Introduction
The trend of shifting from centralized exchanges (CEX) to on-chain derivatives is unstoppable with the development of various low-cost L2 and proprietary chain networks. While there have been notable achievements in on-chain derivatives, their market share remains small compared to CEX. The fundamental reason behind this is the gap in funds and models between different chains and derivatives, resulting in insufficient user adoption and conversion rates. The derivative track urgently needs a transformative force.
In response to this, a group of ecosystems and leading projects have launched the derivative infrastructure organization SOFA.org. Members of the organization include investment management company Galaxy Asia Trading Ltd., Layer 2 Arbitrum, Linea, infrastructure Chainlink, OKX Wallet, SignalPlus, VC OKX Ventures, HashKey Capital, and others. These members will contribute collaboratively to SOFA.org from multiple dimensions, bringing new vitality to the derivative 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 facilitate the connection between underlying architecture, middle-layer protocols, and top-level users and funds. Additionally, SOFA.org will introduce the token RCH, utilizing its innovative token economics to promote the overall operation of the ecosystem.
SOFA’s Reshaping of the Future of On-Chain Derivatives
Whether it’s recent closures like FTX and 3AC, or events like the bankruptcy of Lehman Brothers in the traditional financial sector, the importance of decentralization is evident due to the risks associated with centralized institutions. In the crypto sector, the trend of migrating derivative trading from CEX to on-chain is gaining momentum, with several top derivative protocols already emerging on various chains like GMX, AEVO, each with its unique features and advantages. However, there are still challenges to be addressed.
One major issue is the restriction of positions being limited to opening and closing within accounts, hindering fund utilization and the design and use of composite products. Moreover, the significant capital involved in derivatives poses severe security risks, making it difficult for users to trust the safety of new chains and protocols, thereby limiting development.
The birth of SOFA.org aims to revolutionize the competitive landscape and model of on-chain derivatives. Leveraging the immutability of smart contracts and on-chain asset settlement capabilities, SOFA.org ensures that trading parties do not need to rely on intermediaries, and user and market maker trades are settled automatically by a standardized vault, achieving the core value of trustless, decentralized transactions.
SOFA.org innovatively tokenizes the risks of financial instruments, not only including nominal amounts but also recording other critical parameters of transactions, converting them into 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.
In addition to these features, SOFA.org collaborates 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 derivative 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 SOFA.org attract users to participate in a multitude of competitive products? The key lies in offering excellent products and services. Through its innovative and practical derivative services, SOFA.org provides users with a solid foundation to win the market and thrive. Another crucial point to leverage is the incentive token mechanism, as demonstrated by protocols like dYdX, which showed that effective incentive policies can elevate 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 destroyed at launch.
Stable incentive output: After token issuance, 12,500 RCH will be airdropped daily to users trading within the ecosystem, with a 20% reduction in airdrop quantity every 180 days until all RCH has been distributed.
Deflationary design: Additionally, all fees earned by protocols within the SOFA.org ecosystem will be used to purchase RCH on Uniswap and burn them, achieving total deflation. Furthermore, all derivative projects joining the SOFA.org association must include a fee buyback and burn mechanism in their protocol. The deflationary force will strengthen as the ecosystem develops.
Based on these designs, RCH establishes a stable price floor, immune to selling pressure from VCs or other presale participants, providing investors with a fair opportunity to participate. The fee-based burn mechanism ensures long-term value for the token, as the ecosystem’s continued operation will provide sustained upward development and resilience against short-term fluctuations.
For users, the RCH model offers ongoing trading subsidies, allowing them to earn additional income while using excellent derivative protocols. RCH also holds long-term storage value, with increasing user numbers and trading volumes driving up RCH prices, further fueling user trading enthusiasm and completing the growth flywheel of the SOFA.org ecosystem.
Basic Operating Process
Initially, SOFA.org will focus on the settlement system and tokenization of structured products in the crypto space, starting with Ethereum and Arbitrum and later supporting Linea, X Layer, and more EVM-compatible chains. As mentioned earlier, one of SOFA.org’s significant features is conducting the trading process on-chain, eliminating centralized risks and counterparty default risks. The basic process can be simplified as follows:
Institutional market makers continuously provide real-time prices for structured products to the protocol.
