"Price volatility is one factor limiting growth in the blockchain space.. Currently [hodlers have] no effective way to manage their price exposure… MARKET Protocol enables derivatives trading of crypto assets allowing businesses and traders to hedge the price volatility associated with these assets."
Hang on back up a sec.
What is a Derivative?
A derivative represents a contract between a buyer and a seller. The value is derived from on an underlying asset or assets. Common derivatives use stocks, commodities, currencies, bonds, or interest rates as the underlying asset for the contract. So I hold an asset, like a piece of Apple ($APPL) stock, and I can now create different set of financial products which derive their value from the $APPL stock? Interesting.
What are some common derivatives?
According to Wikipedia:
Forwards: A contract between two parties, where payment takes place at a specific time in the future at today's pre-determined price.
Futures: contracts to buy or sell an asset on a future date at a price specified today.
Options: contracts that give the owner the right, but not the obligation, to buy (call) or sell (put) an asset.
Binary options: contracts that provide the owner with an all-or-nothing profit.
Swaps: contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies exchange rates, bonds/interest rates, commodities exchange, stocks or other assets.
Well. If ERC20 Tokens on Ethereum, and digital assets on other platforms are just a different asset class, then why can't we create derivative like contracts for those as well?
In this cast, we chat with Co-Founder and CTO of Market Protocol Phil Elsasser, about his team's goal to build an underlying open source blockchain derivatives protocol. The big catch? Bringing real world assets onto the blockchain.
There is a ton of complexity to building this kind of platform, and in this cast me and Phil get a bit into the weeds about:
- Why price volatility is a concern with regards to promoting adoption of digital assets.
- Some risks not discussed with Centralized Exchange providers, and why having more options with DEXs is a great thing!
- Using Oracles, to bring stock price data and other real world dimensions like time, in order to better track and represent underlying assets in derivative contracts.
More on Phil Elsasser
Food For Thought 🍍
Bottom up systems (unlike top down systems) are more effective than top down ones. In most of these system it is redundancy that is particularly important, as it builds a buffer of overcompensation for mistake. Focus on overcompensating and creating redundant systems to improve robustness.
… some of my notes from Nassim Taleb's book, Anti-Fragile
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Music Credits to: Dlay - Far Away Place (Intro) The Ant - Libby Hill (Outro)
Design inspiration: BlockChannel Media