Wednesday’s abrupt and substantial drop in Bitcoin’s price, followed by a sharp 5% recovery, has prompted the launch of Passage, a decentralized application (dapp) introduced on Ethereum rollup Arbitrum. Passage aims to offer a gamified approach for traders to speculate on volatility.
Passage functions as a market designed for trading volatility in a straightforward manner, avoiding the complexity of traditional options strategies. It operates as a prediction market for price ranges, featuring short-duration, initially two-day, contracts denominated in Ethereum (ETH).
The core idea is to facilitate the trading of volatility in a manner similar to perpetual futures (perps). Co-founder Pelli Wang highlights that Passage can be a valuable complement to perp trading. Instead of predicting the direction of the price, traders can specify a range and bet on whether the price will “break out” or “stay in” that particular range. This approach adds a gamified and intuitive dimension to trading volatility.
The volatility experienced in the market on Wednesday resulted in over $600 million in liquidations, according to derivatives data.
Pelli Wang, co-founder of Passage, emphasized the potential risks associated with high leverage, stating that using a ten-times leveraged position (10x) in a perpetual contract (perp) on Bitcoin, for instance, could lead to liquidation if the market moves unexpectedly. The benefit of Passage’s “breakout” feature is highlighted, as it allows traders to focus on predicting extreme volatility rather than the direction (long or short) of the market.
Bracket Labs, the company behind Passage, is incorporated in Panama and recently announced a successful seed round fundraise of $2 million. The development of Passage has been ongoing for over a year and a half, and it has been live on an Arbitrum testnet since mid-October 2023.
The road to Passage
Pelli Wang and Mike Wasyl initially collaborated in business development roles at ConsenSys in 2018. Subsequently, they founded Deer Creek, a Web3-focused advisory firm, in 2019. In March 2022, they joined forces with technical co-founder Jason Glazier to establish Bracket Labs.
The team’s journey began with a critical assessment of existing crypto-native derivatives solutions, such as options vaults. Not finding these solutions satisfactory, they decided to innovate and create a more transparent and versatile model for on-chain options trading.
The outcome is what they refer to as an “adaptive pricing model,” which is percentage-based. This model has been applied to their product, Passage, enabling range-bound volatility trading in a more user-friendly and understandable manner compared to existing options. The team’s experience and dissatisfaction with available solutions led them to create a unique approach that aims to enhance the on-chain derivatives space.
Passage, with its “breakout” feature and adaptive pricing model, is positioned as a valuable tool for traders uncertain about the market’s direction but still seeking leveraged positions. Mike Wasyl expressed that this concept is particularly useful for traders who want exposure to market movements without the need to predict the market’s precise direction.
While currently a proof of concept, Passage’s approach could potentially extend beyond crypto-native assets to include tokenized commodities and other assets in the future.
The platform targets both professional and retail traders. Professional traders may see Passage as a complement to their existing futures or options strategies. For retail traders, Passage offers a unique opportunity to gain exposure to long or short volatility without the complexity of building and managing intricate trading setups. Users can simply buy contracts and let the system handle automatic settlement. This ease of use is expected to make volatility trading more accessible to a broader audience.
Making on-chain derivatives work better
Passages, the contracts offered by Passage, differ from traditional options in that they do not have a fixed expiration date and time. Instead, they always have a duration of exactly two days.
In the event of a breakout, the Passage contract automatically calculates the fraction of that two-day period during which the asset’s spot price remains within the specified price range, as outlined in the documentation.
The default price range, which is referenced from a Chainlink oracle, is dynamically adjusted using a weighted look-back period over the preceding three days.
One challenge in the decentralized finance (DeFi) space is ensuring sufficient liquidity for on-chain derivatives. Passage addresses this by facilitating peer-to-peer trades, all conducted on-chain. In cases where there are no matching orders in the order book after a few minutes, an “auto buyer” vault can intervene to provide liquidity based on predetermined risk parameters. This dual structure in the order book aims to enhance user performance by ensuring sufficient liquidity and facilitating seamless trading experiences.
