A major criticism or source of wariness from investors and individuals towards the cryptocurrency space is the wild volatility that defines cryptocurrency markets. While this point of criticism has historically been deflected and downplayed by community supporters, the evolution of utility tokens within the industry has further legitimized and even exacerbated this claim.
Despite the inarguably useful and sometimes revolutionary utility tokens throughout, the volatility associated with these tokens often dwarfs any benefit or legitimate use, barring a wider audience from daily adoption.
MARKET Protocol recognizes the inherent need for price stability as a precursor to global scaling and widespread usage. In the same essence as the necessity for technology to improve to enable such scalability (for example, Bitcoin needs to expand its 7 transactions per second by magnitudes to catch up with VISA), it is imperative that price stability is made possible across utility tokens so as to prevent volatility from negating and even overshadowing the benefits associated with said currencies.
A key utility of the MARKET Protocol is the ability for users of utility tokens to hedge and protect themselves against potential volatility of the tokens they seek to use in everyday life. Existing cryptocurrency projects offer numerous solutions and capabilities for the average consumer: e-commerce, file storage, mobile data, counterfeit protection, and so much more.
For the first time, MARKET Protocol offers a platform where users can protect themselves from future volatility while maintaining ownership and complete control of the tokens they seek to use.
Price Stability Made Possible
To demonstrate this phenomenon, let’s take SALT as an example. SALT is the token behind the SALT lending platform, a peer-to-peer ecosystem that allows users to lend and receive cash loans with cryptocurrency collaterals. SALT offers a great utility for borrowers — the peer-to-peer nature of the platform means that users can earn very competitive, likely optimal interest rates on loans. The crypto collateral aspect also means that users are not forced to sell cryptocurrency holdings or liquidate real world assets in order to free up capital.
However, SALT has had a very volatile price history, reaching highs of $17 before dropping to lows of $1. As SALT is required to use the platform, the possibility for the coin to lose massive valuation (from extremes, close to 95%) far outweighs the potential savings versus traditional bank loans or simply selling cryptocurrency holdings.
Imagine we have Individual A who is looking to take out a loan on the SALT lending platform. Individual A purchases the 25 SALT required for $4 a piece, or $100 total. Individual A then creates a futures contract that pins SALT against Maker DAI, a stablecoin partnered with MARKET Protocol, that is pegged to the US Dollar.
The contract opens at the rate of 4 SALT/DAI, with a total size of 25. Because Individual A wants to guarantee the $4 price of SALT, they sell SALT at 4 SALT/DAI. Trader B speculates that the price of SALT will rise, and fills Individual A’s contract with a 25 SALT buy order. Individual A’s position is worth 100 DAI (or $100). Keep in mind, Individual A maintains complete control and liquid ownership of their SALT. As it stands, they have a position worth $100 and 25 SALT, also worth $100.
Let’s say that, from the beginning to expiration of Individual A’s contract, SALT appreciates from $4 to $6 each. As the rate of DAI/SALT has increased by 2, Individual A sees a loss of 2*25 = 50 DAI, or $50. However, they also netted a gain in the value of their SALT holdings, which is now worth 25*6 = $150. The gain in SALT nullifies the loss in the SALT short contract, and Individual A sees a net zero change in value of their holdings.
Instead, if SALT depreciates from $4 to $2, a similar outcome will take place. Individual A will experience a gain of 2*25 = 50 DAI, or $50, due to the depreciation of 2 SALT/DAI. Of course, their 25 SALT holdings are now only worth $50 — or $50 less than the value at initial purchase.
The contract gains mitigate the value losses. As a result, Individual A was able to maintain control of and use SALT without seeing any loss in value, even though the value of SALT during that time frame halved. Not only was Individual A able to benefit from the optimal interest rates of SALT-powered loans, they disabled the risk of price volatility while they were engaging with the lending platform.
Of course, the price stability enabled by MARKET Protocol expands beyond cryptocurrencies. As we know, the Protocol also enables derivatives trading of traditional commodities and stocks. This suggests that price stability can also be derived from real world assets.
This concept of stability through hedging is not foreign or untested. Airlines, for example, frequently hedge against the price of jet fuel, a similarly highly volatile commodity that is also integral to their operations as a flight provider. As a result, airlines maintain cheaper, more stable costs and passengers (theoretically) benefit from cheaper flights.
The mortgage industry, after the fallout from the 2008 housing crisis, also saw more widespread hedging to protect against mortgage fluctuations and defaults. Once books were hedged, so to speak, the market began to scale once more.
Of course, the decentralized, transparent nature of MARKET Protocol carries major benefits over traditional alternatives. As a decentralized platform, users are completely empowered to create exactly the contracts they need and desire and can maintain full control to completely hedge against volatilities in traditional and crypto markets alike.
As is the nature of MARKET Protocol, any interested party is capable of developing on top of the protocol (and a number of entities already are!).
One example of an application we may see built upon MARKET is some type of “stable wallet”. Essentially, a stable wallet would automate the processes described above. If a cryptocurrency holder expected incoming depreciation of their assets, or otherwise preferred to lock in prices and free themselves of potential volatility, they could deposit ETH or any ERC20 tokens into this stable wallet.
The stable wallet would automatically lock in current prices of the coins deposited by creating the exact contracts explained previously. When wallet users are ready to once again expose themselves to market conditions, they withdraw the token from their stable wallet, where they receive the same dollar, ETH, or whatever specified peg worth of the token as they first deposited.
Since MARKET Protocol has already established partnerships with Havven, MakerDAO and Digix, our team will be focused on decoupling price volatility from token utility to empower the efforts to scale the blockchain.
Additionally, we will look into solving many more problems in the crypto space. To stay informed about our future developing efforts, please join us on Telegram and Discord, and read our whitepaper to learn more.