Bankless founder: Why do you believe Tracer DAO is the future of derivatives?
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Bankless founder: Why do you believe Tracer DAO is the future of derivatives?
The metaverse is not ready to be opened to the public until stability can be ensured for every asset and every participant.
Navigating Web3 tides with focused insightsAuthor: Ryan Sean Adams, David Hoffman, Bankless
Translation: 0xBread, TechFlow
David Hoffman and I (Ryan Sean Adams) decided last September to join Tracer as long-term advisors, and have been working closely with the team ever since. We believe Tracer represents the future of derivatives—not just the future of DeFi derivatives, but the future of derivatives for everything.
Here’s why. Cryptocurrency is chaotic. Its price is constantly changing, sometimes dramatically! Even Bitcoin—the largest, most liquid asset in the industry—is prone to rapid 10% swings. And as crypto assets move down the risk curve, these volatility levels increase.
Volatility is essential for making crypto systems adaptive and antifragile, but it creates hardship for those seeking long-term stability. The metaverse cannot open its doors to the masses until every asset and every participant can access stability.
Stability is how we bring the world into the metaverse. We must not forget the real world. While our financial primitives can make crypto more stable, the "real world" is becoming increasingly chaotic—tech companies in Silicon Valley influencing elections; climate change displacing people from their homes; experimental monetary policies; political instability; uncertain job markets. The world today needs stability more than ever before. But what if crypto could export stability to the real world?
For centuries, financial instruments like derivatives have helped humanity achieve stability. Traders use futures and options contracts to hedge risks across commodity markets worldwide, encouraging businesses to think long-term. Yet, derivative coverage has not yet reached long-tail assets.
Risk management has long been a luxury for the few. Now, we can democratize it for the many. Through DeFi, we can drastically reduce the cost of financial contracts, making derivatives easily accessible, affordable, and abundant—even for long-tail assets in both the metaverse and real life. This means everyone can access free-market, low-cost risk management tools. This is Tracer’s vision for the future.
Wherever there's demand for stability, Tracer will be there.
What is Tracer?
Tracer is a meta-protocol for derivatives. It enables unrestricted access by deploying financial derivatives as new tokens. You can mint a token that gives 3x long exposure to BTC, or another token that provides 3x short exposure to the Euro.
Using Tracer’s factory contract, any price or data feed can become an option, swap, or futures product through this simple process: connect an Oracle → generate a derivative. Tracer is permissionless—an important improvement over existing derivative designs. Anyone can create a derivative on Tracer. Compared to other DeFi lending protocols, Tracer is more similar to Rari than to Compound.
For example, Rari is a superset of Compound. Compound runs a single lending application instance, offering approved collateral for only seven assets. In contrast, Rari allows users to deploy “fuse pools” without approval. Fuse pools are lending markets where creators can freely choose which assets to lend and borrow, along with interest rate parameters. You could recreate Compound’s lending market using Rari’s fuse pools—an example among infinite possible configurations.
Uniswap for Derivatives
One of Uniswap’s key innovations was enabling instant, day-one liquidity for long-tail assets. Previously, token trading required approval from centralized exchange operators. Uniswap’s contracts allow anyone to trade any token directly with anyone else.
Tracer adopts a similar design pattern, using factory contracts to become a superset of all derivative contracts. On Tracer, you can build a perpetual swap exchange like dYdX, or an options protocol like Opyn. The factory contract enables permissionless deployment of perpetual markets for any asset. Any need you have for a derivatives market can be built with Tracer.
DeFi unlocks democratized stability for the world. Any DeFi user can build open, free financial markets around any asset. As the number of assets in the metaverse grows from thousands to millions, then to billions, removing approval requirements for launching new markets becomes increasingly critical. This is how finance scales to meet the demands of the metaverse—and it’s all made possible through factory contracts. Let’s dive deeper into them.
The Magic of Factory Contracts
Factory contracts are Tracer’s core product, containing standardized templates for derivative markets. Users input custom parameters for their market and deploy it directly onto the blockchain via the factory.
Like Uniswap’s factory contracts, Tracer’s are permissionless—anyone can launch a market around any asset. Instead of approving individual markets, Tracer manages governance through approval of individual factory contracts. Changes to existing factories or additions of new ones are governed by Tracer DAO, ensuring the market templates available for deployment maintain the highest security and quality standards.
