A Unified Framework and Comparative Study of Decentralized Finance Derivatives Protocols

TL;DR

This paper presents a formal, protocol-agnostic framework for analyzing and comparing DeFi derivatives protocols, including perpetuals, options, and synthetics, supported by numerical simulations of their dynamics.

Contribution

It introduces a unified analytical framework for DeFi derivatives, categorizes main instrument types, and evaluates their behavior under various economic conditions.

Findings

Developed a formal characterization of DeFi derivatives

Created a protocol-agnostic analytical framework

Simulated derivative evolution under different market scenarios

Abstract

Decentralized Finance (DeFi) applications introduce novel financial instruments replicating and extending traditional ones through blockchain-based smart contracts. Among these applications, DeFi derivatives protocols enable the creation and trading of decentralized derivative instruments whose value depends on underlying cryptoassets, indices, or other reference variables. Despite their growing significance, however, they remain relatively understudied compared to other DeFi protocols, such as lending protocols and decentralized exchanges. This paper systematically analyzes DeFi derivatives protocols, categorized into perpetuals, options, and synthetics, with the aim of comparing their instrument structures, protocol mechanisms, operational dynamics, and economic agents. We provide a formal characterization of the main classes of decentralized derivative instruments and develop a protocol-agnostic framework that connects instrument-level specifications, market-state variables, and protocol-level mechanisms. We complement the analytical framework with numerical simulations that evaluate how derivative positions evolve under varying economic conditions, including changes in underlying asset prices, volatility, protocol-specific fees, and leverage. Overall, this study provides a structured analytical framework for understanding and comparing the design and functioning of decentralized finance derivatives protocols.