Does the crypto environment exhibit the same level of sophistication and leverage in the derivatives industry as traditional finance? This Article explores this question by providing the first qualitative and empirical analysis of the uncharted crypto-derivatives landscape within the crypto economy and its interaction with traditional finance. The conclusion drawn is that, at their current stage of development, crypto-derivatives do not represent a significant leap forward in terms of sophistication. Instead, they tend to replicate the most basic existing structures. Furthermore, although they have the potential to be a transformative force in the crypto economy and contribute to the emergence of a new financial network, they are not yet widely spread in the market.
Derivatives and leverage have significantly influenced the development of modern financial capitalism, contributing to the emergence of new networks, particularly the shadow banking system, with unprecedented levels of financial innovation. Starting from this foundation, this Article delves into the analysis of new financial derivatives in the crypto economy. It provides a qualitative and quantitative assessment of these structures, including the first dataset of existing crypto-derivatives available in the market, referring to 100+ crypto-exchanges. This Article also considers the size of the liquid staking market and liquid staking derivatives (“LSDs”), taking into account the major fifty competitors globally. It then contextualizes crypto-derivatives in the entire crypto economy, questioning whether they contributed to the emergence of a new network identified as crypto shadow banking, mimicking the shadow banking system and, more generally, traditional finance. In doing so, this Article highlights the role of crypto-derivatives in the development of similar problems affecting the financial system, particularly liquidity risks and technology-related risks. It also identifies some regulatory measures to mitigate and, in some cases, anticipate these imminent problems.
* Professor of Law, Chair for Financial & Corporate Law, University of Zurich, Research Fellow, Institute for Corporate Governance & Finance—NYU Law. Global Fellow, Woodrow Wilson Center, Program on Science, Technology Innovation. I am grateful for the comments received from participants at the 2024 University of Illinois Law Review Symposium, the 2024 American Law & Economics Association Annual Conference held at Michigan Law School, and the 2024 Vanderbilt Law School–University of Zurich Conference. I am especially grateful to Nizan Geslevich Packin and Yesha Yadav for their support, to Matteo Micol for his excellent research assistance, and to the editors of the University of Illinois Law Review for their outstanding work on my piece.
The full text of this Symposium is available to download as a PDF.