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Contango is the expirable leader in DeFi. To understand why we need expirables, let's dive into the types of contracts available in CeFi:
- Perpetual contracts - Standardised instruments without an expiry date that can be held indefinitely and where funding fees are periodically exchanged between long and short on a regular basis, e.g. each 8h, to keep the futures price tethered to the spot price. These funding rates are unpredictable, i.e. depending on the market conditions you can receive or pay money. Over a longer-term horizon, funding fees can start biting into your profits, as high as 30% annualized (Deribit insights). In a nutshell, you can't reliably control your costs with perpetuals.
The following table compares the main pros and cons of each contract type.
In our opinion, we do not see perpetual and expirable contracts as competitors. Both are here to coexist: perps work well on a short time horizon where funding rates won't make a big dent in the position, whereas expirables are more suitable for longer-term trades.
In CeFi the total volume traded in 2021 was $112 trillions. Expirable futures represent a small portion ($6.6 trillion), yet their volume kept growing in 2021 - about 2.4x compared to 2020 (source: TokeInsight).