In traditional financial markets, Cost of Carry (CoC) is a crucial concept in futures and options trading. It refers to the costs associated with holding a financial asset over time. These costs include factors like storage fees, insurance, and interest rates, which can either increase or decrease the overall expense of maintaining a position. In the decentralized finance (DeFi) space, where derivatives trading is growing rapidly, a fair and transparent CoC mechanism is equally critical to ensure users benefit from accurate pricing and market predictions.

Understanding Cost of Carry (CoC) in Traditional Markets

The CoC is typically the difference between the spot price (the current market price of an asset) and the futures price (the price agreed upon for future delivery of that asset). This relationship is influenced by several factors, including:

• Interest Rates: Borrowing or opportunity costs of capital tied up in the trade
• Storage Costs: Expenses incurred for physical assets like commodities
• Dividends or Yields: Any income generated by holding the asset

For example, in commodities trading, the CoC accounts for storage and insurance costs, while in equity derivatives, it incorporates dividends and interest rates. Traders use the CoC to predict market movements, arbitrage opportunities, and fair pricing of futures contracts.

The Role of CoC in DeFi

In the DeFi landscape, where futures and options are becoming integral to crypto trading, the CoC concept plays a similar role. However, due to the decentralized nature of DeFi, the absence of intermediaries and fluctuating tokenomics of crypto assets make implementing a transparent and equitable CoC more complex.

Without a fair CoC system, DeFi users risk engaging in trades where the pricing of futures or options diverges significantly from market realities. This creates inefficiencies, discouraging broader participation and hindering DeFi’s growth as a viable alternative to traditional finance.

How 1xMM Redefines Fair Cost of Carry

1xMM introduces a groundbreaking approach to CoC that prioritizes fairness, accuracy, and transparency, setting a new benchmark in the DeFi derivatives market: Perpetual Constant Maturity Options (PCMOs). Here’s the benefits of PCMOs:

• Dynamic Pricing Mechanisms: 1xMM employs real-time data feeds and smart contracts to dynamically calculate CoC based on market conditions
• Market-Driven Valuation: PCMOs valuation depends on market volatility (i.e. asset's potential of move) and futures drift (i.e. asset's expected beta); therefore, CoC is fully dependent on parameters defined by the market
• User-Centric Design: CoC depends on pools liquidity thanks to the Notional Adjustment mechanism; therefore users' positions themselves impact the CoC
• Education as a Pillar:1xMM’s platform includes gamified educational tools that help users understand CoC and its implications. This bridges the knowledge gap, making advanced trading concepts accessible to a broader audience

Benefits of a Fair CoC System

1xMM’s fair CoC system provides significant advantages for DeFi users:

• Enhanced Trust: Transparency in CoC calculations fosters trust among users, encouraging broader participation in DeFi
• Reduced Risk: With clear insights into carrying costs, users can avoid hidden fees and manage their trades effectively

Pioneering the Future of DeFi Trading

The introduction of a fair and dynamic CoC mechanism by 1xMM is a testament to the platform’s commitment to empowering users and driving innovation in DeFi. By addressing a critical pain point in derivatives trading, 1xMM not only enhances accessibility but also paves the way for a more robust, transparent, and inclusive financial ecosystem.

As DeFi continues to evolve, initiatives like 1xMM’s fair CoC system ensure that both new and experienced traders can navigate this complex landscape with confidence and clarity. Whether you're a seasoned trader or a DeFi newcomer, 1xMM’s tools and education empower you to make the most of every opportunity in the decentralized economy.