Clearmatics, one of the first startups to explore how financial instruments can live on blockchains, reveals a brand new class of decentralized futures products that it calls forecast markets.
These full on-chain instruments take the form of dated future contracts that can trace any public time series data, whether it is crypto index, inflation or temperatures, giving the appearance of something more related to prediction markets such as polyming than traditional derivatives.
Forecast markets will be supported on the soon-to-be launch 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 “Prognastaton” next month, a way of inviting quantities, engineers and defi-enthusiasts to participate in creating prototype products on autonity.
“AFP supports the permissionless creation of dated future contracts that can track any underlying time series of interest, not only market time series, but non-market time series, such as GDP, Inflation, Global Temperature, Blockchain Metrics, etc.,” CEO Robert Sams said in an interview. “Basically at any time time series that the market cares enough to speculate or hedge, you can create a product for Autonity.”
Despite the fact that they sound like prediction markets that are currently popular because of the success of the polymemarket, the two are not working the same way. Prognosis contracts move one-on-one with an underlying factor that provides a symmetrical payout profile. Prediction markets provide a one -time payment.
When a prediction market event occurs, the winning side is paid and the market disappears. However, a number of futures contracts on an underlying data series may continue for eternity, Sams said. This allows liquidity to build up over time and trace risks that persist, while the prediction markets are more focused on current stories, he said.
Forecast markets are not intended to compete with prediction markets, Sams said.
“We see forecasting and prediction markets as complementary to each other that serve different needs in a shared and growing space with market-based mechanisms to control uncertainty.”
The Crypto Derivatives space, which has been warm up recently, as some large exchanges acquired derivatives, remain largely dominated by eternal futures products. Crypto Perps will be supported in a future version of AFP, Sams said, but on-chain, dated futures with the capacity to track any real world, measurable risk factor can create far more value and social benefit than protocols that focus on crypto markets, he said.
“There is a society of people in quantitative trade and machine learning research who would love to test whether their systems have an advantage in predicting things that can not be traded at the moment,” Sams said. “The long tail of value creation will come when people discover how these instruments could be used to reduce volatility in asset portfolios. Each portfolio has exposure to risk factors for which there is no similar financial coverage instrument.”
Stanley Yong, head of the Autonity Foundation, Blockchain’s decentralized control unit, offers the pricing of Singapore’s Certificate of Right (COE) for cars as an example of a real risk that cannot be uncovered today.
“Singapore controls the number of cars on its roads by rationing the supply of COEs through periodic COE auctions,” Yong said. “All cars need a coe, so used car prices swing with COE auction prices. A prognosis -contract that tracks COE auctions would give someone who wants to sell their car to uncover the amount they receive in advance.”
A somewhat nerdy, market structure for Autonity Blockchain and AFP is the separation of the exchange part, where buyers and sellers agree on a price and perform a trade, and the clearing part where smart contracts hold security, handles margin requirements and auction out under financed positions. In other defi protocols, this is usually done in a vertical integrated architecture where a product can only be traded at a specific trading site.
AFP allows products to be allowed listed in multiple trading sites, but with all the collateral and cross margin 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 are the fragmentation of open interest across exchange silos.
“We think it’s strange to call a market” decentralized “when you can only trade it through a trading site, even if it is a monopoly place,” Sams said. “We believe that a market is only decentralized when participants can enter a position through the place they choose and leave a position through the place they choose.”
