DeFi Deep Dive - Contango
Expirable Futures in DeFi
Introduction:
Contango is a new non-custodial DeFi exchange offering expirable futures without order books or liquidity pools. At launch, it will offer two trading pairs: ETH-DAI and ETH-USDC. What makes Contango different and better is that they are the only DeFi exchange offering expirable futures; with physical delivery and at a minimal price impact for larger trades. Contango's futures have a maturity date so traders can estimate costs with certainty. At expiry, traders know that they will have a predetermined amount to purchase or sell. There are no hidden costs. When a trader opens a position, the protocol borrows on the fixed-rate market, swaps on the spot market, and then lends back on the fixed-rate market. Contango will be a good choice for crypto investors and traders looking to speculate, hedge, and arbitrage using a DeFi platform with top notch CeFi-quality UI. Traders will be able to take advantage of arbitrage opportunities between Contango and major centralized exchanges. Contango was founded in the Summer of 2021 and is based in Europe with a fully distributed team. Users can learn more by visiting Contango’s website.
Social Media:
Twitter: https://twitter.com/Contango_dex
LinkedIn: https://www.linkedin.com/company/contango-exchange/
Financials:
Contango raised $4M at a $45M valuation in December 2021 from lead investor ParaFi Capital.
VCs:
ParaFi Capital
Advanced Blockchain AG
dlab
Angel DAO
Spartan
Coinbase Ventures
Trading Houses:
Amber
GSR
Cumberland
CMS
Product Overview:
Contango protocol synthesizes futures positions by using spot exchanges and borrowing and lending at a fixed rate, i.e. cash flows of futures positions are replicated through fixed interest rate markets. The different steps are realized atomically, i.e. in one transaction each time a trader buys or sells a futures. If for any reason the transaction fails then no position will be taken neither by the trader nor by the protocol. If you want to learn more about fixed-rate markets and how Contango integrates with them, check out this talk by the CEO and co-founder Kamel Aouane:
Trading Pairs:
Contango will support two trading pairs at launch:
ETH-DAI
ETH-USDC
Use Cases:
Contango’s three main use cases are for speculation, hedging, and arbitrage.
Speculation:
Just like in TradFi, Contango’s futures can be used to speculate. If a trader is bullish on ETH, she will go long (agrees to buy). If a trader is bearish on ETH, she'll go short (agree to sell)."
Hedging:
Using Contango, a trader can short ETH with an expirable futures in order to hedge an ETH staking position with the same maturity as the staking period.
Arbitrage:
Contango is the first protocol that uses fixed-rate markets to price futures, so at launch expect some price difference from what you can see on other DeFi exchanges. If new protocols pop up offering expirable futures, you could expect price differences to occur within the DeFi space too.
Main Features:
Contango’s main features include:
Linear and inverse contracts:
Traders will be able to choose between linear and inverse contracts, pick an available expiry date, define leverage and can forget about the unpredictable costs of funding rates.
Minimal price impact:
Contango takes advantage of the deep liquidity pools of underlying protocols to offer a minimal price impact for any trade size.
DeFi composability:
Every position is tokenized as an NFT enabling other projects to easily build on top of Contango.
Physical delivery:
At expiry, Contango directly delivers you the asset for the price set when the position was opened, thus eliminating risks associated with index price manipulation.
Fees:
Contango charges a 0.15% trading fee per transaction.
Security:
Contango is in the process of coordinating an audit by a top-tier firm with the plan to release a beta version after this audit is completed later this summer.
Conclusion:
Contango’s pricing and features make it a good choice for beginner to expert crypto traders and institutional investors looking for a new DeFi exchange. Its expirable futures, CeFi-quality UI, and physical delivery are the main draw. Overall, Contango is a good choice for DeFi traders and investors. Make sure you understand all the risks involved including:
Liquidity risk: The possibility of thin liquidity on underlying markets, especially when closing a position.
Market risk: Sudden movements in price that can result in potential liquidations.
Smart contract risk: The risk of using protocols that can be hacked and exploited.
“We were quickly impressed with the team’s understanding of core DeFi primitives and the challenges traders currently face. Leveraging its integrations with fixed-rate markets, Contango aims to scale its liquidity base and provide predictable upfront pricing for traders. We’re excited to support the Contango team and ecosystem.” - Anjan Vinod, Vice President of ParaFi, a leading crypto native investment firm.