The digital asset ecosystem entered a new era of legitimacy with the January launch of the first spot Bitcoin (BTC) exchange-traded funds (ETFs) on the U.S. market, and record inflows continue to highlight the increasing appeal of the up-and-coming asset class that is helping to redefine how global financial markets operate.
Decentralized finance (DeFi) has been seeing a steady increase in adoption over the past four years and recently saw an uptick in activity that aligned with the launch of the Bitcoin ETFs. This was highlighted by an increase in the total value locked (TVL) across DeFi, which surpassed $100 billion on Friday for the first time since May 2022, according to data from DeFiLlama.
To get an insider take on how the launch of the spot BTC ETFs is impacting the DeFi ecosystem, Kitco Crypto spoke with Matt Losquadro, a Core Contributor at Synthetix, a decentralized liquidity provisioning protocol that enables the creation of synthetic assets, offering unique derivatives and exposure to real-world assets on the blockchain.
“The SEC’s greenlighting of the spot Bitcoin ETFs marked a pivotal moment igniting widespread attention toward cryptocurrency,” Losquadro said. “With these ETFs, investors now have access to a fully regulated avenue for tapping into the potential of Bitcoin, fueling a surge in mainstream interest in the digital asset space.”
With Bitcoin’s price now trading at all-time highs, he said the more “seasoned crypto investors are poised to rekindle their interest in exploring diverse trading options, including derivatives.”
“In recent days, the crypto derivatives volume has been surging,” he noted. “As per Laevitas, a Swiss-based data tracking platform, transactions totaling $374 billion in crypto futures, perpetual futures, and options contracts occurred within a single day.”
“Sophisticated retail investors are drawn to derivatives due to their potential for amplified gains (through leverage) and ability to hedge against risks in the volatile cryptocurrency market,” Losquadro said. “Retail traders often engage in derivatives trading to speculate on price movements, manage their portfolios, or execute more complex trading strategies.”
He also noted that “Fund managers and institutional investors are increasingly dabbling in decentralized derivatives as centralized products are under more scrutiny than ever.”
“The BTC ETF has significantly benefited the overall cryptocurrency market, contributing to its robust growth,” Losquadro said. “Anticipated milestones like the BTC halving and the potential approval of a spot ETH ETF are poised to further stimulate market activity and potentially usher in the continued bull run.”
Other tokens of interest
Losquadro noted that while Bitcoin is “the leader of the crypto market, it’s common for other tokens to mirror its movements.”
“The crypto market is interconnected, meaning that the value of a single cryptocurrency can prompt comparable fluctuations in others, influenced by factors like investor sentiment, market trends, and trading behaviors,” he said. “Interest in derivatives for altcoins has also increased. We’re seeing significant demand both on Synthetix Perps and elsewhere.”
DeFi revival
With the entry of fund managers and institutional investors to the crypto scene, Losquadro said DeFi stands poised to see a new wave of adoption as newcomers to the crypto scene start to explore all that the decentralized marketplace has to offer.
“The envisioned potential of DeFi is at a critical juncture. While the emergence of DeFi last cycle was about establishing financial primitives on-chain, the user experience was not ready for mass adoption,” he said. “We are now seeing a wave of consumer-focused apps building on top of the DeFi infrastructure that has been built over the last several years.”
“The improved app-level UX combined with user-centric Layer 2’s like Base will enable a new wave of users to enter the space, maturing the DeFi market overall and powering the next leg of innovation,” he said. “The increasing attraction of decentralized derivatives to fund managers and traders in recent months indicates that this burgeoning sector could emerge as a major catalyst for expansion within the broader DeFi ecosystem.”
With Bitcoin currently experiencing a strong uptrend, Losquadro said there is a lot of interest in longing the market, as investors have seen its price increase 72% since the start of February and know that historically, the top crypto experiences a major price increase once it surpasses the all-time high from the previous market cycle.
“In bullish market conditions, there tends to be heightened interest in going long on the market, with traders aiming to capitalize on rising prices,” he said. “This is because traders anticipate ongoing asset value increases, leading them to prefer long positions, where they buy assets with the expectation of selling them at a higher price later on.”
“Currently, it appears that bullish trends are setting in, particularly in light of the approval of ETFs, increasing curiosity about novel on-chain protocols, and the shift of users from centralized exchanges to the decentralized landscape through Base,” he added.
While things have started to look better for DeFi recently, the ecosystem still has a long way to go to achieve what it is capable of, he said.
“Despite being in its early stages, DeFi has not yet fully delivered on its fundamental promise of providing democratized financial opportunities in a transparent and permissionless manner,” he said. “Even the most advanced decentralized protocols often rely on centralized infrastructure to introduce new products, introducing custodial and regulatory risks. Crypto’s dirty secret is that most people are still using centralized exchanges to interface with tokens designed to be decentralized.”
Derivatives’ role in the crypto market
While many in the crypto community dislike derivative products, seeing them as primary contributors in pushing the global financial system to the brink of catastrophe in 2008, Losquadro said they play a vital role for all markets, including cryptocurrencies, as they keep traders actively engaged and help provide more liquidity.
“A healthy derivatives market can be attractive to professional traders and institutional investors; this increased activity helps keep the market alive and liquid,” he said.
“A bull run is characterized by rising prices, demand outweighing supply, and high market confidence,” he added. “When it comes to the derivatives market’s specific role in the next crypto bull run, liquidity is the key component. Synthetix has been well aware of the role that liquidity plays and has continued to prioritize it in all market conditions.”
But Losquadro acknowledged they are not without their drawbacks. “The current framework for developing derivatives typically follows a top-down approach, rather than empowering individuals to create these financial instruments themselves,” he noted.
“Both traditional financial institutions and crypto companies are constraining the organic emergence of innovative products within DeFi, resulting in a lack of the permissionless infrastructure necessary to foster genuine financial innovation,” he said. “Synthetix V3 empowers individuals to construct and introduce derivative products through accessible and decentralized tools for creating derivatives, which are open-source and permissionless.”
Base layer-two network
Synthetix, which originally launched on the Ethereum network, recently expanded to Base, a layer-two network backed by Coinbase that offers significantly lower transaction costs than Ethereum mainnet.
“The recent Synthetix launch was platformed on one focal mission – to enable anyone to deploy permissionless derivatives products seamlessly and with access to the necessary liquidity needed to launch these products successfully,” Losquadro said. “When deciding on an L2 to launch/build on, Base was a clear frontrunner for a multitude of reasons.”
He noted that Base “shares the same infrastructure as Optimism (OP),” and said, “Within the Optimism superchain system, all individual chains utilize the same technology and code.”
“It felt fitting to round out the Synthetix V3 update by deploying the first major perpetuals protocol on Base Mainnet,” he added. “Base was also intriguing due to its goal to create an environment that is easy to build on and its potential for driving new users onchain. Base serves as a gateway for the millions of Coinbase users and by deploying Synthetix on Base, we aim to generate increased trading volume for Synthetix perps across the Ethereum ecosystem.”
