Bracket Labs is the hub for supporting the Bracket Protocol
Today, we are excited to announce the community launch of Bracket Labs and Bracket Protocol.
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Check out our resources here.
TL;DR: Bracket Protocol
Bracket Protocol is a DeFi derivatives primitive created by Bracket Labs, which makes it easy for buyers to take leveraged positions on blue-chip assets like BTC, ETH, AVAX, SOL, USDT, etc... Bracket Protocol simplifies traditional options and structured products to better suit the current Web3 landscape.
Bracket Protocol creates “brackets,” or ranges of payoff with fixed potential payouts packaged into a single product containing features optimized for blockchain as the underlying infrastructure.
The Origins of Bracket
When we started working in crypto back in 2017, things were… rudimentary. Tools like wallets and browser extensions were just emerging and DeFi didn’t even exist. Fast forward a summer and we received the core lending, borrowing, DEX, and stablecoins liquidity apps but still, only a few users used these dApps. Today, new entrants are realizing the promise of Web3 finance and are coming from the world of NFTs, centralized exchanges, and payments, all seeking new ways to utilize their crypto in this new frontier.
However, large unexpected downward price moves led to pain for users just trying to get involved and grow their base. These users were left to HODL while more sophisticated power users took advantage of market volatility. Tools that sophisticated traders use, derivatives, structured products, perpetual futures, and other risk-mitigating tools are daunting for the less-initiated. While innovation has flourished in the derivatives space, complexity keeps the normal user away. Further, the derivative protocols tend to closely mirror their TradFi counterparts instead of re-imagining the protocols for the requirements of DeFi.
As such, we saw an opportunity to build a protocol that helps users take advantage of market moves by reducing complexity and simplifying the buying experience.
DeFi Needs Ease of Use
Why is it that the DeFi market has accelerated with easy ways to buy and trade crypto, lend and borrow, but not to hedge risk and get pre-packaged leverage?
Leverage is a key building block in any financial system, as it allows for a magnification of returns and sometimes losses depending on the product utilized. Unfortunately, the status quo in DeFi today is a set of TradFi financial primitives ported over without much adaptation, which has led to the following challenges for DeFi leverage products:
Financial accountability — in TradFi, in the case a client’s positions cannot be liquidated for sufficient money when margin calls are triggered, the client is financially responsible for losses with their account using their external wealth, then the Broker/Dealer “BD” is liable, and finally the Exchange members. This deep safety net underlies TradFi leveraged products to ensure financial commitments are honored.
- The consequence is DeFi tools like perpetual futures and options have mandatory liquidations when the market becomes lopsided, and buyers do not get their full payouts. Also, liquidity can be very thin and frequently disappears, which could create cascading liquidations, forcing the price down far below its inherent value.
Slow and intermittent connectivity — in TradFi, the BDs have hardwired connectivity into the exchanges that guarantee sub-second response times to pricing updates. Blockchains take time to process transactions, and transactions may fail and need to be re-sent multiple times before succeeding. Further exacerbating this issue is that in times of extreme price volatility, when people most acutely need to manage price risk, connectivity and delays will commonly be the worst.
- The consequence is that prices can go “out of date” before a Funder can update them, which causes the Funder to lose money, or forces the Funder to over-price the derivative to account for this risk.
Price manipulation — while it is possible for larger players to manipulate prices in TradFi, it is significantly more difficult due to multiple market makers maintaining deep inventories and liquidity. Exchanges have put in place “circuit breakers” to create guardrails to limit excess volatility. Further, in many cases, security law has made manipulated price collusion illegal, which creates additional disincentives
- The consequence in DeFi is that all market participants need to “price in” and accept the excess risk of financial manipulation. This is toxic and can lead to risk sellers (e.g. Funders) unwilling to enter markets.
Bracket Protocol’s Innovations
To solve some of our own challenges in using DeFi derivatives and improve some of the shortcomings of other existing platforms, we have created the following innovations:
- Remove the need for margin accounts, users interact directly with each other on the platform (decentralized, permissionless, non-custodial). All contracts are fully collateralized so there is no additional need to come back and add additional capital when markets are volatile. This is especially important when blockchain networks are congested.
