Channel and Epoch are two new products to profit in low-volatility markets
Purchasing an asset or derivative only profits due to large price movements. Buy low, sell high…. unfortunately, high volatility tends to present as occasional spikes, and the majority of the time, the market is in a low volatility state where the price just moves within a fairly narrow price channel for extended periods of time.
The BitVol and EthVol indices measure the expected 30-day implied volatility derived from tradeable bitcoin option prices.
If we look at the last four years of data, BTC remained <100 for 83% of the time and ETH 52% of the time. That begs the question, why isn’t there a product that can work in ALL conditions including the MAJORITY of the time when volatility isn’t spiked?
Today, Bracket Labs is proud to introduce two new products on www.bracketx.fi that can profit in low volatility market conditions, Channel and Epoch. This is Bracket Lab’s next step in the journey to becoming the best place in DeFi for fully on-chain structured derivative products.
Channel
Channel is a new product where you profit from staying within a fixed price channel of an asset as long as possible until it first breaks out or goes to full term and terminates.
Unlike other derivatives, Channels gain value based on TIME and not price.
Beginning at purchase, buyers will be compensated for the fraction of time the spot price of the asset remains in the channel until it terminates as compared to the full term. A buyer’s profit starts at $0 and constantly increases until expiration, either early or at full term. For example, a 3-day channel that first breaks out of the channel after 2 days would get 67% of the maximum possible payout.
Similar to brackets, Channel is a two-sided market with Buyers on one side and Funders on the other. Funders adjust the percentage width of the channel based on a known term and maximum payoff multiple. For example, a ±2% width up and down for a 3-day channel with a 6x maximum payoff multiple.
From a buyer’s perspective, they desire the widest channel (largest percentage) possible to maximize their chances of staying in the channel for as long as possible. Conversely, a funder will want the narrowest channel (smallest percentage) possible to try to get the price to break out as soon as possible.
Epoch
Epoch is a periodic buying version of Channel with some key differences. Like Channel, Epoch pays out based on the fraction of time the spot price remains within the fixed price channel until it first breaks out, as compared to the full term. With Epoch however, there is no funder. An epoch has an initial period where it is open for investment. During this period, buyers see the term (e.g. 2 day), the start time (e.g. in 25 min), and the percentage width (e.g. ±1.5%) that will be applied when it starts. All investments and payouts are in ETH.
Buyers can invest in either the “stay in” or “break out” side. “Stay in” investors will make more money the longer the asset price initially stays in the price channel, and conversely, “break out” profits if it breaks out early. If the term is 2 days, the “stay in” investors believe it will not break out before 1 day, and the “break out” investors believe it will break out in under 1 day. The maximum potential payout for each investor group is based on the imbalance of investment as can be seen by our example below.
The max payout is determined by adding the investment together and subtracting the platform fee, currently 3%.
Example: if the “stay in” investors put in $400 and the “break out” investors put in $600 respectively, the total minus 3% fee is $970. Initially, the “stay in” has a max payout potential of $970 / $400 = 2.43x, and break-out $970 / $600 = 1.62x. When the Epoch starts, the value of “stay in” side is $0 and increases, the “break out” is $970 and decreases. If the asset price breaks out after 1.5 days or 75% of the 2 day term, then the “stay in” side will get 0.75 * $970 = $727.50 which is a 1.82x payout. The “break out” side will get 0.25 * $970 = $242.50 which is a 0.41x. The “stay in” profited more than the “break out”. If one was a “stay in” investor that put in $40 of the $400, then one would receive $72.75 (1.82x the original $40 investment).
Channel and Epoch can work well in all market conditions
In higher volatility markets, funders will widen their channel percentages, while in lower volatility markets they will tighten their channel percentages to levels that will still attract buyers.
So to summarize some of the differences between Channels and Epochs:
- Channels have buyers and funders, Epochs only have investors.
- Channels start immediately upon purchase whereas Epochs must wait until the established start time before the range is set and the payout begins to accrue.
- Channels have a known maximum payout multiple at time of purchase, whereas an Epoch’s maximum payout multiple is determined at the time it starts based on the imbalance of investors on the “stay in” or “break out” sides.
- Epochs will be auto-canceled if the imbalance of investors is more than 15x.
- Channel buyers pay in ETH and get paid out in USDC, whereas Epochs are only in ETH.
- Channel buyers need to return to the website to withdraw, Epochs payouts are auto-transferred to their wallet.
- The Channel buyer and Epoch “stay in” side are both always guaranteed a non-zero payout. The Channel funder and Epoch “break out” side could be paid zero if the contract goes to term.
- An NFT is associated with the ownership of a Channel that after expiration may have a collectible value, as they did for Brackets. Epoch investments are not NFTs.
To summarize some similarities, both Channel and Epoch:
- Payoff based on the fraction of time they first remain within their price channels and not based on asset price movement.
- Set their fixed price channel range only once they start. What is shown before the contract starts is just an estimate.
In TradFi, the closest analogous products would be range accruals or strangles, but both are distinctly different.
Channel as a Buyer
- Assume BTC is $16,771. A Buyer might want to take the position that BTC will STAY in a percentage range.
- The Buyer is presented with offers with max payouts of 3x, 6x, 10x, for terms of 24 hours, 3 days, 10 days, etc. If the Buyer thinks BTC will remain in the range for the term or close to it, they can select that channel.
- If the Buyer believes BTC will stay within the range up or down ($16,294— $17,372) in 24 hours, they may select the 3x channel. The Buyer can decide to invest up to the max available in the channel.
- To buy this channel, all the Buyer has to do is invest in the minimum amount (currently $10).
Payouts begin at the breakeven price (1x) and go up linearly until the max claim is achieved at (3x) (1 day in the channel). Buyers will never have to manually claim because the protocol will automatically expire at the highest achieved value during the term once the channel breaks out of the range or the full term is reached. All claim payouts are in USDC.
Channel as a Funder
Funders write “offers” at the fixed potential payouts, e.g. 3x, 6x, 10x, etc. By writing offers, Funders make USDC available to back specific channels. They decide how wide the channel is, e.g. ±3.1% (above or below) the spot price at the time of purchase. Once an offer is sold, the percentage set by the Funder is converted to a price range. The Funder’s USDC is locked as collateral for the full term of the channel. If the channel breaks out of the channel, the Funder’s excess collateral is released.
Epoch as an Buyer
As mentioned, Epochs allow investors to take the “stay in” or “break out” side with a 2 day term.
Once the Epoch has started, it is locked until it auto-expires early or at full term. If the “stay in” vs “break out” investments are more than 15x imbalanced, Epochs will auto-cancel at the start time and buyers will be fully refunded with no platform fee taken.
Channels and Epochs will be launching soon
In the coming week, we will be launching Channels and Epochs on BracketX Arbitrum testnet, and will launch on Arbitrum mainnet in late January 2023. Buyers of Channels on mainnet will receive NFTs associated with purchase. Terms and conditions will apply.
Follow our Discord or Twitter to stay up to date on these product launches and associated limited edition launch NFTs.
— The Bracket Team
