In a first, Opium Network, the permissionless derivatives protocol, has launched the 1st credit default swap (CDS) in DeFi in partnership with Aave, the open-source and non-custodial protocol.
With this launch, Opium Network will be offering traders insurance against the default on Aave’s credit delegation loans. In other words, CDS will allow borrowers to cover potential losses of Aave’s unsecured 20BTC loan to the decentralized crypto exchange DeversiFi or use it to swap the risk of credit default through buying or selling CDS contracts at DeversiFi.
How is the CDS Margin Set?
Traders can buy CDS contracts at a nominal value of 0.1 wBTC, which means they will need to purchase 200 CDS contracts to ensure the 20wBTC loan against the credit risk of their loan.
Trading of CDS
Traders can buy or sell CDS contracts using a link provided by Opium Network or through its OEX-CDS-AAVE-CREDIT-5FEB-0.1CAP market. After this, both buyers and sellers would get a derivative spot token. This token can later be transferred outside out of the exchange, or kept in the cold wallet, or sold on the secondary exchange.
What is CDS?
CDS is technically a type of financial derivative, where a lender purchases a CDS contract from investors with an agreement to get reimbursed in case the borrower defaults on a loan. In so doing, the investor, who sells the CDS contract, gets extra returns on the collateral asset by taking the risk of their credit.
What Is Aave Credit Delegation?
It is a form of a transaction occurring after an Aave user delegates under-collateralized credit line to a trusted party at a set interest rate or to a smart contract with predefined functions.
What Is the Future of CDS in DeFi?
As the DeFi market is growing rapidly, so are the risks for DeFi and crypto traders and investors. CDS not only decreases their risk while minimizing potential losses but also helps them get more returns on the collateral asset while taking on extra credit risk.
CDS is of utmost significance in a DeFi ecosystem for insuring credit delegation loans against credit defaults due to under-collateralized credit line.