Bankless Founder: Why Do You Believe Tracer DAO is the Future of Derivatives?

Original authors: Ryan Sean Adams, David Hoffman, Bankless

Compiled by: 0xBread, TechFlow

I (Ryan Sean Adams) and David Hoffman decided to join Tracer as long-term advisors last September and have been collaborating with the team ever since. We believe that Tracer represents the future of derivatives—it's not just the future of DeFi derivatives, but the future of all derivatives.

Let’s start with the reasons. Cryptocurrency is chaotic, and its market is always changing, sometimes even experiencing extreme fluctuations! Even Bitcoin, the largest and most liquid asset in the industry, can easily see a rapid 10% swing, and as the risk curve of crypto assets moves downward, the magnitude of these fluctuations will increase.

Volatility is essential for making the cryptocurrency system adaptive and anti-fragile, but it also puts those seeking long-term stability in a bind. The metaverse cannot be opened to the public until every asset and participant can achieve stability.

Stability is the way we bring the world into the metaverse. We cannot forget the real world. While our financial elements can make cryptocurrencies more stable, the "real world" is becoming increasingly chaotic—Silicon Valley tech companies sway elections; climate change displaces people; experimental monetary policies; political instability; uncertainty in employment. The world today needs stability more than ever. But what if cryptocurrencies could export stability to the real world?

For centuries, financial products like derivatives have helped humanity achieve stability. Traders can use futures and options contracts to hedge their risks in various commodity markets and encourage businesses to think long-term. However, the coverage of these derivatives has not reached long-tail assets.

Risk management has always been a luxury for the few. We can make risk management accessible to the masses. We can reduce the cost of financial contracts through DeFi, allowing derivatives for long-tail assets in both the metaverse and real life to be easily, cheaply, and richly accessible. This means that everyone can benefit from free market and low-cost risk management products. This is Tracer's vision for the future.

Wherever there is stable demand, Tracer will be there.

What is Tracer?

Tracer is a meta-protocol for derivatives. It allows people to access financial derivatives unobstructedly by deploying them as new tokens. It can mint a token to go 3x long on BTC or mint a token to go 3x short on the Euro.

By using Tracer's factory contracts, any price or data can be turned into an option, swap, or futures product, with the specific steps being: connect to an Oracle → generate a derivative. Tracer requires no approvals, which is a significant improvement over existing derivative designs. Anyone can create a derivative on Tracer. Compared to other DeFi lending protocols, Tracer is more similar to Rari and less similar to Compound.

For example, Rari is a superset of Compound, which is an instance of a single lending application that requires approved collateral for only seven assets. Rari allows for the deployment of "fuse pools" without approval. Fuse pools are also a lending market, but their deployers can input any assets to provide and borrow, as well as set interest rates. You can recreate Compound's lending market using Rari's fuse pools, with an infinite set of parameters—this is just one example.

The Uniswap of Derivatives

Enabling long-tail assets to gain instant, first-day liquidity is one of Uniswap's successful secrets. In the past, token trading required approval from centralized exchange operators, while Uniswap's contracts allow anyone to exchange any tokens.

Tracer adopts a similar design pattern to Uniswap, becoming a superset of any derivative contract by using factory contracts. You can establish a perpetual swap exchange similar to dYdX on Tracer, or create an options protocol similar to Opyn. Factory contracts allow for the deployment of approval-free perpetual markets for any asset. Whatever your demand in the derivatives market, you can create it with Tracer.

DeFi has unlocked democratized stability for the world. Any DeFi user can create an open and free financial market containing any assets. As the number of assets in the metaverse grows from thousands to millions, and then to billions, it becomes increasingly important to eliminate all approval measures for deploying new markets. Finance continuously scales to meet the demands of the metaverse. All of this is achieved through factory contracts. Let’s discuss these next.

The Wonders of Factory Contracts

Factory contracts are Tracer's main product, containing standardized templates for the derivatives market. Users can input custom parameters for their markets and deploy them directly onto the blockchain.

Like Uniswap's factory contracts, Tracer's contracts are also approval-free, allowing anyone to launch any market around any asset. Tracer is managed not through individual market approval processes but through approval processes for individual factory contracts. Changes to existing factory contracts and new additions are managed by the Tracer DAO to ensure that the market templates people can deploy have the strongest security and highest quality.

