Passage

Passage is a first of its kind on-chain volatility market

Passage was specifically designed to have features that for blockchain as the underlying infrastructure. DeFi has peculiarities compared to TradFi that include:

• Financial accountability. In TradFi, in the case a client's positions cannot be liquidated for sufficient money when margin calls are triggered, the client is financially responsible for losses with their account using their external wealth, then the Broker/Dealer "BD", and finally the Exchange members. This is the basis of the deep safety net that underlies leveraged TradFi products to ensure financial commitments are honored.

  • The consequence is crypto perpetual futures and options have mandatory liquidations when the market becomes lopsided, and buyers do not get their full payouts. Also, liquidity can be very thin and frequently disappears, which could create cascading liquidations, forcing the price down far below its inherent value.

• Slow and intermittent connectivity. In TradFi, the BDs have hardwired connectivity into the exchanges that guarantee sub-second response times to trading updates. Blockchains take time to process transactions, and transactions may fail and need to be re-sent multiple times before succeeding. Further exacerbating this issue is that in times of extreme price volatility, when people most acutely need to manage price risk, connectivity and delays will commonly be the worst.

  • The consequence is that prices can go "out of date" before a Funder can update them, which causes funders to lose money, or forces the funder to over-price the derivative to account for this risk.

• Price manipulation. While it is possible for larger players to manipulate prices in TradFi, it is significantly more difficult due to multiple market makers maintaining deep inventories and liquidity. Exchanges have put in place "circuit breakers" to create guardrails to limit excess volatility. Further, in many cases, security law has made manipulated price collusion illegal, which creates additional disincentives.

  • The consequence is that all market participants need to "price in" and accept the excess risk of financial manipulation. Further, it is unclear if intentionally manipulating the market and then profiting from it is even illegal as there is no one security law framework governing DeFi. This final point is toxic and can lead to risk sellers (e.g. Funders) unwilling to enter markets.

These differences have made it so that porting the TradFi system without modification will create a suboptimal DeFi experience. We believe this is why most DeFi derivatives have extremely thin liquidity or are very lopsided. Bracket Labs believes that innovation is required to address each of these issues, and has addressed them as follows:

• Fully Collateralized. Passages are fully collateralized in ETH up to their max settlement value, so unlike crypto perpetual futures and options, there are no mandatory liquidations when the market becomes lopsided. The trader always gets their full value owed at settlement.

• Capital Efficient. Most derivative instruments can lose 100% of their value on the short side and have infinite upside on their long side. This does not work in DeFi or would lead to massive over-collateralization. Passage solves this by having a max payout as well as an accrual mechanism that is time-based.

• Packaged for Easy Purchase. For a user to compose a DeFi option strategy like a corridor, there are many steps. They must price and purchase the two legs of the strategy separately and establish and fund a margin account for the sold leg. To understand net purchase cost, they must at a minimum calculate the difference in price of the two option legs and account for the cost of capital in their margin account. With Passage, no margin account funding is required and the entire purchase is one transaction at one price, and with a known multiple of maximum settlement value.

• Reduces the need for continual price updates. As mentioned, due to the slow and intermittent connectivity, we needed to create a way to make pricing resilient to price changes in the underlying assets. This is detailed in the Passage Pricing section

• Tradeable. We issue and associate an NFT with each purchase so it can eventually be traded.

• No Need to Hold the Underlying Asset. All assets are priced using a blockchain oracle, so there is no need to hold the underlying asset.