- Pricing of contracts is floating, so the price is only locked in when a contract is purchased or sold. Even if the spot price of the underlying asset moves up or down, say 50%, users (both funders and buyers of brackets) are equally protected
- Unlike other derivatives products, terms don’t need to be fixed at TradFi set intervals (e.g. every Friday at 3:00pm). Buyers are able to match the terms directly to whatever they are trying to hedge because they are entering into a direct contract with the Funders. No other platform offers this level of customization
- Given the unique way that we are setting premiums and claimable ranges, we can offer leverage (10x, 20x, 50x) in an extremely capital-efficient way
Here is a quick example to illustrate how the protocol works as a Buyer
The protocol defines markets between “Funders,” the sellers of brackets, and “Buyers,” the buyers of the brackets.
- Assume BTC is $19,496. A Buyer might want to take the position that BTC will go UP in price.
- The Buyer is presented with offers with max payouts of 10x, 20x, 50x, or 100x the amount invested over pre-set durations (7, 15, 30 days etc.). If the Buyer thinks BTC will reach the price range indicated in the bracket selected, they can purchase it.
- If the Buyer believes BTC will go up within 7 days and hit a price of $21,309-$23,258 or more, they may select the 10x long bracket. The Buyer can decide to invest up to the max available in the bracket.
- To buy this bracket, all the Buyer has to do is invest in the minimum amount (currently $3).
Payouts begin at the breakeven price (1x) and go up linearly until the max claim is achieved at 10x ($23,258+). Beneath (0x) the bracket is worthless, over (10x), it has reached the max claim value. Buyers can claim at any time within the term of the bracket, or the bracket is auto-claimed at expiration. All claim payouts are in USDC.
The advantages for Buyers are:
- Fully Collateralized — brackets are fully collateralized in stablecoins up to their max claim value, so unlike crypto perpetual futures and options, there are no mandatory liquidations when the market becomes lopsided. The Buyer always gets their full claim value.
- Packaged for Easy Purchase — for a user to purchase a DeFi option (e.g. bull call spread or bear put spread), they must establish a margin account and calculate their potential investment payoff, which changes constantly with price. With brackets, no margin account funding is required, the entire purchase is one transaction at one price, and the max claim value is a fixed multiple of your investment.
- Tradeable — we issue and associate an NFT with each bracket purchased so it can be traded.
Bracket Protocol as a Funder
Funders write “offers” with the Bracket Protocol at the fixed potential payouts, e.g. 10x, 20x, 50x, 100x. By writing offers, Funders make USDC available to back specific brackets. They decide how far out-of-the-money a bracket starts, e.g. 11% out of the money, and Bracket Protocol locks in a max claim at +10% spread above. Once an offer is sold, the range is converted to a price based on the current spot price, e.g. 11% to 21%. The Funder’s USDC is locked as collateral for the full 10% range to pay any potential claims. If there is no claim or a partial claim made, the Funder’s excess collateral is released.
For Funders, Bracket Protocol addresses the challenges mentioned above directly:
- Capital Efficient — most derivative instruments can lose 100% of their value on the short side and have infinite upside on their long side. This would lead to massive over-collateralization in DeFi. Bracket solves this by establishing a max claim value. This eliminates unbounded losses for Funders.
- Reduces the need for continual price updates — Bracket Protocol fixes the premium and allows brackets to be priced based on the starting point of the bracket’s claimable range as a percentage of spot, so the Funder does not need to continually re-price.
- No Need to Hold the Underlying Asset — as mentioned above, all funding is in stablecoins and all assets are priced using a blockchain oracle, so there is no need to hold the underlying asset.
Our First Product Will be Launching Soon
We are excited to launch our first application, BracketX, for non-US users this fall. Terms and conditions will apply.
Check out our docs here to learn more about the protocol.
— The Bracket Team
