Introduction
With the development of various low-cost L2 and proprietary chains, the trend towards shifting from CEX to on-chain derivatives is unstoppable. Despite the remarkable achievements of various on-chain derivatives, their market share remains small compared to CEX. The fundamental reason behind this lies in the financial and model gaps between different chains and derivatives, which leads to insufficient user adoption and conversion rates. The derivatives track urgently needs a revolutionary force.
In response to this, a series of ecosystems and leading projects have launched the derivatives infrastructure organization SOFA.org. The organization members include investment management company Galaxy Asia Trading Ltd., Layer 2 Arbitrum, Linea, infrastructure Chainlink, OKX Wallet, SignalPlus, VC OKX Ventures, HashKey Capital, and others. The organization members will contribute collaboratively to SOFA.org from various dimensions, bringing new vitality to the derivatives track.
SOFA.org aims to establish a complete clearing and settlement ecosystem to address existing issues in derivatives. Products within the ecosystem will follow a unified framework to achieve the operation mode of underlying architecture, middle-layer protocols, and the connection of top-layer users and funds. In addition, SOFA.org will introduce the token RCH, which will promote the overall operation of the ecosystem through its innovative token economics.
SOFA’s Reshaping of the Future of On-Chain Derivatives
Whether it is the recent closures of FTX and 3AC or events like the bankruptcy of Lehman Brothers in the traditional financial sector, the risks brought by centralized institutions, such as opacity, leverage, and counterparty risks, underline the importance of decentralization. In the crypto field, the trend of migrating derivative trading from CEX to on-chain is intensifying, with several top on-chain derivative protocols emerging on various chains, such as GMX and AEVO, each with its own features and advantages. However, there are several issues that need to be addressed.
SOFA.org was established to revolutionize the competitive landscape and model of on-chain derivatives. By utilizing the immutability of smart contracts and on-chain asset settlement capabilities, SOFA.org ensures that transactions do not require intermediaries, and the settlement between users and market makers is automatically standardized by the Vault, achieving the core value of trustless and decentralized transactions.
Innovatively tokenizing financial risks, SOFA.org not only includes the nominal amount but also records other critical parameters of transactions, converting them into on-chain position tokens. These tokens represent ownership of on-chain assets and can be freely transferred and combined like conventional ERC-20 tokens, serving as collateral for other protocols, significantly enhancing capital liquidity and utilization efficiency.
Apart from these features, SOFA.org will collaborate with various ecosystems and market makers to introduce a diverse range of on-chain derivative protocols to meet users’ security, leverage, and liquidity needs, ultimately transforming the derivatives system and its development path.
Product and Ecosystem Token Details
Ecosystem Growth Flywheel – Incentive Token RCH
Looking at the entire chain, the number of derivative protocols has reached a certain scale. How can users be attracted to participate among numerous competitors? The fundamental elements lie in providing excellent products and services. By offering innovative and practical derivative services to users, SOFA.org has laid a solid foundation for winning the market and thriving. Another key aspect that can be fully utilized is the incentive token economy. Protocols like dYdX have demonstrated that an effectively designed incentive policy can take excellent products to new heights.
To this end, SOFA.org has designed a stable, high-capacity, and fairly distributed token system aimed at effectively incentivizing the use and development of ecosystem products through the incentive token RCH. The token details are as follows:
Fair distribution: The total supply of RCH is fixed at 37 million, with a Fair Launch on June 7th, with no form of investor or presale allocation. At launch, there will be 25 million RCH (approximately 2/3 of the total supply) and over 700 ETH as initial LP, which will be burned at launch.
Stable output for incentives: After token issuance, 12,500 RCH will be airdropped daily to users trading within the ecosystem, with a 20% reduction in airdrop amount every 180 days until all RCH is airdropped.
Deflationary design: Additionally, all fees earned by protocols within the SOFA.org ecosystem will be used to purchase and burn RCH on Uniswap, achieving total deflation. Furthermore, all derivative projects joining the SOFA.org association must include a fee buyback and burn mechanism in their protocols, strengthening deflationary forces as the ecosystem develops.
With these designs, RCH establishes a stable price floor, free from selling pressure from VCs or other presale holders, providing investors with a fair opportunity to participate. The fee-based burn mechanism also provides long-term value to the token, and the ecosystem’s long-term operation will continuously enhance the token’s value, providing sustained growth momentum for the SOFA.org ecosystem.
For users, RCH’s model will bring continuous trading subsidies, allowing them to earn additional income while using excellent derivative protocols. Moreover, RCH holds long-term storage value, and as the ecosystem grows, an increase in users and trading volume will further boost the price of RCH, feeding back into users’ trading enthusiasm, thus forming a complete growth flywheel for the SOFA.org ecosystem.
