The Derpetual Manifesto

My mad plan to fix the world’s economy.

Much of today’s derivatives infrastructure carries assumptions inherited from an earlier era.

Derivatives — options, futures, forwards — are central to financial markets.

They underpin commodity prices, interest rates, and currency exchange.

Their infrastructure has evolved over generations.

Since then, we have added electronic trading, cash settlement, and central clearing.

But those are patches on top of a design that was never built for the modern world.

The underlying asset is a liability

Traditional futures infrastructure carries the complexity of delivery, settlement, market makers, order books, and layers of systems added over time.

Every new patch adds complexity.

That makes markets harder for normal participants to understand and can introduce new forms of structural risk.

The physical underlying itself can become a source of operational risk.

The lesson is not that markets do not work.

The lesson is that their architecture is carrying assumptions inherited from a very different era.

Current markets serve speculators, not businesses

Imagine a company that wants to protect itself from changes in the price of oil.

It cannot necessarily hedge the exact price it pays its supplier.

Instead, it may be limited to standardized contracts such as WTI or Brent because those are where deep liquidity exists.

The difference between the risk a company actually faces and the derivative it can trade is basis risk.

Managing that mismatch requires expertise.

Many businesses cannot justify the cost.

Many do not try.

Concentrating liquidity into fewer markets is useful for market makers and speculators.

It is much less useful for businesses that want to hedge very specific real-world risks.

A small set of markets covers a much larger economy

Traditional derivatives markets cover a relatively small number of standardized underlying assets.

Major indices.

Large commodities.

Top currencies.

Benchmark interest rates.

Much of the rest of the economy remains difficult or impossible to hedge directly.

Residential real estate.

Thousands of less-standardized commodities.

Environmental indicators.

Local economic variables.

The long tail of measurable risks.

The unserved market is enormous.

What fixing the market means

If it becomes possible to hedge exposure to far more measurable risks, businesses can focus more directly on what they are actually good at.

The same idea extends beyond traditional corporate hedging.

If a market can be created around a measurable external variable, that variable can become something people can express a view on, hedge, or trade.

Air quality.

Local costs.

Operational risks.

Events.

A chip manufacturer should not have to become an expert in every geopolitical event that could affect its supply chain.

The infrastructure should make it possible to manage more of that exposure directly.

That is the direction we want to build toward.

A derivative is just two people who disagree

At its core, a derivative can be described very simply.

One person thinks a number goes up.

Another thinks it goes down.

When the outcome becomes clear, one pays the other.

Much of the infrastructure surrounding derivatives exists because markets historically needed systems for matching, settlement, delivery, liquidity, and trust.

We are exploring a different approach.

I call this asset class abstract futures.

They are the main product of Derpetual.

When trading abstract futures, traders settle gains and losses directly with each other without going through an order book.

That has an important implication:

A market can exist wherever two people take opposing views on a number.

There is no requirement for a market maker to fill an order book first.

The full technical specification is outside the scope of this manifesto.

Testing the technology

Testing the technology with real traders is part of the approach. Feedback from live market conditions can help shape the design.

Crypto is an aggressive test environment.

That is exactly why it is useful.

From crypto, via finance, into the undefined

Blockchain finance has been an enormous laboratory for financial engineering.

On-chain markets have shown what happens when market infrastructure becomes programmable, global, and continuously available.

Crypto is the starting point for Derpetual’s approach.

The next step is to open the infrastructure so others can create derivatives on more kinds of measurable quantities.

Longer term, the ambition extends beyond crypto and toward regulated financial infrastructure.

That is the direction.

Derivatives should be beautiful

I am building Derpetual because I am obsessed with the simple elegance of financial assets.

A derivative, in its purest form, is one of the most beautiful structures in finance.

Two centuries of infrastructure have buried that simplicity under layers of operational machinery.

Delivery.

Clearinghouses.

Price limits.

Trading halts.

Each layer solves a real problem.

But together they leave us with a system optimized for a relatively small set of standardized markets.

I want to make derivatives what they were always supposed to be:

Simple.

Universal.

Precise.

That is what I am building.

Continue reading

Read Introducing Abstract Markets to see how Derpetual thinks about markets built around measurable quantities.

Explore the Abstract Markets Glossary for the terminology behind abstract futures, market equations, market credit and Position Yield.