Ethereum [ETH] turned on its head? Derivative token with inverse pegging to be launched by dYdX

A new way has emerged for Ethereum [ETH] traders to diversify their portfolio. A decentralized financial derivatives startup known as dYdX plans to create short and leverage positions for Ether and other ERC20 tokens. Notably, the startup recently closed a funding round led by the market leader in investments, Andreessen Horowitz.

Other prominent investors for the round were Polychain Capital, Kindred, Abstract and angel investors such as Brian Armstrong, the CEO of exchange platform Coinbase, and Elad Gil, a prominent investor.

The founder of dYdX, Antonio Juliano, stated:

“The main use for cryptocurrency so far has been trading and speculation, buying and holding. That’s not how sophisticated financial institutions trade.”

He went on to speak about derivatives markets in general, and how they are bigger than the underlying spot markets by an order of magnitude. He said:

“The cryptocurrency market is probably on the order of $5 billion to $10 billion in volume, so you’d expect the derivatives market would be 10X bigger. I think there’s a really big opportunity there.”

dYdX offers a short Ethereum token that is inversely pegged to the value of the cryptocurrency. When the price of Ethereum goes up, the token’s value goes down. When Ethereum depreciates in value, the token’s value increases. This means that traders could sell these tokens after predicting a drop in the price of Ethereum.

dYdX also plans to offer short and leveraged tokens for any cryptocurrency on the ERC20 standard. This would potentially allow customers to short coins that they know are going to depreciate in value.

The way these tokens work are that lenders on the backend of the system can gain interest by providing Ether, or other currencies as a collateral. This collateral is locked into a smart contract which backs up the short tokens. These tokens will be offered on dYdX’s own application, and also on other exchanges who are partnering with the startup. Juliano stated:

“We think of it as more than just shorting your favorite shitcoin. We think of them as mature financial products.”

The startup was created with a vision to provide infrastructural support to institutional investors and big funds. The protocol itself was a project to begin offering margin tokens. Now, it aims to offer the maximum liquidity to investors trying to enter the cryptocurrency market through margin trading.

On the business model for the startup, Juliano stated:

“We plan to capture value at the protocol level in the future likely through a value adding token. It would’ve been easy for us to rush into adding a questionable token as we’ve seen many other protocols do; however, we believe it’s worth thinking deeply about the best way to integrate a token in our ecosystem in a way that creates rather than destroys value for end users.”

A partner from Polychain, Olaf Carlson-Wee, had only good things to say about the dYdX product. He also provided a positive prediction, stating:

“Antonio and his team are among the top engineers in the crypto ecosystem building a novel software system for peer-to-peer financial contracts. We believe this will be immensely valuable and used by millions of people. I am not concerned with short-term revenue models but rather the opportunity to permanently improve global financial markets.”

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