Will it still be liquidated? DeFi newcomer Passage wants to help

Wednesday’s Bitcoin price drop was sudden, unexpected and severe. About 10% was followed by an equally sharp 5% rebound. Passage, a new dapp launching today on Ethereum rollup Arbitrum, aims to help traders bet on volatility in a new, gamified way.

Passage is a market that allows you to simply trade volatility without resorting to more complex options strategies. This is essentially a prediction market for price ranges, offering ETH-denominated contracts of short duration (initially 2 days).

The idea is to allow trading volatility as intuitively as Perpetual Futures (Perp), but according to co-founder Pelli Wang, the product can also serve as an effective complement to Perp trading.

Instead of betting on price direction, traders can specify a range and bet only on whether the price will “break through” or “maintain” that range.

Wednesday’s volatility led to more than $600 million in liquidations, according to derivatives data.

“If you were 10x on the culprit (a 10x leveraged position) and were buying Bitcoin, you would have potentially been liquidated if you were wrong. Because no one would have thought there would be a sale today. ”Wang told Blockworks.

“So that’s kind of the advantage of using a ‘breakout’ where you don’t necessarily want to predict whether it’s going to be long or short, and you don’t want to predict that it’s going to be extremely volatile,” she said.

The product from Panamanian corporation Bracket Labs, which announced a $2 million seed round of funding on Thursday, has been in development for over a year and a half and has been live on the Arbitrum testnet since mid-October 2023.

The road to Passage

Wang and co-founder Mike Wasyl began working together in business development roles at Consensys in 2018 and left in 2019 to found Deer Creek, a Web3-focused advisory firm. They teamed up with technology co-founder Jason Glazier to form Bracket Labs. March 2022.

The trio began looking for ways to improve cryptocurrency derivatives after being unimpressed with existing solutions such as option vaults.

“They were interesting, but extremely opaque and you couldn’t really do much with them. All you had to do was buy it,” Wasyl told Blockworks. “We started applying the model to rework the options to make them work better within the chain.”

The team decided on a percentage-based “adaptive pricing model” and applied it to range-bound volatility trading.

“We think this is a great tool to use for traders who are not sure which direction the market is going but still want to take a position with some degree of leverage,” he said.

This is a proof of concept, but could eventually be used for non-crypto native assets such as tokenized goods.

Passage targets both professional and retail traders. The former may think of it as a complement to their existing futures or options strategy.

“But retailers who are just playing around can actually be exposed to long- and short-term volatility for the first time without making anything. This is really cool. Because all you have to do is buy. When you sit on it, it automatically stabilizes,” Wasyl said.

Making on-chain derivatives work better

Unlike traditional options contracts, “passages” do not have a common expiration date and time. Instead, it is always exactly two days.

In the case of a breakout, the contract automatically charges for that portion of the period during which the asset’s spot price remains within a specified price range, according to the document.

The default price range referencing the Chainlink oracle is dynamically adjusted using a weighted lookup period of the previous three days.

Ensuring sufficient liquidity in on-chain derivatives markets is an unresolved problem in DeFi.

With Passage, transactions are all done on-chain and peer-to-peer. If there are no matching orders on the ledger after a few minutes, an “automatic buyer” vault can step in and provide liquidity according to pre-set risk parameters.

“There is some sort of dual structure to the order book, which we think will improve user performance,” Wasyl said.

Read more: Aevo mainnet launch provides decentralized futures and options

Car buyers will need assistance in the early stages of building on-chain liquidity for their order books. Wasyl also believes that dynamically adjusting price range widths could provide new DeFi fundamentals for others to build on, such as volatility indices.

“There are a lot of creative ways this product can be used in every market,” Wasyl said.

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