A crypto derivative is an ERC-20 token whose value is based on something else. A few examples of that something else could be:
- A collection of other crypto tokens (like an index fund)
- Assets (stocks, gold, etc.)
- Results of an event (sports, elections, etc.),
Creating derivatives with Smart Contracts allows all sorts of opportunities. In traditional finance, derivatives need to be created by certified, trusted institutions. With decentralized finance, anyone can create an auditable derivative. There's also the opportunity to create derivatives that have logic encoded in them, so that they behave a certain way when the market does something, or based on an external data feed (like an oracle).