Examining 2024 Narratives

As we head into the new year, it’s evident that excitement around the entire blockchain industry is approaching levels not seen in the past two years. But while the Terra and FTX debacles decimated mainstream attention, dedicated DeFi builders kept pushing new products, solving problems, and putting together the money legos that are making up this evolved financial system. The bear market saw plenty of narratives emerge, such as the rise of Rollups, Ethereum LSTs, cross chain interoperability, and so on. Looking ahead to 2024 with a cautiously bullish market sentiment, what trends are we expecting to lead the way, and how is Bracket thinking about leveraging them?

TL;DR

• Post-launch, Bracket will be considering several developments to increase Passage utility including the incorporation of LSTs & RWAs as collateral assets & creation of Perpetual Passage contracts
• LST integration would allow ETH stakers to hedge / leverage / diversify their position in a capital efficient manner
• The same goes for RWAs, however the use case would be slightly different, adding crypto volatility exposure to their existing long term low risk RWA holdings such as T-bills and institutional loans
• Perpetual Passage would be a modified version of the base contract with an indefinite duration, useful for continual long / short volatility strategies and hedging

Bracket’s Place in the Crypto Ecosystem

To set the stage for this discussion, let’s start by establishing Bracket’s, and more specifically Passage’s, niche in the larger crypto market. Passage will launch on Arbitrum mainnet on January 4th, unlocking ultra-simple-to-use, pure long / short volatility positions for traders on what has emerged as the eminent DeFi trading chain. Core uses are twofold: speculation and hedging. Expecting a lull in volatility? Bet on it with a Stay In Passage. Entering a leveraged long position, but don’t want to risk liquidation in high vol conditions? Cover your downside with a Break Out Passage. Improve your risk management, play those tricky spots where price could break either way, you get the picture.

First things first, we’re bringing Passage to market in January, but with most of the heavy lifting already taken care of, it’s time to ideate on how to improve the product post-launch. Here are a few of the narratives we can see taking off in ’24 and how they can be incorporated into

Bracket’s future.

2024 Narratives We’re Watching

The Bracket team has an eye on three rising/continuing trends that are most relevant to our niche in the derivatives market.

• Perpetual Options
• LSTs
• RWAs

Big picture: we’re thinking about how LSTs and RWAs can be integrated as collateral assets on Bracket, increasing utility for holders of these assets. Perpetual options could potentially come into play as a feature allowing Passage holders to roll over their positions, creating perpetual exposure rather than having a specific expiration date.

LSTs as Collateral

ETH staking is picking up serious momentum heading into 2024, with Lido’s TVL approaching all-time highs and other names like Rocket Pool, FRAX, Stader Labs picking up significant market share of their own. Cumulative ETH staked with LST protocols has grown to nearly 12m, creating a massive market of LST holders looking for ways to deploy those assets across DeFi.

Source https://defillama.com/lsd

Allowing stakers to tap into Passage seems like a perfect match. They already have price exposure to ETH, so the Passage ETH market would grant a unique opportunity to couple it with a long / short ETH volatility position.

Expanding on that idea, what’s the thesis for ETH stakers? They’re holding ETH, so bullish on the asset with a medium to long time horizon. They’re earning yield, typically 3–5% APR, depending on the platform. They have liquid tokens representing the staked position and are likely looking for ways to use LSTs for additional yield / leverage, or risk management.

Passage + LSTs

Given the ETH bull thesis that can be generally applied to stakers it follows that they may want to use liquid assets to hedge against downside risk or effectively lever up their ETH position. Purchasing a Break Out ETH Passage with LSTs would allow stakers to do both at once. Since the Break Out contract is a long volatility position, stakers expecting significant ETH price action in either direction could benefit from purchasing one. If price exits the Break Out contract’s range to the downside, unrealized losses on their initial ETH position are recouped by the Passage’s payout. If price breaks out to the upside, gains on the initial ETH position are bolstered by the Passage’s payout. This works as a highly capital efficient hedge / leverage opportunity.

