There are several use cases for expirables in DeFi. They can be grouped in:
Just like in TradFi, expirables 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).
Since Contango's expirables have a maturity date, traders can estimate costs with certainty. At expiry, they already know for sure that they will have a pre-determined amount to purchase or sell. There are no hidden costs. Everything is known upfront.
Expirables can be used to hedge investments by taking the other side of the market, e.g. go long on an asset, go short on the expirable contract on that same asset. That way any loss on one side if offset by a gain on the other side - meaning you're effectively market-neutral.
For instance, a trader could buy ETH and stake it to earn staking rewards, while shorting it with an expirable on Contango (with the same maturity as your staking period). At expiry, she redeems her ETH (plus staking rewards) and brings it to Contango to close her short position. Regardless of the spot price of ETH at maturity, she made a profit from the rewards.
In this case her position is fully hedged so she loses any upside price exposure to ETH.
As with spot markets, expirable markets can be arbed too. There are 3 different scenarios:
We’re the first protocol that uses fixed-rate markets to price our expirables, so at our launch we expect some price difference with standardised futures, e.g. on Binance. But that’s good news! That’s a free lunch for anyone interested in arbitraging.
If new players pop up offering expirables or standardised futures, we expect price differences to occur within the DeFi space too. Looking forward to that!
Wen DeFi arbitrage?
The most famous arbitrage between spot and expirable markets is called "cash and carry" trade or "basis" trade. It can be considered an arb since it captures the spread between spot/expirable and locks in a risk-free profit.
A simple way to do a cash and carry with the markets being in contango, is to buy the base currency and sell the expirable on an inverse contract by posting the base currency as collateral. E.g. if the expirable ETHDAI is trading 10% above the spot, then buy ETH on Uniswap and post your ETH as collateral to sell an inverse contract on Contango.
Without leverage (i.e. when the position is fully collateralized) the trader is better off lending her initial capital on the fixed-rate market directly, without going through Contango. This way she avoid unnecessary steps and fees.
However, Contango comes in handy when a trader wants to use leverage to amplify her gains in a cash and carry trade.
The most detailed explanation of a cash and carry trade is still All aboard!, by Arthur Hayes. If you haven't read it, stop whatever you're doing now and go read it.