The first futures in the history of exchanges were peer-2-peer, now it's time to bring back to the good old times with blockchain technology and WEB3


July 22, 2022

Derivatives have existed basically since the dawn of stock exchanges — the famous tulip bulb boom (Tulip mania) from 1634 to 1637 was largely based on what we now call futures and options. At that time, however, the ownership of contracts or other securities passed from hand to hand, which today we can call the P2P market. In the meantime, however, market manners have changed to such an extent that derivatives are traded within the framework of the order book, asset liquidity and stock market balance sheets. Why not go back to the “old” model?

Decentralized P2P Futures

This is the case — apart from a few marginal exceptions, participation in the Futures markets requires joining a centralized system — an exchange or other brokerage service. Depending on the markets in which you trade, the requirements vary. In the case of currencies or “traditional” instruments, the typical requirement is KYC / AML, and the entire model is based on the trust that our broker will be solvent, and the regulator will not spoil our blood.

What if the third party — the intermediary — was rejected from the circulation and made you took responsibility for your own finances and investment decisions?

If you are familiar with the crypto industry, you understand that blockchain technology allows for secure financial interactions (and many others that require security) directly between network participants. Derivatives, on the other hand, are instruments that can only be issued by (large) entities after obtaining appropriate licenses / permits. It’s hard to create a truly decentralized environment, because for the derivative offered, someone has to take responsibility and commit to complying with the regulations. But if there is no middleman and blockchain allows you to create a safe environment, then there is no problem either?

The answer is yes.

The XYZ instrument costs $ X

The market participant (A) thinks the price is undervalued and wants to bet on increases

Market participant (B) states that the valuation is exaggerated and predicts declines.

Both players decide to take a position. To do this, they must use the services of exchanges.

In the currently known model with the use of centralized entities, players with opposite predictions “meet” on the exchange and through it open their positions or put them in the order book, along with thousands of other orders. It is smooth, efficient, but the responsibility is always taken by an intermediary — we know from experience that companies / brokers go bankrupt, cheat in reports, charge commissions, manipulate prices of derivatives and are subject to regulations that can destroy the business overnight.

In the model of decentralized Futures contracts, the intermediary role is played by a smart contract in the blockchain network. A smart contract is something like a civil law contract in which both parties undertake to comply with its provisions, with the difference that a smart contract, which is based on an oracle and can store deposits, eliminates the risk of insolvency of the other party to the transaction. There is no intermediary — so there is no regulation.

Decentralized Futures P2P Market on bigshortbet$ platform.

The model will reflect the 17th century Amsterdam stock exchange, but with the use of an internal blockchain network. You will need 2 sides with mutual bets for each transaction. In order to buy, someone has to sell, and vice versa. There must be two sides in the deal that contain opposing bets to form a pair of “Bets”.

Decentralized futures contracts are contracts that have a mechanism to follow the price of a given pair of assets (e.g. quarterly or perpetual settlement). In the case of BigShortBets, it refers to assets equivalent to assets on a conventional exchange, but decentralized and digital. In this case, the popular NDX / USD (Nasdaq) pair will be listed e.g. as NDX / USDC — in stable tokens. The BigShortBets futures system also has a trading engine that monitors the contracts in terms of time, quantity and owner.

Read more in bigshortbet$ whitepaper (3.2 Decentralized Futures Platform — DAO Market).

The principle of operation greatly simplifies the essence of futures contracts. To trade, you need two sides with mutual bets. Someone buys and someone sells — no philosophy. The transaction, i.e. the pair of “Bets”, is saved in the block, in the blockchain network, along with information about the account ID (anonymity, no KYC) and the details of the bet.

Nodes play an important role in decentralization. They are trusted network participants who are responsible for checking whether the execution of the induced transaction is possible (Whitepaper 5.1 BIGSB SideChain and Nodes). A special library aggregates the information needed for validation in the network. Everything is done using smart contracts, without outside interference.

Excluding the human factor from the game eliminates the chances of manipulation or interference with the accounting. The platform does not act as an intermediary, it is merely a tool that allows players to place direct positions on a clear basis. The platform does not print any money and has no impact on the economy of the market — the prices of transactions. The rules clearly define how the value flows between network participants and what conditions must be met for the flow of funds (liquidation), and everything is written in the smart contract.

The model illustrating the mechanics of the market:

Figure 2: Market structure

The development of technology, large databases and corporations has, in a way, forced the functioning of derivatives in the currently known form, as a condition for increasing the availability of investment instruments and maintaining high market liquidity. Web 3.0 and blockchain is a technology that offers a completely new quality in concluding any transactions. A trusted third party becomes redundant, virtually anywhere in the world, if we only replace it with smart contracts.

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