The new prediction marketplace solves longstanding liquidity issue, but does it create new problems?
On August 31, 2020, Morpher Labs announced the launch of its flagship Ethereum-based contract trading and prediction market platform, Morpher, with the stated goal of providing users unlimited access to long-and-short trades of real-world stocks, commodities, and FOREX markets.
The technical obstructions of such a goal, however, have historically proven tricky to navigate.
In a recent interview with Cointelegraph, Morpher Labs CEO Martin Forehler explained that Morpher’s vision is to allow worldwide access to asset classes that normally have multiple barriers in the form of geographical restrictions, middlemen, and steep fees.
“The goal of the platform is to enable anyone living on Earth to trade assets 24/7, featuring minimized fees and without needing a counterparty,” said Forehler.
Many projects harbor similar ambitions, but have been hampered by the seemingly intractable problem that arises whenever projects try to offer on-chain users access to real-world assets and their price action: liquidity.
Synthetix, for instance, allows users to mint synthetic assets that track the price of real-world assets such as gold or the Nikkei stock index. However, their platform requires users to hold a quantity of SNX tokens at a 600% ratio to the value of their synthetic asset portfolio in order to mint new synthetics or withdraw their funds.
Similarly, prediction market Augur allows users to bet on the outcome of real-world events — say, if the price of a specific asset exceeds a certain threshold within a specified date — but the protocol has never managed to crack $3 million in TVL, according to DeFi Pulse.
In these instances, liquidity either comes in the form of a heavily-collateralized chicken, or as an egg that never hatches.
Morpher, meanwhile, is attempting to tackle the liquidity problem with a token-economic solution.
“The [Morpher] smart contract creates or destroys MPH token depending on the outcome of [a] bet,” explains Forehler. “E.g. a 100 MPH token bet on Apple becomes 110 MPH if Apple gains 10%, or 90 MPH if Apple loses 10%.”
This peer-to-contract system hypothetically allows for unlimited liquidity, as any user can enter and exit a MPH-denominated bet of any size.
However, Hristo Piyankov, a token economy expert and Chief Data Officer at REINNO, cautions that this model may lead to situations where liquidity dries up for MPH holders.
“To give an example,” Piyankov explained to Cointelegraph, “If currently 1 MPH is traded for 0.015 DAI and then all of a sudden the total supply of MPH doubles (because a tracked underlying asset doubled in value), would it be possible to sell all those newly minted MPH for 0.015 DAI each (the definition of liquidity), or would this drive the price of MPH down (suggesting that the token is illiquid vs other well-established currencies)?”
When asked about this dynamic, Forehler contends that such value fluctuations occur in real-world markets as well, though with less extremes.
“If the average user has a return of say five percent per year, there are five percent more MPH token that year. Assuming a constant market capitalization, only users with returns greater than five percent make a profit, while everyone with lower returns has a loss,” he says.
“This may seem odd at first, but it just replicates what happens on traditional markets. Traders who do not outperform the inflation rate lose, even if their nominal returns were positive,” he added.
Thus far, the results of Morpher’s model have been mixed. According to Forehler, in the nearly two months since launch Morpher has attracted 28 thousand users. The Morpher Twitter account, however, has reported numerous withdrawal outages.
While it remains to be seen if Morpher will be able to solve the problems faced by prediction markets, Forehler remains a zealot for the end mission: to provide global access to real world assets without middlemen:
“We are convinced that the full potential of the Morpher Protocol will only unfold once it is universally accessible, and we are working hard on making that happen.”