Risk Management with TracerHow Tracer’s smart contract protocol for derivatives enables reliable risk management
Risk is everywhere, this is a simple fact. It exists in the digital realm as well as in our lives offline. There are vast capital markets and financial networks being built in the decentralised finance (DeFi) industry, which at present is a high-risk environment; and for builders and users who wish to sustain this environment and evolve its technology, intelligent risk management is essential.
Enter Tracer; an open source, decentralised smart contract protocol for derivatives that enables reliable risk management.
Historically, derivatives tools and technologies have been the domain of financial institutions whose processes, protocols and systems are opaque and prohibitively expensive.
Tracer’s mission is to reimagine trust in the financial industry, by solving the extant problems attached to derivatives and their foundational technologies through its open-source, transparent protocol.
One of the imperfections of the traditional financial system is that it relies on trusted third parties to facilitate transactions.
Tracer, on the other hand, is decentralised by design, allowing it to provide powerful levels of security through its open-source code and reliable blockchain infrastructure. This is a catalysing force for secure, self-determined and autonomous transacting between individuals, businesses and markets.
The inherent result of this transparency is accessibility. Tracer makes derivatives easy to engage with and understand. Simple terms, simple risk management. You can read the whitepapers to familiarise yourself with the inner machinations of this technology and its praxis.
Barriers to Entry + Accessibility
Tracer’s barriers to entry stand at near zero. All you need is an internet connection.
The Tracer protocol operates as a novel architect for derivative markets. The smart contracts are permissionless, meaning anybody can deploy a new market, circumventing the traditionally exorbitant costs of market creation due to administrative fees, bureaucracy and the time investment; not to mention the requisite guaranteed participation of traders and hedgers in order for the market to function.
The only external input required by a Tracer contract to function as a market is a reliable data feed. Fortunately, a decentralised oracle network can source you this. Put simply, a decentralised oracle network gathers data from multiple operator nodes and uses a consensus mechanism to arrive at an aggregated, single source of truth for that data feed.
In addition, when these foundational derivative protocols are established, myriad applications and markets can be built as services on top — similar to how Apple and Android have cultivated rich development environments and ecosystems.
Tracer contracts can be integrated into incumbent software used by financial institutions as well as neo-banking applications that provide risk management tools.
The Tracer Factory:
Financial innovation is achieved through the Tracer Factory. This is a facility capable of mass-producing financial markets. For example, a financial contract type, such as the perpetual swap, can be added to the factory once engineered (the addition is voted on by Tracer DAO governors) and will exist as a template in the factory — able to be reproduced on demand.
Contract templates ensure standardisation, an advantage which is significant for traders and applications to be built on top of Tracer.
Anybody can permissionlessly deploy a template installed in the factory, provided they have an oracle price feed to price it; and token to settle the agreement.
Risk Management & Security
Tracer can ensure an outstanding level of security that traditional financial infrastructure cannot provide.
The cryptographic technology underpinning Tracer allows it to preserve the sovereignty of the individual, the business and the market; and enable consumers to trade with trust through a decentralised and transparent process.
Tracer Factory Contracts:
The perpetual swap is a derivative contract that is an incredible risk management tool. It’s a financial contract that accords exposure to any market in perpetuity.
Traditionally, these contracts have been engineered with centralised components and use liquidation and insurance mechanisms that are reliant on third party providers — a high risk practice. Tracer’s perpetual swap contracts provide a far more secure and reliable option.
Tracer’s Perpetual Pools contract is a new derivative primitive with no liquidations and no margins. The contract template has been configured for traders to gain maximum exposure at minimum cost, while guaranteeing the highest level of security. Anybody can permissionlessly deploy a new market with any quote and base assets.
Each Tracer Perpetual Swaps market has an isolated insurance pool specific to that market, allowing for liquidation risk to be localised, neatly avoiding jeopardising the entire ecosystem.
There are a variety of token risks that require management in the decentralised digital economy.
To demonstrate: take a prospective Chainlink stake and imagine that an entity purchased a LINK token to secure the Chainlink network. They may wish to stake this token for a fixed period of 6 months. By using Tracer derivatives for risk management, the entity can lock in their LINK stake, guaranteeing a fixed price over that 6-month period.
Chainlink node operators, one of the largest gas consumers in the DeFi economy, need to manage their gas risk, which is considerably volatile. Tracer is building a market for these operators so they can continue to reliably provide pricing data for the DeFi economy.
Impacts and Opportunities for Markets
The Tracer protocol provides a bulwark against being held hostage by constituents of unpredictability, like fluctuating resource prices. It also allows the creation of new, experimental markets at very low cost.
The futures and insurance markets for agricultural commodities have enabled farmers to scale their operations and feed the world. Many parts of the world don’t have an existing market, making access to these products challenging.
Tracer infrastructure will support these new markets and deliver risk management tools directly to a farmer’s smartphone, no matter where they are in the world.
Climate + Environment:
Carbon credit generating companies produce and sell their carbon to other entities that purchase these credits to operate as carbon neutral. These companies require risk management tools so that they can remain carbon neutral at a fixed cost.
Many of these real-world market prices and values will eventually be crypto-economically secured by Chainlink oracles, serving as a reliable, definitive truth for Tracer contracts to consume and pay out each counter-party.
Tracer aims to forge new water derivative markets that allow astute management of one of our most essential natural resources. It’s imperative that sophisticated markets for water exist, so the resource can be effectively shared and priced in the economy.
Tracer envisions a world where individuals are easily able to manage their local consumption risk.
For instance, an Uber driver’s profits are dependent on how much they spend on fuel. They can minimise their fuel pricing risk by locking in a fixed price via Tracer derivatives. The purchase process of this contract can be completely abstracted and easily baked into a user-friendly interface for any driver.
Trust You Can See
By creating definitive truth through crypto-economic guarantees, many new local and global markets can be formed via Tracer, which meaningfully enable both individuals and firms to manage their risk.
The Tracer protocol is the vanguard answer to the systemic problem of mistrust in traditional financial firms; and is a potent solution against the stranglehold that these financial institutions have over consumers.
Tracer allows users to ‘trace’ any digital or real-world market with an oracle and form simple derivative agreements — the contracts are built and owned by the user, for the user. It’s transparent, secure and decentralised; it is trust you can see.
We’re currently growing and expanding. There are many roles opening in Tracer DAO and we encourage new contributors and builders to join the ecosystem. For further details of the Tracer Factory and its derivative protocols, visit the whitepapers. Be sure not to miss an update by following Tracer on Twitter and joining the discussion on Discord. Learn more about the activity of governance on Discourse and go deep with us on GitHub.