Designing DeFi Products

How to give users what they want without the complexity

Written by Dheeraj Chakilam (Arrow Markets) and Qin En Looi (Saison Capital)

When DeFi Summer 2.0 returned in 2021, a pair of entrepreneurs who met at Cornell University for the IC3 conference saw a big opportunity - interest in decentralized finance (DeFi) was at an all-time high, yet the market for decentralized derivatives was almost non-existent. Not only was it technically complex to build a decentralized derivatives protocol, but everyday DeFi users also struggled to understand and trade these complex instruments. A protocol that could make DeFi derivatives trading smooth and simple stood to win.

Arrow Markets launched as a result. The Automated Market Maker (AMM) is predicated on making the options trading experience as easy as possible. Traditional options trading exchanges (with Limit Order Books) result in a frustrating user experience to most users, whether casual or not. The core challenge is that liquidity is very fragmented (across strikes and expirations), and it is difficult to get your order filled. Arrow’s AMM solves this issue by deploying an automated options pricing and hedging engine backed by a liquidity pool.

The typical DeFi user does not know how derivatives work and is unlikely to be interested in the intricacies of options and perps. As demonstrated by the success of the perps markets, all they want is leverage - to gain more bullish or bearish exposure to a token with less capital. As Chief Product Officer, Dheeraj Chakilam is tasked with bringing the user experience to life, keeping such users in mind. With a simplified interface design and engaging banter on Discord, Dheeraj and his team are helping make DeFi options trading accessible and effortless. Here, he outlines the strategies Arrow Markets has deployed to deliver value to users what they want without the complexity - tactics that are pertinent to any web3 startup looking to take on a technically complex problem.

Recognize what simplicity looks like

Drawing lessons from tradfi, the startups that have successfully changed user behavior are the ones that have simplified value propositions for customers, leaving behind the clutter. Robin Hood made stock trading extremely easy, Mint did it with personal finance, and Credit Karma removed complexity from accessing one’s credit score. In a similar vein, Dheeraj recommends two principles of simplicity for DeFi protocols:

Objective-first design

Often, users trade derivatives because they want financial exposure to their opinions - “I believe Token X will rise in price over the next 2 weeks, and am willing to bet $1,000 on it”. Participation in most DeFi protocols requires translating this opinion into technical jargon - “I will need to purchase a long call option with $A strike price and set parameters such that I minimize out-of-money risk”

To help users better achieve their goals and circumvent the need for “translation,” Dheeraj and his team developed a user interface that is intuitive and helps users achieve their objectives faster. Instead of presenting infinite choices and parameters to toggle (which is appealing only to the sophisticated DeFi trader), Arrow Markets clarifies the user’s objectives via three questions:

• Are you feeling bullish or bearish?

• Do you think the price will reach or go above/below?

• What is your desired expiration date?

With the deft use of buttons and sliders, the cognitive workload for users to express their opinions in an options trade is reduced. 

A side-by-side comparison between Arrow Markets objective-first design vs. other DeFi protocols

Clear and limited options (no pun intended)

A product’s objective-first design has to carry over to clear and limited choices. This can seem counterintuitive - afterall, ask any DeFi user and they will say they want as many choices and possibilities as they can get. This is one of the reasons why DeFi trading has gotten so complex, with a rush among protocols to build more and more power trading tools - but for most, it has become more of a headache.

To clarify through this clutter, Arrow Markets present users a maximum of three options, rather than infinite combinations and permutations. They go one step further to rank the options by preference, with the top choice being one that is likely to maximize profit. That way, a user gets the options they need to make a decision, and if they want to dig in deeper, they have the option to. While some may prefer a swift decision-making process, others may desire a comprehensive understanding of the available options before making a move. Thus, providing clear and limited options at the start, but allowing for further customization and flexibility can serve all users.

Recommendations provided by Arrow Markets

Build banter to be welcoming

“Community” has been routinely misapplied, especially in the realm of web3 projects and protocols. Often, “community” is a euphemism for users or audience - a random collection of wallet addresses put together, which presumably represent individuals who are engaged.  Yet the essence of community lies in how these individuals interact with one another - especially in banter. 

When groups of people first gather, their first point of arrival is usually objective-driven - “I have a question I need an answer to” or “I want to discover how to accomplish X”. Gradually, true communities form when these individuals come back not only for “utility”, but to enjoy time spent with others, act on their passions with one another, and contribute to the vision. Much of these are enabled through banter - casual, light-hearted and often humorous exchanges. Banter in turn creates a friendly and relaxed atmosphere, and helps establish connections not just between the individual and the protocol, but among other individuals.

For Arrow Markets, this insight led to the intentional hiring of a community manager who is not just skilled in Discord management, but also familiar with derivatives trading. From discussing market sentiments to the occasional s**tposting of memes, the right talent helped to replicate the trading floor banter common to financial institutions and stock exchanges. Supported by a consistent and disciplined micro-content creation schedule (e.g. a content piece published on Trading Thursdays), the conversations in Arrow Markets’ Discord have evolved from the courtesy “gm” to in-depth discussions - a vision Dheeraj has after being inspired from Reddit’s WallStreetBets.

From light-hearted memes to technical analyses, Arrow Markets Discord channel #trading-floor aims to recreate the banter in in-person, traditional exchanges

Create safe zones for exploration

For many DeFi protocols in testnet, many of them are raring to go live, with the view that testnet is a temporary holding place to iron out bugs and plug loopholes before going to mainnet. While that is one of the key purposes of the testnet phase, what Arrow Markets also learnt is testnets offer a safe environment for users to experiment and experience options trading in - without the risk of losing actual money (or in this case, cryptocurrency). Often, many DeFi traders are adventurous and want to try a new strategy, and this presents an opportunity for protocols like Arrow Markets. 

The protocol intends to maintain and grow the testnet protocol to offer a “paper trading” platform, not only for DeFi derivatives, but even to include in equities and mainstream cryptocurrencies. At the same time, they are regularly hosting testnet trading competitions for DeFi traders to make real money…out of no money. Since their inaugural competition in May 2022, monthly competitions have been organized to encourage traders of all backgrounds to test their skills with the chance to win thousands of USDC in prizes. While the prize pools have been adjusted over time as the popularity of the protocol grows, participation levels have been very high, with some traders even identifying bugs that lead to $100K (in testnet value) being traded up to US$1.9B within a month (for DeFi farmers out there, the loophole has been plugged and this was on testnet so there was no animals harmed gains realized). Beyond the economic and technical audit of the platform, Arrow Markets active engagement and advocacy of testnet allows users to practice, develop a deeper understanding of options and ultimately build familiarity in a safe zone.

In short, DeFi derivatives trading may not be everyone’s cup of tea, but the design considerations shared by Dheeraj reflects Arrow Markets attempts to lower entry barriers and reduce complexity. By building with simplicity at the forefront, fostering banter between community members and creating safe zones for exploration, DeFi protocols can take a leaf or two out of the protocol’s playbook and deliver more delightful experiences.