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$GCR AMA with TracerDAO

Tracer DAO is an open-source, smart contract protocol for derivatives. They’ve recently launched their first market type, their Perpetual Pools contract. Perpetual Pools are a simple way to create leverage tokens that don’t expire, and can’t be liquidated. GCR is excited to learn more about Tracer’s leverage, long and short ERC20s, and how they can be utilized.

Hi, everyone. Welcome to the Tracer DAO talk, exclusively on the GCR Community Stage. As some of you may know, GCR participated in Tracer’s investment round back in June, so you could say we’ve been friends for a while. So, without further ado, I’d like to invite Issy | Mycelium, Adam and Lord Soprano from Tracer DAO to the stage. Welcome to GCR, guys. We’re excited to have you here.

1. Hi Tracer team! Welcome to the GCR Discord! Can you introduce yourselves to the GCR community and tell us a bit of a background about Tracer DAO project?

Adam:

I’m Adam. I’m part of the Mycelium team that works on the Tracer DAO project, predominantly in DAO operations and ecosystem development.

Lord Soprano:

I’m Lord Soprano. Also work for Mycelium, and I predominantly do the more design side of things.

Issy:

We’re super excited to be here. I’m Issy. I work as part of the Mycelium team. We’re contracted to provide a road to the Tracer DAO. I’m one of the product managers here, specifically on Perpetual Pools.

2. Why should I use Tracer vs a battle-tested centralized solution and how does Tracer compete with similar offerings in the DeFi space?

The goal of Tracer is to be an open-source, smart contract protocol specifically for derivatives. And the reason for this is that we’re looking to codify the rules of finance so we can create a really scalable trust model that removes the barrier to entry for individuals to engage in instruments as they currently stand or innovative instruments. By creating these derivative agreements, we can create a really trusted foundation. And democratized governance is something that’s super important to us. The DAO for Tracer was launched in January of 2021. We’ve had some huge proposals come through there since that time thanks to Barry or Adam. We also have a really strong focus on financial innovation.

To date, we’ve also tested a Perpetual Swap contract type. And obviously as said before, we’re operating in V1 of Perpetual Pools, which is actually an innovative derivative type. Whether the derivative instrument exists or it’s totally novel, we can install them in the Tracer factory, or the DAO can vote to install them. And creators of contracts can be remunerated for this contribution to the DAO, so hopefully, this structure encourages some financial innovation in the derivatives space.

Also worth touching on, we have quite a significant commitment to security. So, we’ve had two audits with Sigma Prime to date, and there are a number of bug bounties under our belt. Always open for more contributions as well.

That’s a pretty light overview of where Perpetual Pools capacity is at right now. 

3. Tracer DAO governs ‘Factories’ that generate ‘Tracers’ that are instances of ‘Markets’ on-chain. Could you explain what ‘Tracer’ means by giving a real-world example that would help better illustrate the concept?

Tracer DAO is really keen to provide financial infrastructure for the new market types. And broadly, we’re achieving this through a series of smart contract generators called factories. These are governed by Tracer DAO and can host a variety of what are essentially standardized derivative templates. Referring to this Tracer factory, there are a lot of platforms out there that have governance tokens, but there are very few platforms that actually give the governance token the ability to vote on the development of the new financial tool. So, that’s quite a fundamental difference there. We see it as a community taking charge of the development and where the instruments go. So, that’s pretty exciting in terms of parameters, but also in terms of what gets installed. And also, we always say it’s quite different to centralized solutions in terms of censorship of assets, software downtime, and KYC requirements. It’s a pretty fundamentally different experience, especially on an L2. It’s very sharp. Touching on the censorship of assets point. Early on in the year, we had the GameStop event where you had trading applications like Robinhood, which are centralized entities, being able to actually close down the trading interface and not allowing people to actually close their positions. And they were also closing positions for others that were gaining off the GameStop event. So, Tracer seeks to mitigate that and allow trading in a decentralized manner, that isn’t held by one party to have the ability or actually attempted to shut down trading for any type of reason, whether it’s bribery or whether it’s to hold those trusted relationships with the banking sector.

