An Introduction to Qilin Protocol: the First of DeFi Derivatives

by ImmuneBytes
Qilin Protocol

The cryptocurrency market is evolving with each passing second and so is the technology behind every newly launched decentralized protocol. From having simple lending protocols to now having cryptocurrency as DeFi derivatives, the tech has come a long way.

In today’s article, we’re going to talk about the Qilin protocol which allows altcoins to be used in crypto derivative deals, rapidly expanding the utility of altcoins. Derivatives generate critical volatility, which is likely to be the engine of growth for altcoins. Volatility creates critical trading opportunities for a cryptocurrency. 

Thus, derivative availability leads to more volatility which leads to more trading opportunities, which in turn leads to more value.

 We’ll talk about all this and more. Keep reading!

What is Qilin?

Qilin Protocol

Qilin is a decentralized derivatives protocol built on the Ethereum blockchain. The protocol allows users to build and customize derivative contracts denominated in any asset and prices liquidity based on the risk to the liquidity provider.

Qilin aims to democratize derivatives trading. Qilin sees the current liquidity risk profile in decentralized finance as an obstacle to that goal and has key risk-mitigation mechanisms to reduce liquidity risks.

What is Derivative Trading?

A derivative is a contract or product whose value is determined by an underlying asset. Currencies, exchange rates, commodities, stocks, and the rate of interest are all examples of derivative assets. The buyer and seller of such contracts have directly opposed predictions for the future trading price. To earn a profit, both parties wager on the underlying assets’ future value.

Derivative trading in crypto?

The underlying asset in crypto derivatives trading can be any cryptocurrency token. Two parties that enter into a financial contract speculate on the cryptocurrency’s price on a future date. 

During the first phase of the contract, the sides agree on a selling/buying price for the cryptocurrency on a specific day, regardless of the market price. As a result, investors can profit from changes in the underlying asset’s price by purchasing the currency at a cheaper price and selling it at a higher price.

The most popular type of derivative in crypto is Perpetual Contracts

what are perpetual contracts?

Perpetual contracts are derivative contracts similar to futures that have no expiration date or settlement, allowing them to be held or traded for an indefinite amount of time. 

Perpetual contracts are slowly gaining popularity in crypto because they allow traders to hold leveraged positions without the burden of an expiration date. Unlike futures, perpetual contracts trade close to the index price of the underlying asset due to perpetual funding rates.

You can read more on perpetual contracts here.

Coming back to Qilin protocol.

Qilin V2

Most derivative protocols today are based on the spot market model of Uniswap V2. This means they have one uncapped liquidity pool and an automatic market maker model which is a critical reason for the lack of traction in the decentralized derivatives market. 

Qilin Protocol has changed all this with its permissionless, crypto-denominated perpetual trading protocol for all crypto assets. At the core of Qilin Protocol’s design is its understanding of the LP business, having been an active market maker for both projects and exchanges since 2017.

Key Features of Qilin V2

The Qilin V2 upgrade comes with a bundle of features of which we have listed a few below.

  • creating a liquidity pool without permission
  • creating an altcoin reverse contract trading without permission
  • designing and implementing a reward mechanism for Rebase operators
  • designing and pre-researching the uniswap-based oracle machine
  • deploying price shifting mechanism
  • optimizing and upgrading the trading experience
  • expanding the soft and hard wallets supported by Qilin

Qilin believes that the funding raised by various professional institutions not only reflects the recognition of Qilin but also a lot of constructive opinions from professional perspectives on the project. 

In view of Qilin, volatility is far more important than liquidity for altcoin, so it has designed an innovative decentralized on-chain risk control and dynamic liquidity supply mechanism. This innovation aims to provide the ability to build permission-free on-chain reverse, forward contracts for altcoins.

What does Qilin aim to do?

Qilin’s key innovation is to create peer-to-tranches liquidity pools that have different risk-reward profiles, based on an understanding of the end-users, be they market makers, traders, or yield seekers.

For market makers, the liquidity pools have a primary liquidity tranche, a customizable tranche cap, and a preferable annual percentage yield (APY). Yield seekers can access the reserve liquidity tranche, uncapped public access as well as a secondary APY.

The protocol also has an incentive structure that does not inflate the value of the tokens that are offered. Instead of the traditional incentive mechanisms based on a predetermined tokenomic pool with pre-allocated reward tokens, Qilin uses a rebate structure

What’s this Rebate Structure?

Qilin’s rebate structure is: 

  • Community-owned
  • Has a non-inflationary front end with customizable rewards 
  • Has asset pair marketplaces
  • Trading fee settings
  • Rebate settings 
  • Comes with a referral link

A protocol having such features and coming up with such innovative solutions will prove to be a key driver in the development of derivative markets priced and traded in altcoins. We believe that just as the fiat money supply exploded once we came off the gold standard, altcoin demand will explode as the crypto markets move off the stablecoin standard. 

Final Thoughts

Innovations like the Qilin Protocol enhance the use cases and user experience of decentralized markets. This not only is a step forward in technology but also attracts users to invest their time and money for the better. 

Altcoins have been here for a while yet Bitcoin dominance is still quite prevalent in the market. Increasing the utility of altcoins in the derivative markets will massively increase their value. In the process, this will allow the market to move away from the hegemony of stablecoins and the dominance of bitcoin.

About Us 

ImmuneBytes is a Blockchain security firm that employs the industry’s best tools and practices to provide a comprehensive smart contract audit. We have a team of robust and experienced security professionals who are adept at their niches and provide you with a quality service. We have worked on 175+ projects spread across the world on different Blockchain frameworks with some of the industry’s top firms and we continue to unfold the decentralized movement.

We are also providing consultancy, coming up with a bug bounty platform, and also an insurance product to provide our clients with a hassle-free security product catalog. Stay tuned.

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