MARKET Protocol

[BassBauman]

dap: 7
project name: MARKET Protocol
main site: https://marketprotocol.io/
author: Bass Bauman ([email protected], @BassBauman)
discussions-to: n/a
status: Submitted
created: 2018-10-01

Simple Summary

MARKET Protocol is bringing the $100+ trillion derivatives market to the blockchain.

Abstract

Crypto is a rapidly growing ecosystem with many promising projects across a wide variety of use cases, however a serious challenge threatens the progress of this space. Due to extreme price volatility, many crypto assets are a poor store of value, medium of exchange, and unit of account. Furthermore, decentralized platforms and applications which incorporate crypto assets face an uphill battle for user adoption, since mainstream users are much less likely to hold and use assets that can rapidly lose value. The future success of this community requires a solution to price volatility.

MARKET Protocol is an open and permissionless protocol built on the Ethereum blockchain that provides the framework needed for exchanges and applications to enable traders, users, and organizations to securely and trustlessly manage their exposure to price volatility while also eliminating traditional counterparty risk. In traditional finance, centralized derivatives are used to manage price volatility, such as when an airline hedges the price of jet fuel. MARKET Protocol’s derivatives are decentralized agreements between two or more individuals which automatically settle in the future based on the price of a reference asset, which can be any crypto asset or a traditional asset such as a commodity or equity.

Resources

• Site - https://marketprotocol.io/
• Code - https://github.com/MARKETProtocol
• Dev Tools - https://docs.marketprotocol.io/

Motivation

In traditional finance, derivatives are a tool for managing asset price volatility, however this system is largely closed to crypto. Within the crypto ecosystem, few exchanges offer users access to derivatives, and these exchanges are centralized and susceptible to the same problems that plague the traditional derivatives market, such as issues with security, safety, and custody of funds, resulting in auto deleveraging (BitMEX) and socialized losses (OKEx). Furthermore, decentralized exchanges have had no easy way to offer users derivatives for crypto assets, much less for cross-chain and real world assets.

MARKET Protocol provides developers with a trustless and secure framework for creating decentralized derivatives exchanges, including the necessary clearing and collateral pool infrastructure. The clearing functionality provides a safe and secure framework to manage crypto assets, positions, and leverage in a systemically responsible way. All smart contracts and collateral pool balances are publicly available on the blockchain. MARKET Protocol enables third parties to build applications for trading, order routing, and related activities. No person or entity controls the flow of assets among participants; order matching, contract creation, and dispute resolution are all decentralized.

Using MARKET Protocol, centralized and decentralized exchanges alike can create markets for derivatives by hosting order books, offering their users new trading relationships (cross-chain and off-chain), better trading (short positions and leverage), and safer trading (no counterparty risk or margin calls). Order book hosts are incentivized by the collection of transaction fees, which the hosts independently set and control. Meanwhile, MARKET Protocol smart contracts handle the complexities of securing collateral, validating creditworthiness, executing settlement, and custodying user funds on chain.

Third party applications built on MARKET Protocol will allow organizations such as companies and foundations to easily hedge their operating capital and development treasuries. Consumer wallets will integrate MARKET Protocol contracts to provide users with easy access to one-click price protection and enhanced trading opportunities. In the future we expect to see many innovative and unimagined use cases for derivatives as decentralized protocols and applications integrate MARKET Protocol to leverage the benefits of derivatives widely across the ecosystem.

Specification

Walkthrough of our smart contracts’ functionality and code: https://docs.marketprotocol.io/#solidity-smart-contracts

For more information please refer to our whitepaper: https://marketprotocol.io/assets/MARKET_Protocol-Whitepaper.pdf

Rationale

Off-chain orders: MARKET Protocol utilizes off-chain orders to reduce the number of needed transactions that must occur on the blockchain. Third parties will provide order book hosting and aggregation services on top of the protocol to facilitate liquidity. Orders however are cryptographically signed to ensure no manipulation and facilitate trust-less executions.

Oracles: MARKET Protocol’s contract creators select an oracle-based solution for the final settlement price to be used in their contract’s profit and loss calculations. By using oracle solutions for settlement, users can create contracts for any type of real world asset such as the S&P 500, or cross chain asset prices like Bitcoin or Monero.

MarketContract is an abstract contract that will allow for implementing classes such as MarketContractOraclize to complete the needed top level functionality around oracle solutions. MarketContractOraclize was the first fully implemented MarketContract, however the MARKET Protocol team is currently implementing ChainLink, a fully decentralized oracle solution. MARKET Protocol’s design will allow for additional oracle solutions as the market evolves.

Collateral: To ensure contract solvency, all positions are fully collateralized, meaning the maximum possible loss for a position is the required amount of collateral to open that position. For a buyer, the maximum possible loss is calculated as the price of the trade minus the priceFloor times the qty transacted. Conversely, if you are opening a short position the maximum loss is calculated as priceCap minus the price of the trade, multiplied by the qty transacted. Upon filling an order both parties commit their respective maximum loss to the collateral pool. Collateral is credited back to a user’s address and able to be withdrawn upon expiration of the contract or if the user trades out of their open position.

Collateral is contributed in the form of an ERC-20 token selected during contract creation. Since the value of the contract is derived from the value of this base token held as collateral, contracts can be created for any asset including cross-chain and off-chain assets, and it is not necessary to hold or borrow the asset itself. For example, a trader can open a short position without sourcing and borrowing the underlying asset, a user can hedge the price of a utility token while also using it, and a node operator can protect the value of their staked crypto while earning staking rewards.

The MarketContract represents the main contract responsible for combining the needed functionality for trading, settlement, and position management. As previously designed, each MarketContract had to be paired with a unique MarketCollateralPool after instantiation in order to allow trading to become enabled for a created contract. The linked MarketCollateralPool contract was controlled by its corresponding MarketContract, and held users balances, locked base token collateral balances, and open position accounting related to the MarketContract. This enabled many to many trading, allowing users to exit a position by simply trading with another user before contract expiration. However, this design has been improved to provide a significantly better user experience. As currently implemented, users deposit collateral into a global collateral pool, which can then be used to trade any MARKET Protocol contract. This means that a user can deposit DAI once and then trade both BTC/DAI and XRP/DAI, rather than separately locking up DAI in two collateral pools. This implementation also reduces the gas costs users pay when creating a MARET Protocol contract since now only a single transaction is required.

Contract settlement: Upon expiration, the contract will reach a settlement price via the oracle solution selected at contract creation. To avoid incorrect or inaccurate settlement prices, there is a short time delay between contract expiration and settlement to allow for disputes to be raised. If more than a certain percentage of the participants with open positions initiate a dispute, then the contract enters a disputed state and a backup oracle (or oracles) will be used to obtain a settlement value. At this point, all funds will be able to be withdrawn for all open positions. The amount of collateral that is credited back to the user will be determined by their execution price and the settlement price of the contract.