A Commodities Market for Everyone
We are building the infrastructure to bring real commodity futures trading onchain.
Commodity futures exchanges serve a critical function for the global economy, providing the producers and end-users of a commodity with the financial instruments to hedge their underlying exposure to raw materials while providing speculators with a deep liquid market to trade.
Traditional Exchanges accomplish this through standardization and risk mitigation, ensuring market participants trust the instruments they are trading and who they are trading with. They control which commodities are traded and cleared and who is allowed to interact directly with these financial instruments.
Each commodity futures contract is standardized, representing the same quality, quantity, and delivery specifications, establishing the fungibility of the underlying instrument. The exchange’s clearing house stands in the middle of each trade, reducing the risk of dealing with unknown counterparties and guaranteeing the delivery of the underlying commodities while enforcing the exchange’s rules and regulations.
We believe it is possible to abstract away the centralized clearing house in traditional commodities markets and replace it with a dynamic system of collateral provisioning managed by code and backstopped by a pool of assets established by participants and delivery partners.
Ready for the next leap
One of the many selling points of blockchain technology is its underlying trustless architecture—meaning that network actions do not rely on the trust of a centralized counterparty for fulfillment.
But, what happens when you deal directly with raw materials used in a manufacturing process? Raw materials need to be transported, stored, and verified, all actions that rely on trust in a network or service provider. Our mission is to bridge this gap and connect the real and onchain economies.
To accomplish this, we are developing a decentralized clearing protocol for everyone and anyone, enabling unserved businesses and verticals to hedge their exposures, and opening the door for speculation (and by extension, price discovery) across previously unavailable markets.
This is the leap into the future for commodities trading: moving from a centralized clearing house to a decentralized clearing protocol.
What does the clearing protocol enable?
The Allocation Protocol equips end-users and resource providers from unserved industries with the tools to hedge their natural exposures to the underlying commodities they deal in while giving speculators access to new and unique markets previously unavailable to trade.
The decentralized clearing protocol enables:
The trading of dated futures contracts with cash and physical settlement.
Risk reduction for counterparties by standing between all trades and providing a financial backstop against delivery failure.
Collateral staking for delivery partners to serve as a contractual bond against non-compliance with obligations.
More performant settlement, margin provisioning, and composability across blockchain ecosystems thanks to Algorand State Proofs.
3rd Parties to build out functionality and additional liquidity via decentralized API (dAPI).
This market infrastructure will provide operators with sophisticated financial instruments for de-risking resource exposures and servicing expenses. In addition, it transforms physical goods and services into standardized contracts, turning capital today into on-chain contractual rights for delivery in the future.
How does it work?
The Allocation Protocol has a number of different elements designed to address 3rd party access, counterparty risk, protocol risk, and delivery risk.
Decentralized API (dAPI)
The protocol provides the Algorand community with a foundation to build marketplaces and services that support trading across a diversified set of commodities and domains. In addition, the Allocation Protocol’s decentralized API (dAPI) allows multiple commodity marketplaces and service providers to run on the same infrastructure and token. As a result, many traditional risks associated with delivery facilitation can be bypassed through the transparency of onchain execution and transfer.
Clearing House
Counterparty risk has been dramatically reduced with the advent of Algorand Atomic Transfers which manage the exchange of underlying assets at the smart contract level, leaving no room for one side of the trade to skirt their contractual obligations. With Atomic Transfers, all the transactions necessary for a transfer are submitted in a batch operation, meaning that they all succeed or fail, removing the need for more complex approaches like escrow or time hash locked contracts. However, when dealing with assets that bridge the digital-physical divide, facilitation risk becomes a more significant concern for market participants.
A decentralized clearing house is designed to mitigate the facilitation risks associated with physical delivery and financial risks associated with unknown counterparties. The protocol will stand between each trade, eliminating the risk of transacting with an unknown counterparty. It is the buyer for every seller and the seller for every buyer.
Dynamically Provisioned Collateral
The beating heart of the Allocation Protocol is a nested set of collateral pools managed by code and backstopped by a pool of assets established by participants. Users of the Allocation Protocol will have an ongoing requirement to fund their open positions through the commitment of onchain collateral should the position drop below the maintenance margin required to keep the position open. The protocol manages the margin requirements and collateral calls through the periodic mark-to-market valuation of the assets across all trading accounts, minimizing the risk to the protocol.
Trusted Delivery Partners
Delivery partners, who warehouse and deliver physical commodities, will be required to put up collateral to backstop their commitments. This collateral serves as a contractual bond which is at risk of being cut should they fail to follow through with agreed commitments. Delivery partners earn a share of protocol fees for their network participation and interest payments on their committed collateral
How do we envision people using it?
We envision a future in which the Allocation Protocol has enabled the trade of diverse resources ranging from orbital commodities to exotic terrestrial goods to digital-native assets like NFTs and Cryptocurrencies.
Our goal is to create the market infrastructure that enables the transfer of risk from resource-based businesses that are exposed to adverse price changes to speculators who are risk takers. With this in mind, 3rd parties can stand up marketplaces that cater to different asset types or provide other value-added services catering to those already in existence such as analytics, accounting, or custody to name a few.
How are we using it?
The Allocation Protocol is being developed to provide a commodities market infrastructure to support the commercialization of space. We believe that the space economy should be accessible to everyone, not just a few privileged players. Creating a headless commodities market framework built with a web3 design sensibility will ensure that access.
We are developing a decentralized clearing house and exchange to underpin the in-space economy that is trust minimized to match the fragility surrounding the risks of operating in the final frontier.
The commercialization of space relies heavily on private investment in the technologies that will take us there. Currently, operators rely on insurance to backstop their businesses, with each leg needing to be separately accounted for, spanning pre-launch, launch, on-orbit, and third-party liability.
This increases costs and introduces delay, whereas a market-based approach would be more transparent, performant, and cost-effective for these businesses.
Allocation.Space will introduce novel financial contracts which enable firms to hedge against launch delays and adverse fluctuations in fuel prices with plans to introduce speculation across the commodities powering the in-space economy. With a market-based approach, speculators will gladly take on this risk for the opportunity to invest in the inputs of space commerce while companies gain the ability to hedge away natural risk exposures and reduce expenses.
We are not reinventing derivatives markets; we are simply upgrading them to better serve us on our journey into the space age.
