Why We Built Kubo
Last updated
Last updated
Derivatives dominate the crypto market with a majority of all notional trading volume. However, the lion's share of crypto derivatives volume resides on centralized exchanges. For comparison, in March 2024, derivatives trading volumes on CEXs reached $6.18T, while DEXs only saw $316.9B in monthly volume (< 5% market share). While there's an apparent demand for crypto derivatives, the vast gap between CEX and DEX market share indicates that product-market fit has not yet been found in DeFi.
This gap is mainly because CEXs support hundreds of derivatives markets, while DEXs offer leverage on a small token. In other words, CEXs act as one-stop leverage trading shops while DEXs do not.
The data shows DeFi's lagging listings. For example, Binance supports 300+ perps markets, while GMX (the top derivatives DEX by TVL) only offers 16 tokens.
Being the one-stop shop is especially important because market activity on CEXs indicates strong demand for long-tail token derivatives—the exact tokens DeFi is missing. For instance, over half of the derivatives volume on Binance comes from tokens outside the top 10 (i.e., long-tail tokens).
Crypto lacks a one-stop shop where users can trade both long- and short-tail token derivatives permissionlessly on-chain. However, creating such a venue requires solving the issue of supporting long-tail leverage in DeFi.
Supporting leverage on long-tail tokens requires some persistent source of short interest on such tokens.
This is easy for CEXs because they maintain centralized control of their opaque liquidation, oracles, and risk management engines. That makes them comfortable with the tail risk of short exposure in long-tail markets, which allows them to lend to market makers to ensure liquidity. DEXs can't replicate this model because of their inherent transparency and auditability.
The problem DEXs face in supporting long-tail leverage is not capital inefficiency but a lack of short-side interest to offset the long trades. Traders who use DEXs tend to be even more bullish on new technologies than users of centralized exchanges, so they don't like going short! This is the fundamental headwind faced by derivatives DEXs. It shows up in materially higher funding rates for long traders. On long-tail tokens, it can become ludicrously high, so high that activity dries up altogether. That's why DeFi can't always support all the tokens - and that's why we built Kubo.
Kubo solves the lack of short-side interest problem with a special instrument called the Repo trade. The Repo trade fills the role of an offsetting short instrument while providing a fixed delta-neutral return. Delta-neutral returns appeal to stablecoin farmers, which exist in multitudes in DeFi. This enables Kubo to offer leverage on many long and short-tail tokens, making it and the order-book DEXs it partners with into one-stop shops for DeFi derivatives.