4. Last month Tracer DAO launched Tracer Perpetual Pools on the Arbitrum One mainnet Ethereum L2 chain. Tell us a bit more about this launch – what is the future of L2 derivatives?

I would say the settlement time … I don’t know the exact numbers, but we are on Arbitrum, so it’s significantly quick to mint or burn said token. Yeah. That’s the way that, I guess, these derivatives are settled. It’s the act, it’s the process of minting, which is buying a percentage of a pool. And then these pools settle hourly, basically, and move collateral between one or the other as the price changes. So, if the price goes up, the long pool gets some collateral from the short pool. And then if the price goes down, the long pool pays the short pool that collateral. So, I guess that settlement and clearing is done on an hourly basis. But I guess for the actual derivative … The derivative is really just a share of that pool. So, the mechanism is these two pools have this transfer agreement that just swaps assets between them depending on the Oracle feed. And then the derivative in that sense is, I just own a percentage of that share.

So, in terms of settling and clearing, it’s just buying into that pool and then selling out of that pool. Yeah. That’s on Arbitrum, so the actual process of that is extremely quick. But yeah, I guess it’s settled hourly, I guess is a way you could look at it, which is the rebalancing period.

5. Does Tracer also work on L1 Ethereum? Are there any plans to integrate with other L2s or blockchains?

Yeah. We’re pretty much open to it. We’re pretty much open to anything which is EVM compatible and has the relevant security safeguards. Like, we don’t want to go … We’re not a fan of anything which relies on pretty much-centralized control to actually be on said side chains. Yeah. Probably Adam can speak on it more, but yeah. It really is that we’re open to anything that’s EVM compatible. We’re not intending to move away from Arbitrum at the moment. We sort of seeing that Arbitrum seems to be growing quite nicely, and it’s a nice little ecosystem. There seems to be more liquidity being deployed over there. Yeah. I guess the answer is that we’re open to it, but no plans as of yet. In addition to that, I’d say yeah, as Lord Soprano just touched on, yes, we’re on Arbitrum at the moment due to the fact that it’s EVM compatible. But we’re also very fond of Ethereum itself. We’re very fond of Ethereum becoming the global sediment layer in the future. And as Ethereum pushes to an Ethereum 2.0, we’re keen to integrate there. So, keen to say where Layer 2s go, but I’m also keen on where Ethereum 2.0 comes into play, reducing gas costs across the board.

6. Perpetual Pools is the only market type being offered by the protocol right now. Can you briefly explain Perpetual Pools and how they work? Are there any plans for other new features and market types?

Specifically, Perpetual Pools is a product that allows you to mint long or short leveraged tokens. They’re fully fungible, they’re ERC20 compatible, and they don’t require any collateral or margin, or ownership of the underlying asset. Of course, you can opt to do so if you’re willing to execute some different strategies on trading. But generally speaking, these are swap agreements with two sides of the pool that transfer the positive collateral in a leveraged fashion. So, your stake in the pool returns a leveraged multiplier of changes in an underlying price feed.

These Oracle price feeds, it’s worth noting, can be for any asset. Currently, we’re limited to those on Arbitrum, because we are deployed in Arbitrum L2. But since September 28th, 29th, we’ve had about $50 million in trading volumes. This is minting and burning, or deposits and withdrawal, from all of our pools. And currently, we have a TVL of 37.5 million in Perpetual Pools.

7. There are no liquidations in Tracer’s derivatives. How does Tracer manage to achieve this?

Perpetual Pools different, perhaps, from the other products on the market, the demand for this maintenance-free product, access to leveraged exposure, has traditionally been met by leveraged ETF, LETFs. These are financial instruments that have been around for a really long time, and you’ll see that leveraged tokens are often a modern take on this leveraged ETF product. These sort of instruments typically require some form of active management, so this is a price, time-triggered balancing so that they stay at the leverage at which they were advertised, which can be super expensive. You also have trusted third parties, so your finances and your Binances and your FTXs. They fulfil a need by managing, say, perhaps swap or a lending protocol position, and selling shares of that position.

