Decentralized derivatives first came to being on Ethereum. Ethereum, of course, is the first mover smart contract platform that remains home to the vast majority of decentralized application (dapps) activity today.
Yet for these derivatives projects to flourish going forward will require them to “move up a layer,” so to speak. This means they’ll have to migrate their operations to Ethereum’s layer-two scaling solutions.
This is because the rise of DeFi and NFTs over the past couple of years has led to an incredible demand surge for Ethereum blockspace. The result has been Ethereum gas prices acutely spiking to unprecedented heights. This in turn has priced out many “L1” DeFi derivatives traders.
The good news is that Ethereum’s scaling ecosystem is blooming in all directions right now. A range of dapps including derivatives projects have already moved to or natively deployed on the first “L2s” in production.
The result? It’s possible in the here and now to enjoy very fast and very cheap Ethereum-based derivatives transactions. For this you’ll have to “move up a layer” as dapps are, though. If you’re interested in making that climb, below we’ll cover 10 DeFi derivatives projects live on L2s today. First, though, let’s do a quick refresher on Ethereum’s scaling scene.
Ethereum scaling solutions 101
If you’re just starting to dive into L2s, be sure to read the fuller Beginner’s Guide to Ethereum Scaling Solutions that we published last year. For our purposes here, we’ll just cover the basics at hand to make sure everyone’s on the same page.
To start, you can think about Ethereum’s scaling solutions as “external execution layers.” In other words, they facilitate many transactions off-chain and can offer users better UX while relieving congestion from Ethereum.
Image via redditor u/emkoscp
Types of L2s
These scaling solutions come in many shapes and sizes. Rollups are considered by many to be the defining example of L2s because they inherit all of Ethereum’s security guarantees and post batches of transactions to Ethereum.
As such, these L2s directly extend and directly depend on the L1 mainnet. To date, they’ve come in two main varieties, which are optimistic rollups (ORUs) and zk-rollups (ZKRUs). These rollup styles operate quite differently, but their end UX — very fast and very affordable transactions underpinned by Ethereum — are generally similar and incredibly promising for the future of DeFi.
Work around ZKRUs has led to the development of new rollup-like L2s, like validiums and volitions. Some examples of dapps powered by validiums today include Immutable X, DeversiFi, and Sorare. And a volition is a newer type of L2 that lets end users toggle between a ZKRU mode and a validium mode for the purposes of flexibility.
Lastly, sidechains like the Polygon Proof-of-Stake (PoS) chain and Axie Infinity’s Ronin chain are another popular scaling avenue in the Ethereum ecosystem. This is because they’re compatible with the Ethereum Virtual Machine and can thus help to decongest the Ethereum L1 of transactions.
Some consider sidechains to be alternative L1s rather than L2s because they don’t directly depend on Ethereum. However, the distinction is blurred in Polygon’s case because the PoS chain commits checkpoints to Ethereum. Also, Polygon is an “internet of chains” and now has ZKRUs like Hermez, Miden, Nightfall, and Zero under its umbrella.
That said, Polygon PoS is a sidechain closely linked to Ethereum and rollups. This combined with Polygon’s quick and inexpensive transactions has made it a popular destination for DeFi projects looking to scale as of late.
Related: Why Invest in an Index?
The top L2 derivatives projects
Now that we’re all caught up on the basics of L2s, let’s survey some of the top DeFi derivatives platforms that have embraced these scaling solutions.
Below you’ll find a mix of dapps, with some having only integrated with a single L2 so far and others having already embraced multiple solutions. Just remember: these are the pioneering days of L2s, thus many are in their earliest forms and still have various “training wheels” on. If you decide to try any of the dapps below, be cautious when starting out while you get the hang of things!
CompliFi
What it is: CompliFi is a derivatives issuance protocol and automated market maker (AMM).
How it’s scaling: In May 2021, CompliFi announced plans to additionally deploy its protocol on Polygon to help users avoid high transaction costs. Since then, the derivatives dapp has made good on those plans and now provides its x5 tokens and options tokens offerings on the Polygon PoS chain.
How to onboard: Make sure you have Polygon connected to your wallet. A service like Chainlist makes it easy if you’ve never done this before. Then simply head to CompliFi, connect your wallet, and switch over to the Polygon network.
dYdX
What it is: dYdX is a decentralized derivatives exchange that focuses on perpetuals trading.
How it’s scaling: In Aug. 2020, dYdX announced plans to shift its exchange operations to a ZKRU powered by StarkWare’s StarkEx scalability engine. This rollup went live in Apr. 2021 and is presently the second-largest L2 per total value locked (TVL).
How to onboard: You have to create an L2 dYdX account by signing two transactions; after that you fund your account and then you’re ready to start trading.
Synthetix + Kwenta
What it is: Synthetix is a derivatives liquidity protocol, and Kwenta is a decentralized exchange that facilitates trading around Synthetix’s on-chain synth assets.
How they’re scaling: Both Synthetix and Kwenta went live on Optimism, an ORU, in July 2021.
How to onboard: You can use the Chainlist resource mentioned earlier to add the Optimism network to your wallet. Then you’re ready to start minting, staking, or trading on these dapps.
BarnBridge
What it is: BarnBridge is a tokenized risk protocol that’s designed to let users hedge against yield sensitivity and price volatility.
How it’s scaling: To date BarnBridge has integrated with Polygon and Arbitrum, with Arbitrum being an ORU and the largest L2 at the time of this article’s writing.
How to onboard: Just make sure you have the Polygon and/or Arbitrum networks set up with your wallet. After that you just need to have funds to proceed. If you need to bridge crypto over, consider using a service like Hop that lets you quickly move money around EVM chains.
Dopex
What it is: Dopex is a decentralized options exchange that relies on liquidity pools.
How it’s scaling: In Sept. 2021, Dopex deployed its main contracts on Arbitrum. Since then the protocol has become one of the premier early options trading venues on the L2.
How to onboard: Again, with this dapp you just need to have the Arbitrum network added to your wallet and funds in your Arbitrum address.
Lyra
What it is: Lyra is an AMM protocol custom-tailored for trading options.
How it’s scaling: Lyra was natively launched on Optimism, meaning its contracts have never touched the Ethereum mainnet, and it’s only ever existed on L2. In this way, the project represents a new wave of DeFi protocols that are opting for L2 infrastructure right out of the gate.
How to onboard: Have Optimism added to your wallet, and you’re good to go!
Thales
What it is: Thales is a decentralized binary options protocol whose AMM system is currently out as a beta release.
How it’s scaling: This options project deployed on the Optimism L2 in December 2021, making it one of the newest entrants to the L2 ecosystem.
How to onboard: Add the Optimism L2 to your wallet.
Premia
What it is: Premia is a decentralized options market powered by AMM architecture. Similar to Uniswap V3 LP positions, Premia options are minted as NFTs.
How it’s scaling: Premia has already deployed on Arbitrum, and the derivatives project is deploying on Polygon and Optimism soon too.
How to onboard: Add the Arbitrum network to your wallet.
Conclusion
L2s represent the future of DeFi derivatives projects. They help these dapps actualize the liquidity necessary for their operations by making transactions so affordable and fast for users. As time goes on, advances not only at the dapp level but also at the bridging and L2 levels will keep pushing DeFi derivatives projects toward giving TradFi derivatives venues runs for their money!
Disclosure: We’ve partnered with CompliFi to help educate and inform the community about derivatives. As always, we’re committed to providing the entire community with quality, objective information, and any opinions we express are our own.
