Contango aims to unlock $13B DeFi derivatives sector using money market protocol as middleware.
Contango, a team leveraging web3 money markets to launch derivatives products, announced the launch of futures contracts built on top of Aave, the leading DeFi lending protocol, on Oct. 4.
The new product, dubbed Contango Perps or cPerps, utilizes recursive or “looped” lending positions via Aave flash loans to create leverage positions. This is achieved by repeatedly using borrowed assets as collateral to increase a user’s credit capacity.
“It’s the native way of longing and shorting assets on-chain,” said Kamel Aouane, co-founder of Contango.” “We estimate that more than half of the volumes on lending markets are due to looping.”
Contango emphasized that it never takes the other side of traders, nor do the lending market’s liquidity providers.
Contango joins an emerging generation of DeFi protocols seeking to disrupt centralized web3 incumbents with competitive decentralized products.
While early decentralized exchanges exclusively supported spot trades executed by an automated market maker, DEXes now offer advanced features including leverage, limit orders, and orderbook-based trading.
Contango’s founder added that the project is planning to launch similar integrations with other money market protocols including Compound, Spark, MakerDAO, and Morpho soon. Aouane said the Contango could unlock a DeFi derivative market worth $13B once deployed across multiple protocols.
Contango claims that the funding rates associated with recursive lending are less volatile than the fees found on centralized derivative exchanges.
It cited an internal study by the Contango team showing cPerps fees have historically trended lower than the funding rates on Binance, the largest centralized exchange, and dYdX, the leading decentralized derivatives protocol.
However, funding rates on Aave have experienced periods of significant volatility this year, with the fees for USDT, USDC, and DAI each tagging double-digits during 2023.