How secure are the oracles? Although Tracer supports creating markets based on data from any oracle, such contracts may not be secure. Historically, it has been difficult to audit oracle performance and reliability, leading to major price manipulation attacks in DeFi. Tracer’s integration with Reputation DAO allows users to inspect and verify the data security of each contract they use. Participants can access the data source powering their market via the “view source” widget on Reputation.link. Tracer has also launched its first killer app, which will be further enhanced with the release of Tracer v2.
Perpetual Pools: The First Killer App
Tracer is the first DeFi protocol to introduce tokenized Perpetual Pools. A Perpetual Pool is a simple way to generate leveraged ERC20 tokens—leveraged tokens that never expire and cannot be liquidated. Imagine adding a 3x long ETH token to your wallet… and simply holding it. Tokenization means leveraged positions can be used as financial “Lego blocks” within DeFi. This gives Perpetual Pool users greater freedom and more choices over their capital, while enabling builders to innovate on top of tokenized Perpetual Pools.
Upcoming Tracer Products
Perp Swaps: On-chain swap markets with permissionless deployment of new markets.
Options: On-chain options markets to hedge downside risk in digital assets. Use them to lock in value during an epic weeks-long gaming battle, or manage price drop risks while enjoying life.
Interest Rate Swaps: Lock interest rates across entire lending protocols, making them more decentralized.
Futures: Cash-settled and physically-delivered markets for producers to manage risks of on-chain and off-chain assets.
Structured Products: Execute professional trading strategies through easy-to-access vaults and earn returns.
How Might People Use Tracer?
Add Utility to Your Tokens
Do you hold a bag of governance tokens and want to add utility to your holdings? Use your ERC20 to take a position on the performance of any other token—or even non-crypto assets.
Bet on Cryptopunks Without Buying Them
Want a Cryptopunk but can’t afford one? Lock your savings into a market that tracks Cryptopunk values, so you don’t miss out on their appreciation. These are just a few ways people might use Tracer. We expect the most exciting uses haven’t even been imagined yet.
Hedge Gas Fees
Oracle networks that provide data to smart contracts (like Chainlink) require ETH to pay for mining costs and sustain the DeFi economy. You can use Tracer to hedge against the risk posed by fluctuating gas fees.
Go Long Like an ETH Maxi
Do you believe Ethereum will remain dominant and that modular blockchains from Alt L1s won't survive? If you want to maintain a long-term leveraged position, avoid liquidation risk, and maximize your ETH Maxi thesis, Tracer is for you.
Hedge Real Estate Markets
Tokenized real estate may take a long time to materialize, but creating synthetic markets using price oracles is much easier.
Go long Manhattan, short Brooklyn. Go long two-bedroom apartments, short studios. Go long the West Coast, short the East Coast.
Metaverse Taxi Medallions
Did you spend years saving up to buy a powerful in-game item that now generates income for you in the metaverse? With Tracer, you can hedge against the risk of that item depreciating over time. Make your in-game assets productive while protecting yourself from wasting time due to asset devaluation.
How Big Is the Opportunity?
This is undoubtedly a massive opportunity. The derivatives market is projected to exceed $1 trillion, with some analysts estimating it could reach at least ten times global GDP. Over time, this market will migrate into DeFi. But DeFi will first capture the rapidly growing metaverse derivatives market. The potential of the metaverse is so vast that even some of the largest players in traditional finance have begun making preliminary estimates.
Morgan Stanley and Goldman Sachs predict that within 20 years, the digital TAM will expand by 10–15%, placing the metaverse opportunity within an $8 trillion range. We expect the valuation of derivative assets to be at least ten times the total size of the metaverse itself. The metaverse will trigger a “Cambrian explosion” of assets worldwide, many of which will require stability products and services to gain broader acceptance. Through TracerDAO’s factory contracts, Tracer is positioned to make navigating and settling in the metaverse significantly easier.
Stabilizing the Metaverse Means Stabilizing the World
Tracer’s mission is to provide robust and secure financial contracts for all goods in the world. Wherever there's demand for stability, Tracer will be there. The metaverse will cause an explosion in the number of market-relevant goods, triggering a “Cambrian explosion.” Moreover, goods emerging in the metaverse may be even more volatile than those in real-world markets. The metaverse is the perfect testing ground for Tracer to refine and strengthen its contracts. Building resilient markets for globally significant goods requires stress-testing—and the extreme volatility of numerous low-liquidity digital assets offers the perfect challenge.
Tracer will stabilize the metaverse first, then the entire world.
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