Why Derivatives?

Phil Elsasser
Feb 27, 2018 · 2 min read

A derivative is a contract deriving value from something else (an underlying asset). Forwards, futures, options and swaps are popular types of derivatives. Derivatives have two main components, the base currency and the underlying asset. Users make or lose the base currency as the underlying asset moves. For example, the S&P 500 future at the CME trades in dollars (base currency) and derives value from a basket of S&P 500 stocks (underlying asset).

Why is this important?

Derivatives are used for risk management, as well as providing price exposure to an underlying asset.

Risk Management

Derivatives allow Traders to hedge price risk.

Why does this matter to the crypto world? Some tokens are designed to provide the token owner utility. For example, if you own XYZ token you can borrow or lend on their platform. The price volatility of the token may exceed the utility associated with owning the token. MARKET Protocol allows Traders the ability to hedge the price risk associated with owning the token, while maintaining custody of XYZ token and consuming the utility.

Price exposure

As derivative relationships, traders never actually take custody of the underlying asset, instead they have similar price exposure as if they owned the underlying asset. For example, this means users can receive price exposure to cross chain crypto assets without actually taking custody, storing or going on exchange all from the Ethereum blockchain.

So what about MARKET?

MARKET Protocol (“MARKET”) has created a unique contract that derives value from an underlying asset settling in the future, using smart contracts and blockchain technology. With MARKET any ERC20 token can be used as collateral to gain price exposure to something else, like gold, oil, stocks, bonds, bitcoin or another ERC20 asset..

MARKET Smart Contracts are similar to traditional derivatives in that they are a contract
between two or more individuals, which settle in the future based on the price of an underlying asset. Traders can create relationships like AAPL/USDT or SALT/ETH utilizing their digital assets as collateral without converting to fiat currency.

Traders deposit collateral funds in the base token into the MARKET Smart Contract prior to trading. At execution, the funds become locked guaranteeing contract solvency. MARKET provides the framework necessary enabling Traders to buy and sell assets in a safe, solvent and trustless marketplace.

To learn more about MARKET Protocol, and interact directly with our founders and developers, join our Telegram.

MARKET Protocol

Powering safe, solvent & trustless trading of any asset | marketprotocol.io

Phil Elsasser

Written by

CTO and Co-Founder of MARKET Protocol | Powering safe, solvent and trustless trading of any asset | marketprotocol.io

MARKET Protocol

Powering safe, solvent & trustless trading of any asset | marketprotocol.io

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