How secure are the Oracles? Although Tracer supports creating markets for any data feedback provided by oracles, these contracts may not be secure. In the past, it has been difficult to audit the performance and security of oracles, leading to significant issues with price manipulation in DeFi. Tracer's integration with Reputation DAO allows users to check and verify the data security of every contract they use. Participants can access the data used in their markets through the "view source" widget on Reputation.link. Tracer has also launched its first killer application, which will be enhanced after the release of Tracer v2.

Perpetual Pools are the first killer application

Tracer is the first DeFi protocol to introduce tokenized Perpetual Pools. Perpetual Pools are a simple way to generate leveraged ERC20 tokens that do not expire and cannot be liquidated. It's like adding a 3x long ETH token to your wallet… and holding it. Tokenization means leveraged positions can be used as "LEGO blocks" of currency in DeFi. This gives Perpetual Pool users more freedom and choice over their capital, while also allowing other builders to create products on top of tokenized Perpetual Pools.

Upcoming Tracer Products

Perp Swaps: On-chain swap markets that support the deployment of new markets without approval.

Options: On-chain options markets to eliminate the downside risk of digital assets. You can use it to lock in assets in a game and engage in an epic battle lasting several weeks; or manage the risk of price declines while continuing to enjoy good times.

Interest Rate Swaps: Lock in the interest rates of entire lending protocols, making them more decentralized.

Futures: Cash and physical delivery markets for producers to manage risks of on-chain and off-chain assets.

Structured Products: Execute professional trading strategies through easily accessible vaults to generate returns.

How might people use Tracer?

Increase utility for your tokens

Do you hold a bag of governance tokens and want to increase the utility of your holdings? Use your ERC20, which can express a position on any other token, even non-crypto assets.

Bet on Cryptopunks without buying

Want a Cryptopunk but can't afford it? Lock your savings in a market tracking the value of Cryptopunks, so the value doesn't slip away from you. These are just a few ways people might use Tracer. We expect that the most exciting uses of Tracer in the future have yet to be imagined.

Reduce gas fees

Oracle networks that provide data sources for smart contracts (like Chainlink) require ETH to pay mining fees and facilitate the DeFi economy, and you can hedge against the risks of mining fees with Tracer.

Go long like an ETH Maxi

Do you believe Ethereum will maintain its dominance, and that the modular blockchain thesis of Alt L1s will not survive? If you want to hold long-term leveraged risk, avoid liquidation risk, and maximize your ETH Maxi viewpoint, you should use Tracer.

Hedge the real estate market

Tokenized real estate won't be realized for a long time, while creating synthetic markets using price oracles is much easier.

Go long on Manhattan, short on Brooklyn. Go long on two-bedroom apartments, short on studios. Go long on the West Coast, short on the East Coast.

Metaverse taxi medallions

Did you spend years saving up to buy a super powerful game item, and then use it to generate income in the metaverse? With Tracer, you can hedge against the risk of that item depreciating over time. This allows your in-game assets to generate benefits while ensuring you don't waste time due to asset depreciation.

How big is the opportunity?

This is undoubtedly a massive opportunity. The derivatives market is expected to exceed $10 trillion, with some analysts believing it could reach at least 10 times the global GDP. Over time, it will migrate into DeFi. However, DeFi will first capture the rapidly growing derivatives market of the Metaverse. The potential of the Metaverse is so immense that some of the largest players in traditional finance have made preliminary estimates about it.

Morgan Stanley and Goldman Sachs predict that digital TAM will expand by 10-15% over the next 20 years, locking the opportunity of the Metaverse in the range of $8 trillion. We expect the valuation of derivative assets to be at least 10 times the total asset scale of the metaverse. The metaverse will trigger a "Cambrian explosion" of assets worldwide, many of which will need stable products and services to gain wider acceptance. Through TracerDAO's factory contracts, Tracer has the capability to make it easier for people to explore and settle in the metaverse.

Stabilizing the metaverse means stabilizing the whole world

Tracer's mission is to provide powerful and secure financial contracts for all goods in the world. Wherever there is stable demand, Tracer will be there. The metaverse can lead to an explosion in the number of market-related goods, triggering a "Cambrian explosion." Moreover, the goods that emerge in the metaverse may be even more chaotic than those in real-world markets. The metaverse is the perfect testing ground for Tracer to refine and strengthen its contracts. Creating robust markets for globally relevant goods requires stress testing, and the extreme volatility of many low-liquidity digital assets is a perfect stress test.

Tracer first stabilizes the metaverse, then the entire world.