changing crypto industry, an integration of on-chain derivatives and Liquid Staking Tokens (LSTs) represents a significant leap forward, and we’re excited to be the first ones to implement this!

The fusion of two strong narratives—derivatives and LSTs—can create an efficient and mutually beneficial ecosystem. This synergy not only enhances market liquidity and accessibility but also opens new avenues for yield generation.

In this article, we highlighted the positive aspects of integrating derivatives and LSTs, offering insights into their current status and potential for growth. For a more in-depth understanding of the technical functionalities of Zaros, please refer to this document.

About Zaros

Zaros is the first Perpetuals DEX powered by Boosted (Re)Staking Vaults that supercharge your LSTs & LRTs yield on Arbitrum.

Notable early angel investors include Fernando Martinelli, founder of Balancer; Kieran Warwick, founder of Illuvium; Danny Wilson, CFO of Illuvium; Antony Sassano, founder of TheDailyGwei; Andy Chen, CTO at Scalene and former Lead Architect at Synthetix, and Kevin Lu, CEO at Scalene and former Growth Lead at Band Protocol.

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