Apollo Crypto sees on-chain derivatives as the next big opportunity in DeFi.

According to Henrik Andersson, the chief investment officer of Australian crypto investment firm Apollo Crypto, on-chain derivatives are poised to become the next major growth sector in decentralized finance (DeFi). In an interview with Cointelegraph, Andersson stated that the increasing popularity of decentralized spot trading will inevitably create a high demand for decentralized derivatives.

“The first decentralized spot exchanges were launched roughly six years ago. Decentralized perpetuals and futures trading is much newer, so there is a high growth opportunity to be had with on-chain derivatives.”

Andersson explained that decentralized spot exchanges have been steadily gaining market share from centralized exchanges, a trend that has accelerated since the collapse of FTX in November of last year.

During the memecoin frenzy in May, daily trading volume on decentralized exchanges (DEXs) like Uniswap briefly surpassed that of established centralized crypto exchanges such as Coinbase.

In June, trading volumes on DEXs surged again, growing over 400% following the Securities and Exchange Commission’s crackdown on Binance and Coinbase.

“In the last year, we’ve seen Uniswap trade more daily volume than Coinbase, and if you look at the overall market share [of DEXs], it’s still small, but it’s gaining ground,” said Andersson. “On a monthly basis, we’re doing over $50 billion in spot volume on DEXs.”

In June, futures trading accounted for nearly 80% of the entire crypto market’s trading volume across centralized exchanges. Andersson believes this futures-heavy trend will also be replicated in DeFi, and he praises on-chain derivatives as the “best product-market fit” the DeFi space has seen in years.

“Most of the volume is in futures, so there’s an even greater growth opportunity for on-chain derivatives.”

In addition to decentralized derivatives, Andersson also mentioned two emerging market sectors that have caught his attention in recent weeks.

The first is NFTFi, which combines nonfungible tokens (NFTs) and DeFi, allowing investors to rent, borrow, and fractionalize NFTs, as well as create derivative and prediction markets based on them.

Describing this nascent sector as having a “strong investment narrative,” Andersson believes that DeFi investors will inevitably start using NFTs for a wider range of functions.

The second emerging theme is LSDFi, which utilizes liquid staking derivative (LSD) tokens such as Lido Staked ETH (stETH) and Rocket Pool ETH (rETH) to enable investors to borrow, speculate, and hedge against their LSD tokens.

Related: Over $204M lost to DeFi hacks and scams in Q2: Finance Redefined

Since Ethereum’s Shapella upgrade, the popularity of LSDs has grown rapidly, with LSD protocols surpassing DEXs in terms of total value locked (TVL), according to data from DefiLlama.

“We have seen a growing number of protocols use staking derivatives as collateral in DeFi, and I think we’ll see much more of that going forward,” explained Andersson.

With the LSD space gaining momentum, Andersson emphasized the need for the market to address concerns regarding centralization among certain staking providers and create a more balanced array of protocols.

“Lido is a bit too dominant for Ethereum itself. We want to have a larger pool of potential stakers and protocols providing that service,” he said. “All of us in the space would like to see not just more protocols themselves but a more diversified environment altogether.”

Magazine: Tornado Cash 2.0 — The race to build safe and legal coin mixers

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