Alternatively, Stay In Passages could be used by stakers to play ranging market conditions. While volatility looks to be back in force as we approach 2024, seasoned crypto market veterans know how often price action falls into tight ranges, producing crab markets that are tough to navigate using perps or spot positions. Opportunities to profit during these sideway markets can be tough to come by unless you have a short volatility tool like a Stay In Passage. Making Passages purchasable with LSTs would provide a capital efficient method of shorting vol while retaining a staked position, effectively enhancing yield while price remains within the Stay In range. For examples of profitable vol shorting we don’t have to look back far, as this was a popular strategy in the BTC & ETH options markets over 2023, where volatility slid to all-time lows on multiple occasions.

Beyond hedging / doubling down on ETH exposure, an LST integration would also allow stakers to diversify without swapping any ETH for other assets. Passage currently supports BTC volatility positions as well, and Bracket plans to add more assets post-mainnet launch. One long-observed crypto market dynamic is the tendency for ETH price to lag behind BTC, a scenario where stakers could leverage Passage to speculate on BTC while retaining their staked ETH position and the yield that comes with it. Again, capital efficiency is the name of the game here, adding BTC volatility exposure to your portfolio without deploying any additional funds.

Overall, we see LSTs continuing as one of the mainstays in DeFi. The synergies between the ETH staking thesis and Passage’s capabilities make adding LSTs as a collateral asset an intriguing consideration for post-launch development. Lido is by far the largest name in the staking space, but there are some other rising players like RocketPool, FRAX, Stader Labs that we also believe would be excellent partners in this vision of connecting LSTs and volatility trading.

RWA Markets

This sector has already made significant progress in 2023, with established DeFi players getting involved and new names emerging. The largest RWA push by dollar amount is coming from Maker, which has brought in over $2.7B in RWAs as collateral in its CDP system.

Other protocols such as Maple Finance, Centrifuge, and Clearpool are handling 9 figure volumes of RWA based lending on-chain.

U.S. treasuries are another hotbed of RWA development, with protocols like OpenEden and Ondo giving DeFi users on-chain access to T-bills and the associated yield.

RWAs as Collateral

The principle behind RWAs is similar to LSTs, tokenizing less liquid positions to make them tradable, but the assets backing RWAs are much more diverse, spanning credit markets, commodities, treasuries, real estate, carbon credits, etc. Thus, their potential integration into Bracket would look the same as for LSTs, enabling Passage purchases with RWA tokens. Once again, holders would be able to take on volatility positions in a capital efficient manner while retaining their RWA position. However, the reasoning behind taking the position would be more for diversification or hedging overall crypto market risk, as opposed to ETH stakers who would be purchasing Passages to leverage / hedge their ETH position specifically.

To expand on that, we can go back to the asset rotation cycle that has been seen time and time again, where BTC leads the sector, followed by ETH, and then altcoins. RWA positions are typically in more stable, long time frame asset classes like treasuries & credit, but through Passage, holders could speculate on shorter term volatility, or the lack thereof, as capital flows between crypto asset classes. The integration would add a unique piece of utility to RWAs, increasing their attractiveness by allowing holders to tailor their overall portfolio exposure using volatility tools.

Perpetual Options

Those familiar with options strategy may have picked up on the inspiration that Passage’s range based contracts draw from straddles. The Bracket team often looks to the options market for ideas, and the most interesting trend we’re observing right now is the emergence of perpetual options. Protocols such as Panoptic are creating options contracts without expiration dates, allowing traders to maintain indefinite exposure. This decreases the time and costs of position management, which aligns well with Passage’s goal of delivering a streamlined volatility trading experience.

Adding perpetual Passage contracts is another item on the table for post-launch development. While this is still in the ideation phase, our vision is to create a cost efficient method for Passage buyers to maintain long / short volatility positions for as long as they wish. There are some key questions to address, such as how to adapt cost and payoff structures. In order to facilitate perpetual Passages it’s important to make them attractive to both buyers and the Passage Vault depositors who would be taking the other side of these trades. Logistics aside, we see this as an excellent opportunity to expand the utility of Passage.

What to Expect in 2024

For Bracket, the top priority heading into the new year is the successful launch of Passage on January 4th. Once the base product is up and running smoothly, then we can seriously consider all of these enhancements and where to place them in the pipeline. Beyond these three potential developments, we’d love to hear from the community on what you all would like to see in the future, or any specific LST/RWA tokens that you think would fit well as collateral options.

Come join the Discord to share your ideas, we’d love to hear what narratives you’ll be watching this year.

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