Concept

A tokenized derivative is a unique digital asset (a digital twin token) that represents an underlying derivative instrument issued and recorded on a different platform, where such representation itself meets the definition of a derivative as applicable under a certain code of law. A derivative is a financial instrument or agreement/ contract whose value changes in reaction to the change in a specific underlying asset or financial/ non-financial variable (such as stock market price, bond price, interest rate, commodity price, FX rate, price index, credit rating/ quality, credit index, etc.) and its settlement takes place in the future. By nature, a derivative requires no initial net investment or if it requires, the initial net investment would be smaller than needed for similar non-derivative contracts.

Examples

The types of derivatives are options, futures, forward contracts, and swaps. If the instruments/ contracts are traded directly between the parties, without relying on an exchange or an intermediary, the corresponding derivatives are called over-the-counter derivatives (OTC derivatives). On the other hand, exchange-traded derivatives are those traded in an organized and specialized exchange where market participants meet and trade standardized contracts as defined by the exchange. In the context of crypto assets, tokenized derivatives may take the form of perpetual options (OPerps)- an option that trades and functions in on a decentralized platform designed for short-term options trading. Such platforms provide for a wide range of application potentialities ranging from leveraged trading and yield farming to liquidity positioning on the underlying assets.

Another example is synthetic assets (or synths) that capitalize on smart contract technologies. These assets do not directly use contracts to create the chain that links an underlying asset with the derivative product, but rather tokenize the relationship. Tokenization implies that the synthetic asset can provide exposure to any asset irrespective of its nature and location, all from within the crypto ecosystem via a smart contract. A synthetic asset is a tokenized derivative that mimics the value and performance of another asset. Using smart contract technology, developers can create synthetic assets and then trade them on blockchains. Contrary to other exchange-trading assets, such as synthetic stocks, synths can trade on a blockchain-based exchange.