Integrating DeFi and Traditional Finance: Galaxy’s OTC Options Trade Shifts the Game

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Galaxy Digital’s recent completion of its first over-the-counter (OTC) option trade is an important step towards integrating the traditional financial system with decentralized finance (DeFi) infrastructure. This event comes on the heels of FTX’s collapse and the demise of several crypto lenders, which shed light on the risks associated with centralized finance (CeFi) practices where people trust companies rather than protocols with their money. With an increasing number of market participants recognizing the vulnerabilities inherent in traditional bilateral options trading, DeFi is gaining momentum.

Jason Urban, Galaxy’s global head of trading, highlighted how DeFi outperformed CeFi and several traditional transaction methods in 2022. The OTC options trade was executed through Ribbon Finance’s Aevo trading platform and involved cryptocurrency investment company CoinFund. These options function as derivatives, traded in the OTC market as opposed to an exchange, and are typically private transactions between buyers and sellers.

As the crypto market evolves, derivatives are becoming more prominent, with their overall volume reaching a record high in comparison to spot trading last month. When trading bilateral options tied to cryptocurrencies with Galaxy, credit risk, which is usually associated with traditional OTC options trades, is eliminated. This is due to users sending their collateral to a smart contract instead of a counterparty, making them less susceptible to counterparty risks and potential mishandling of collateral.

Christopher Newhouse, an independent crypto derivatives trader, believes that this move is crucial for generating the liquidity necessary for the continued growth of DeFi derivatives. He pointed out that Aevo OTC is unique in focusing on popular altcoin options not traded on screens, but only OTC. Newhouse suggests that as more liquid options and a derivatives market for altcoins develops, lower volatility in these tokens may pique institutional interest beyond just BTC and ETH.

However, he also acknowledges that the market still has a long way to go before traditional finance firms are comfortable with gaining exposure to cryptocurrencies through altcoins rather than the larger cap tokens like bitcoin and ether. Despite the challenges that lie ahead, the successful OTC option trade by Galaxy Digital signifies a step forward in the convergence of DeFi and traditional finance, potentially fostering widespread adoption of decentralized financial solutions in the future.

Source: Coindesk

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