Clearmatics' New DeFi Derivatives Let Traders Bet on Anything, but It's Not a Prediction Market

Clearmatics, one of the first startups to explore how financial instruments can live on blockchains, is unveiling an entirely new class of decentralized futures products, which it is calling forecast markets.

These fully on-chain instruments take the form of dated futures contracts that can track any public time series data, whether it's crypto indexes, inflation or temperatures, giving the appearance of something more akin to prediction markets such as Polymarket than traditional derivatives.

Forecast markets will be supported on the soon-to-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 "Forecastathon" next month, a way to invite quants, engineers and DeFi enthusiasts to participate in creating prototype products on Autonity.

“AFP supports the permissionless creation of dated futures contracts that can track any underlying time series of interest, not just market time series, but non-market time series, like GDP, inflation, global temperature, blockchain metrics etc," CEO Robert Sams said in an interview. “Basically any time series that the market cares about enough to speculate on or hedge, you can create a product for on Autonity.”

Despite sounding similar to prediction markets, currently popular owing to the success of Polymarket, the two don't work in the same way. Forecast contracts move one-to-one with some underlying factor providing a symmetrical payoff profile. Prediction markets deliver a one-off payout.

When a prediction market event happens, the winning side is paid out and the market goes away. A sequence of futures contracts on an underlying data series, however, can go on in perpetuity, Sams said. This allows liquidity to build up over time, tracking risks that persist, whilst prediction markets are more focused on topical narratives, he said.

Forecast markets are not meant to compete with prediction markets, Sams said.

"We see forecast and prediction markets as complementary to one another, serving different needs in a shared and growing space of market-based mechanisms for managing uncertainty."

The crypto derivatives space, which has been hotting up lately as some large exchanges acquired derivatives firms, remains largely dominated by perpetual futures products. Crypto perps will be supported in a future version of the AFP, Sams said, but on-chain, dated futures with the capability to track any real-world, measurable risk factor can create far more value and social utility than protocols focused on crypto asset markets, he said.

“There's a community of people in quantitative trading and machine-learning research who would love to test whether their systems have an edge in predicting things that currently cannot be traded,” Sams said. “The long-tail of value creation will come when people discover how these instruments could be used to reduce the volatility of asset portfolios. Every portfolio has exposure to risk factors for which there is no corresponding financial hedging instrument.”

Stanley Yong, head of the Autonity Foundation, the blockchain’s decentralized governance entity, offers the pricing of Singapore's certificate of entitlement (COE) for cars as an example of a real-world risk that cannot be hedged 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 fluctuate with COE auction prices. A forecast contract that tracks COE auctions would allow someone looking to sell their car to hedge the amount they receive ahead of time.”

A somewhat geekier, market structure element to the Autonity blockchain and the AFP is the separation of the exchange part, where buyers and sellers agree on a price and execute a trade, and the clearing part where smart contracts hold collateral, handle margin requirements and auction off under-funded positions. In other DeFi protocols, this is usually done in a vertically integrated architecture where a product can be traded only on a specific trading venue.

The AFP allows products to be permissionlessly listed on multiple trading venues but with all the collateral and the cross-margining done on-chain, Sams said. This makes it very capital efficient, and also solves one of the key structural issues with the decentralized derivatives, which is the fragmentation of open interest across exchange silos.

“We think it's odd to call a market 'decentralized' when you can only trade it through one trading venue, even if that monopoly venue is a DEX,” Sams said. “We think a market is only decentralized when participants can enter a position through whatever venue they choose and exit a position through whatever venue they choose."