Clearmatics, one of the first startups to investigate how financial instruments can live on block chains, reveals a completely new class of decentralized Futures products, which calls it prediction markets.
These completely on-chain instruments take the form of dated Futures contracts that can follow any public time series data, whether they are crypto indexes, inflation or temperatures, making it look slightly more on prediction markets such as polymarket than traditional derivatives.
Prediction markets will be supported on the Layer-1 Blockchain Autonity and newly developed Autonomous Futures Protocol (AFP). The debut of the new Ethereum-compatible chain and the futures protocol will coincide with a “predictionathon” next month, a way to invite quants, engineers and defi-enthusiasts to participate in making prototype products on autonity.
“AFP supports the permissionless creation of dated Futures contracts that every underlying time series of interest, not only market time series, but non-market time series, such as GDP, inflation, global temperature, blockchain statistics, etc.,” said CEO Robert Sams in an interview. “In principle, every time series that gives the market to do enough to speculate or cover it, you can create a product for autonity.”
Although it is comparable to prediction markets, currently popular because of the success of polymarket, the two do not work in the same way. Move prediction contracts one-on-one with an underlying factor that offers a symmetrical payment profile. Prediction markets provide a one -off payment.
When a prediction market event takes place, the winning side is paid and the market disappears. However, a series of futures contracts on an underlying data series can continue forever, Sams said. As a result, liquidity can build up over time, follow risks that persist, while prediction markets are more focused on current stories, he said.
Prediction markets are not intended to compete with prediction markets, Sams said.
“We see prognosis and prediction markets as additional for each other, which serve different needs in a shared and growing space of market-based mechanisms for managing uncertainty.”
The crypto derivative space, which has been confused lately because some large stock markets have taken over derivative companies, remains largely dominated by eternal futures products. Crypto-perps will be supported in a future version of the AFP, Sams said, but on-chain, dated futures with the possibility of following every real-world, measurable risk factor, can create much more value and social benefit than protocols aimed at crypto-activity markets, he said.
“There is a community of people in quantitative trade and machine learning research that would like to test whether their systems have a lead in predicting things that cannot be traded at the moment,” Sams said. “The long tail of value creation will come when people discover how these instruments can be used to reduce the volatility of activa portfolios. Every portfolio has exposure to risk factors for which there is no associated financial hedging instrument.”
Stanley Yong, head of the Autonity Foundation, the decentralized governance entity of the blockchain, offers the prices of the Singapore certificate (COE) for cars as an example of a real-world risk that cannot be covered.
“Singapore controls the number of cars on its roads by rating the range of COEs via periodic COE auctions,” Yong said. “All cars need a COE, so used car prices fluctuate with COE auction prices. A forecast contract that follows COE auctions would enable someone to sell his car to cover the amount they receive in advance.”
A somewhat geekier, market structure element for the Autonity Blockchain and the AFP is the separation of the exchange part, in which buyers and sellers agree on a price and perform a trade, and the clearing part where smart contracts have collateral, margin requirements and auction of sub -financed functions. In other Defi protocols this is usually done in a vertically integrated architecture where a product can only be traded at a specific trading location.
With the AFP, products can be mentioned permissionlessly at multiple trading locations, but with all the collateral and the cross-margining that was done on the chain, Sams said. This makes it very capital efficient and also solves one of the most important structural problems with the decentralized derivatives, which is the fragmentation of open interest on exchange silos.
“We think it is strange to call a market ‘decentralized’ if you can only exchange it through one trading location, even if that monopolistic location is a Dex,” Sams said. “We think that a market is only decentralized when participants can enter a position through any location they choose and leave a position through any location they choose.”
