TLDR: Positions Tokens track the price of another asset. They offer price exposure between a Price Cap and Price Floor. They are guaranteed solvent and offer leverage without margin calls.
Welcome! In this post we will introduce MARKET Protocol Position Tokens, explain their design, and talk about how they are priced.
First a few definitions:
MARKET Protocol Position Token: An ERC-20 token that tracks the price of a crypto, traditional or other asset. Position Tokens are always fully collateralized. There are never margin calls, forced liquidations or socialized losses.
Reference Asset: This is the asset tracked by the Position Token. It can be on-chain, cross chain or off-chain. MARKET Protocol never takes custody of the reference asset. All profit and loss implications are reconciled in the collateral token, which can be any ERC-20 asset but usually a stablecoin.
Price Cap: The maximum reference asset value that a Position Token can track. If the reference asset trades above this price, the contract expires.
Price Floor: The minimum reference asset value that a Position Token can track. If the reference asset trades below this price, the contract expires.
Long Position Tokens offer exposure to the price of a reference asset. The most you can make holding a long Position Token is the difference between your entry price and the Price Cap, and the most you can lose is the difference between your entry price and the Price Floor. All prices between the Price Cap and Price Floor are tradable.
Consider the following Position Token:
Name: BTC/DAI 6/30
Reference asset: BTC
Collateral token: DAI
Price Cap = 12,000 DAI
Price Floor = 8,000 DAI
All BTC/DAI 6/30 tokens minted between now and expiration have the same Price Cap and Price Floor. These terms define all BTC/DAI 6/30 Position Tokens until expiration.
Remember that a Position Token provides price exposure up to a Price Cap or down to a Price Floor. Once either of these bands are breached, all Position Tokens with the same contract specification expire.
So in our example, all prices between $12,000 and $8,000 are tradable. If BTC trades above the Price Cap of $12,000 or below the Price Floor of $8,000, then all BTC/DAI 6/30 Position Tokens expire.
It’s important to note that all Position Tokens have implicit leverage allowing for the same exposure with less collateral. More on this later.
Let’s look at the chart above, which shows the payoff structure of the long BTC/DAI 6/30 Position Token. The green line represents the payoff structure. Profit and loss is on the y-axis, and the price of BTC is on the x-axis. As you can see, a long Position Token holder’s profit and loss increases as the price of BTC goes up.
The maximum loss of a long Position Token is equal to Current Price - Price Floor, at which its value equals zero. The maximum gain is equal to the Price Cap - Current Price. The Z shaped payoff structure reflects the capped gain and loss outcomes. This allows traders to know their maximum downside at all times.
In the example above:
Current Price = $10,000
Price Cap = $12,000
Price Floor = $8,000
For the long Position Token, here are our formulas:
Price of Long Token = Current Price - Price Floor
Max Gain = Price Cap - Current Price
Max Loss = Current Price - Price Floor
So for our example:
Price of Long Token = $10,000 - $8,000 = $2,000
Max Gain = $12,000 - $10,000 = $2,000
Max Loss = $10,000 - $8,000 = $2,000
Now let’s go through another example for BTC/DAI 6/30 while BTC is trading at $9,000:
Current Price = $9,000
Price Cap = $12,000
Price Floor = $8,000
Long BTC/DAI 6/30 Position Token:
Price of Long Token = $9,000 - $8,000 = $1,000
Max Gain = $12,000 - $9,000 = $3,000
Max Loss = $9,000 - $8,000 = $1,000
In this scenario, a long Position Token holder now controls $9,000 of BTC notional value for $1,000, implying 9:1 leverage.
For the short Position Token, the formulas change a bit:
Price of Short Token = Price Cap - Current Price
Max Gain = Current Price - Price Floor
Max Loss = Price Cap - Current Price
Short BTC/DAI 6/30 Position Token:
Price of Short Token = $12,000 - $9,000 = $3,000
Max Gain = $9,000 - $8,000 = $1,000
Max Loss = $12,000 - $9,000 = $3,000
In this scenario, a short Position Token holder now controls $9,000 of BTC notional value for $3,000, implying 3:1 leverage.
Note: The above examples use a simplified pricing formula which is most applicable at expiration. The price of actively traded tokens may price differently.
Why are Position Tokens priced this way?
Security! MARKET Protocol removes margin calls. There are no forced liquidations, socialized losses or insurance funds. Smart contracts ensure solvency of the entire ecosystem at all times. To quantify the maximum downside of all open positions it is necessary to cap the downside and upside of open positions.
In place of margin calls and stop-outs we opted for a more user friendly approach, which works like a global settlement for a particular Position Token specification. There is no larger market impact when the price of a reference asset hits a Price Cap or a Price Floor, since positions are not liquidated.
Why is this better?
- Trade with guaranteed solvency and safe leverage
- Capital efficient. No over-collateralization and no maintenance margin
- No auctioning to close out positions, no credit risk or unknown outcomes
- No margin calls or forced liquidations
- No socialized losses and no auto-deleveraging
- Collateral securely stored in smart contracts on the Ethereum blockchain
This post is part of an educational series that we kicked off with our MPX launch announcement:
- Pricing (this post)
- Minting & Redemption (coming soon!)
- Expiration & Settlement
- The MKT Token & Rewards
If you are interested in listing Position Tokens or making markets, send us an email at email@example.com.