If The Price Isn’t Fixed, You Can Trade It On Overlay
This should be a quick one…
It’s common knowledge that thanks to: technology, market makers and liquidity providers, anyone with an internet connection and a smartphone/PC can buy and sell US dollars without owning them physically in the bank or at home. What if we could do the same thing with sneakers, iPhones or even Electric Vehicles?
Overlay Protocol has decided to introduce new markets to the world of perpetual futures contracts powered by defi and the concept is basically that as long as the price of the quantity fluctuates, then it’s tradeable on their protocol.
The possibilities are supposedly endless: corruption perception index, inflation rate for different countries’ currencies, unemployment & employment rates and so on. Perpetual futures traders should like this one.
I don’t know if it’s something consumers need — we’d have to see about that, but it’s definitely something new.
Let’s examine the features…
All trading activity on Overlay is executed using the platform’s native token OV so fees, payouts and collateral are all denominated in OV.
OV will also serve as it’s governance token; all holders can cast their votes on community proposals and one token represents a single vote.
Overlay doesn’t offer limit orders for opening positions so all positions are executed at market price. The trader puts up collateral and decides whether they want to use leverage or not before confirming the transaction.
Whenever a position is opened on Overlay, it can end in one of three outcomes: Profit, Loss or Break-even.
In the event that it closes in profit, OV is minted to the tune of the profit earned; In the event of a loss, a portion of the OV that was put up as collateral is burned; If the outcome is break-even, no mint or burn action is executed.
Now, because payouts are based on a mint/burn basis, the design has as an inherent flaw- The risk of overinflation.
To protect token holders and reduce the risk of overinflation of the OV supply, the protocol has set up three mechanisms in place.
- One that limits the size of new positions on recently overtraded markets.
- One that sets a hard cap on the payouts of profitable positions in different markets.
- One that sets a limit on the number of open positions that can exist on either side of the market (buy/long and sell/short side).
Overlay doesn’t operate using liquidity providers or market makers, so to try to maintain equilibrium of long and short positions, one side of the market is incentivized whenever the other is traded more; i.e buyers are incentivized to open more buy positions if the sellers are in greater quantity and vice-versa. Note that this operation is not risk free.
Overlay uses reliable and reputable “oracles” to ensure that the prices offered for each market are accurate per time. Using multiple oracles helps Overlay deliver the best prices even during periods of high volatility.
It remains to be seen if this project will be a success, but the innovation is obviously an interesting one. If the marketing is done right and the right markets are introduced — markets that are very appealing to end users — then Overlay could stand a pretty solid chance.
Read up more about Overlay here
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