Basic Operational Process
Initially, SOFA.org will focus on the settlement system and tokenization of crypto structured products, starting with Ethereum and Arbitrum, with plans to support more EVM-compatible chains like Linea, X Layer, and others in the future. As mentioned earlier, one of SOFA.org’s prominent features is conducting the trading process on-chain, eliminating centralized risks and counterparty default risks. The basic operational process can be simplified into the following steps:
Institutional market makers provide real-time prices for structured products to the protocol continuously.
Users select a product based on the displayed price, and funds are sent and locked in the product’s DeFi Vault.
The market maker’s maximum risk exposure funds are also sent and locked in the vault. If either party fails to submit the required funds at this point, the transaction will not be executed.
Users and market makers receive corresponding position tokens, allowing free transfer and combined use.
Having met the basic decentralization requirements through fully on-chain execution, how will SOFA.org build and develop the on-chain derivatives ecosystem?
On-Chain Derivative Protocols
SOFA.org’s answer lies in standardizing architecture and enriching the product matrix. All derivative protocols joining the SOFA.org association must meet two requirements. Firstly, they must include a fee buyback and burn mechanism for RCH in the protocol. Secondly, they need to adhere to SOFA.org’s design specifications to enable interoperability with the organization’s basic clearing infrastructure, allowing position tokens to be nested and used across various protocols within the ecosystem. Standardizing the architecture not only eliminates some security issues but also establishes a foundation for creating network effects within the ecosystem.
Users’ risk preferences vary, and correspondingly, derivative products are diverse. Therefore, a comprehensive and matching system is needed to bridge the two. An interconnected architecture provides users with various means to build an investment portfolio that meets their risk preferences. For the ecosystem and protocols, sharing TVL and traffic implies the establishment of bilateral network effects. Additionally, the RCH airdrop distribution mechanism helps protocols achieve rapid cold starts and promotes product experience and service improvements.
On the day of the token launch on June 7th, SOFA.org will introduce two protocols, Earn and Surge, targeting on-chain structured financial products. Earn offers fixed income-type products, while Surge provides high-yield structured products.
In the Earn protocol, users can choose from three directions – Rangebound, Bull Trend, and Bear Trend. Users will earn additional returns when the price trend aligns with their prediction, even receiving a guaranteed minimum yield if the price exceeds the range.
Surge also offers range selection but lacks a guaranteed yield, instead offering high rewards to users who predict correctly. While the risk level is entirely different from Earn, users can control the risk size by adjusting the range prediction, catering to users’ basic needs for different risk levels.
As mentioned earlier, users’ positions in these two products will be tokenized, utilizing the ERC-1155 standard, which allows asset splitting and merging, storing critical information such as position expiration and price, enabling position tokens to be combined across other protocols.
For example, users can use position tokens as collateral to borrow more funds for operations, enhancing capital utilization efficiency while maintaining the original product’s returns, and increasing market participation opportunities.
Similarly, users can reduce leverage ratios by using a combination of protocols, introducing high-risk position tokens into low-risk protocols to hedge risks. Furthermore, the ultimate owners of the tokens will receive the derivative’s expiration rights, providing flexibility in terms of time, allowing users to lock in profits early through nested use and even combine to create high-risk, high-return products similar to options at maturity. It is reported that SOFA.org will also launch basic products such as on-chain quantitative grid dual-currency financial protocols and leveraged lending protocols for other protocols this year.
SOFA.org’s actions open up infinite possibilities for users’ investment portfolios, providing ample basic products for ordinary users through a comprehensive derivatives network. Professional players can fully utilize this combinational aspect to create investment portfolios that meet their professional needs.
Governance Token SOFA Insights
In addition to the ecosystem token RCH, SOFA.org will launch the protocol governance token SOFA later this year. This token aims to promote community participation and self-renewal of the protocols through the token, further enhancing ecosystem development.
As a decentralized, non-profit, open-source technical organization, the protocols within the SOFA.org ecosystem will continue to grow. However, how to introduce high-quality new protocols, promote innovation in existing protocols, and maintain the sound operation of the RCH economic system are crucial issues for ecosystem development.
Therefore, holders of SOFA tokens will act as community representatives, voting on critical issues such as collateral category, entry of new partners into the ecosystem, daily RCH airdrop quotas, and more. Through this mechanism, excellent new protocols will be integrated into the ecosystem via RCH airdrop quotas for rapid onboarding. Existing protocols, to maintain their competitive positions, need to continually improve product experiences and services, ensure airdrop quotas, and thus achieve healthy competition and development within the ecosystem.
According to official documentation, SOFA tokens are expected to be airdropped within 6 months, with early ecosystem participants and AMM liquidity providers having the opportunity to receive tokens, in addition to early association members and advisors.
Conclusion
By designing a decentralized, interconnected ecosystem paradigm coupled with innovative and fair token incentive mechanisms, SOFA.org is reshaping the development path of on-chain derivatives, poised to build an ecosystem growth flywheel through its excellent products and sustainable token incentives, bringing transformative power to the derivatives track.