And it is possible to achieve desired leverage with this kind of product. They do do that. But it comes with some slippage, market liquidity risk, and just the system complexity level there is quite high. You’ll also find that the leverages are constrained in that kind of scenario, so plus or minus 5X is your cap. I think FTX is the only protocol that offers 5 in that. So, because we don’t require any ownership of the underlying, we can provide that really high leverage. We don’t face those slippage costs, we don’t have those high transaction costs, and there’s no price impact when we’re not selling or buying the underlying. But of course, as I’ve said before, our tagline is No Liquidations, No Margins. This is probably the number one thing that we’re really excited about.

So, I’m going to jump off my slides right now and take you on a little walkthrough of Perpetual Pools products. We can see here, this is in the dark mode. I’m a big softie for dark mode. I’ve gone in already and I’ve purchased some tokens. You’ll see, these are the pool tokens that we currently have on offer. We have, obviously, long and short side in Ethereum, USD and BTCUSD feeds. You can see here we have prices to purchase and mint these leveraged tokens with a little bit of information on how they’re going historically. Most interestingly, though, you’ll see here there’s power leverage displayed.

So, the theory for Perpetual Pools is that at any given point on that rebalance up to a certain point, you can mint or burn into a pool. And at the end of this period … There’s a countdown to it there, the pools will rebalance depending on the outcome of the underlying. So, if the longs are correct in their sentiment, they will receive a payout from the shorts. And if the shorts are correct in their sentiment, they’ll receive the payout from the longs. Based on who loses, essentially, you’ll find that the leverage for gains can be affected by how much collateral is in the opposing pool if that makes sense? You’ll see how leverage for losses consistently remains one or three. But if the pools are slightly imbalanced in their collateral deposits, you’ll see this power leverage effect. But there is a really great initiative to farm the skew between the pools, which brings these quite close back together.

8. What are the main utilities of the $TCR token?

Yeah. Right now, its primary utility is, as you said, governance. So, users can stake their tracer tokens. Once staked, they can make proposals to the DAO. They can also vote on these proposals. So currently, we’re using Discourse for our governance protocol. And on Discourse, there are proposals. There’s a proposal system that’s pushed through, so a proposal passes different stages. It’s then pushed towards Snapshot, where an off-chain voting system occurs. For those that are familiar with Snapshot, yeah, it’s an off-chain voting proposal mechanism that allows … It has the ability to actually count the number of staked tokens in any person’s wallet. Then from there, our proposals are actually voted on off-chain. They’re then relayed by the multisig, and then pushed on-chain for those successful proposals. That’s obviously to reduce gas costs for off-chain voting versus on-chain voting.

Right now, governance utilities are the main one, enabling users to make proposals and vote on proposals, to govern the way that Tracer DAO operates, and govern the way you inevitably trade.

9. What is the governance process at Tracer DAO? First, how could I join the community and, second, how would I go about submitting a proposal for a new change or feature implementation in the protocol?

Yeah. We’re going to look into further how to prevent governance attacks like that. One way we’re working with RMIT Blockchain Innovation Hub is through the process of commitment voting, whereby basically whales can’t have a monopoly. It basically diverges from one token, one vote mechanism. It’s basically a way that you can back your voting power by how much you’re committed to said process, which seems to be a much more robust way to prevent these governance attacks or people trying to attack the mechanism or draining the treasury. So, yeah. That will be in the pipeline going forward.

10. What is your take on increasing regulatory scrutiny and emphasis on institutional adoption and compliance?

Volatility decay is definitely an issue with leveraged assets, though in V2 design we’re working to create something that’s more suited for long-term holding. There is also work on the factory deployment interface. Like I said earlier, we want to build this model where someone can approach these derivative templates and say, “I want this market. Build this market for me,” and it will deploy commission lessly. Currently, this capacity is limited to developers on Perpetual Pools Version 1. But in V2, hopefully, we will have that capacity up and running. And this will hopefully lead to some really exciting new markets coming about, allowing people to get this leveraged exposure that the market is looking for in a variety of applications.