Derivatives are assets that derive their price from something else. This is usually the price of another underlying financial asset such as a stock, a bond, a commodity, a currency, or a cryptocurrency. When it comes to more modern times and DeFi, derivatives have become one of the major forces that drive the whole financial industry forward since the 1970s.
There are four common types of derivatives: forwards, futures, options and swaps.
- Forwards – These are unstandardized contracts wherein the holder is under an obligation to perform the contract. They can be customized as per the requirements of the parties involved are mostly available over-the-counter. The contacts are not marked-to-market which means that their value is not based on the current market price.
- Futures – They are standardized contracts that allow the holder to buy or sell an asset at an agreed price at the specified date. This means that the parties involved in the futures contract are required to fulfill their obligation when the time comes. In contrast to forwards, the value of future contracts is marked to market every day which means that its value is adjusted according to market price till the expiration date.
- Options – These are contracts that give the owner a right to buy or sell an underlying asset at a specified price during a certain period of time. The owner however is not under any obligation to exercise the option. There are two ways that a person can exercise their option:
- Using American options which can be exercised at any time before the expiry of the option period.
- Using European options which can be exercised only on the date of the expiration date.
- Swaps – They are derivative contracts where two parties exchange their financial obligations. Cash flows are based on a notional principal amount agreed between both parties without exchange of principal. The amount of cash flows is based on a rate of interest. One cash flow is generally fixed and the other changes on the basis of a benchmark interest rate. Interest rate swaps are the most commonly used category. Swaps executed mostly over-the-counter between businesses or financial institutions.
Our main focus will be on Unbound which is a decentralized cross-chain liquidity protocol that is building the derivative layer of Automated Market Makers (AMMs). As previously seen with Uniswap, AMMs allow digital assets to be traded automatically and without need for permission by using liquidity pools instead of a traditional market of buyers and sellers.
Unbound locks up liquidity pool tokens (LPT) and mints synthetic assets which further reinforces liquidity in AMMs and Defi thus unlocking liquidity from existing AMM Liquidity Pools. This means that after creating a Ubricoin liquidity pool in a DEX such as Uniswap, you receive LPTs. These LPTs can be taken to Unbound which locks up the LPTs from Uniswap and mints new synthetic tokens. The token minted from Unbound is called UND, which is a stablecoin. The value of that stablecoin is pegged on the US dollar.
What is the essence of minting synthetic tokens from LPT?
LPT acts as a receipt which allows you to claim your original stake and interest earned after providing liquidity. This receipt does not have much use therefore, Unbound mints new tokens which can be traded for other tokens, hedged, lended etc. in the marked while using the LPT as collateral. What this means is that, after providing liquidity to Ubricoin, you do not have to wait for it to earn interest in the pool. Instead, you can collaterize your LPT in Unbound and make more profit.
If you want to get back your LPT, take your synthetic tokens to Unbound which burns the tokens and unlocks your LPT hence you are able to reclaim your share in the Liquidity pool.
Reinforced liquidity by Unbound makes Ubricoin as powerful as its holders want it to be.