Users select a product based on the displayed price, and funds are sent and locked in the product’s DeFi vault (Valut).
The market maker’s maximum risk exposure funds are also sent and locked in the vault. If any party fails to submit the required funds at this point, the trade will not be executed.
Users and market makers receive corresponding position tokens, allowing for free transfer and combination.
After achieving the decentralized basic requirements through fully on-chain execution, how will SOFA.org build and develop the on-chain derivatives system?
On-Chain Derivative Protocols
SOFA.org’s approach involves standardizing architecture and enriching the product matrix. All derivative protocols joining the SOFA.org association must meet two requirements: firstly, integrating a protocol fee write-back mechanism for RCH buyback and burn, and secondly, complying with SOFA.org’s design specifications to facilitate interoperability among these protocols through the foundation’s clearing infrastructure. Additionally, position tokens can be nested and used within various protocols in the ecosystem, standardizing the architecture to address security concerns and establish a foundation for creating network effects within the ecosystem.
User risk preferences vary, and the corresponding derivative products are diverse, necessitating a comprehensive and matching system to link the two. The interoperable architecture provides users with a range of tools to build investment portfolios that meet their risk preferences. For the ecosystem and protocols, shared TVL and traffic represent the establishment of bilateral network effects. Moreover, the RCH airdrop distribution mechanism aids in rapid protocol cold-starts, promoting product experience and service improvements.
On the launch day of the token on June 7th, SOFA.org will introduce two protocols: Earn and Surge. These protocols focus on on-chain structured financial products, with Earn offering fixed-income types and Surge providing high-yield structured products.
In the Earn protocol, users can choose from three directions: Rangebound, Bull Trend, and Bear Trend. When the price trend aligns with the user’s prediction, they receive excess returns, even offering a guaranteed minimum yield if the price goes beyond the range.
Surge also offers range selection, but without a guaranteed return, providing high rewards to users who predict correctly. While the risk level is different from Earn, users can control risk by adjusting the range forecast, meeting users’ basic needs for varying risk levels.
As mentioned earlier, users’ positions in these two products will be tokenized using the ERC-1155 standard, allowing for asset splitting and merging, storing key information such as position expiration and price, enabling position tokens to be combined and used in other protocols.
For example, users can use position tokens as collateral to borrow additional funds for operations, increase capital utilization efficiency, and gain more market participation opportunities while retaining the original product’s returns. Similarly, users can use combined protocols to reduce leverage ratios, hedge risks by introducing high-risk position tokens into low-risk protocols.
Additionally, the ultimate owners of the tokens will receive the derivative’s expiration rights, offering temporal flexibility. Users can lock in profits in advance through nested use or combine high-risk, high-return products similar to end-date options. It is reported that this year, SOFA.org will also launch on-chain quantitative grid dual-currency financial protocols and provide basic products such as leverage lending protocols for other protocols.
SOFA.org’s actions open up infinite possibilities for investment portfolios for users, providing a wide range of basic products that cover the derivative network comprehensively. This enables ordinary users to have sufficient foundational products while allowing professional players to leverage this combinational nature to create portfolios that meet their professional needs.
Governance Token SOFA Decoded
In addition to the ecosystem token RCH, SOFA.org will launch the protocol governance token SOFA this year. This token aims to promote community participation and self-innovation of protocols through its incentivization mechanism, further driving ecosystem development.
As a decentralized, non-profit, open-source technical organization, protocols within the SOFA.org ecosystem will continue to grow. However, introducing high-quality new protocols, promoting innovation of existing protocols within the ecosystem, and maintaining the sound operation of the RCH economic system are critical challenges for ecosystem development.
Therefore, holders of SOFA tokens will serve as community representatives, voting on key issues such as collateral categories, new ecosystem partners, daily RCH airdrop quotas, and more. Through this mechanism, excellent new protocols will be integrated into the ecosystem through RCH airdrop quotas, facilitating rapid launches. Existing protocols, on the other hand, will need to continuously improve product experience and services to maintain their competitive position, ensure airdrop quotas, and promote healthy competition and development within the ecosystem.
According to official documentation, SOFA tokens are expected to be airdropped within 6 months, offering opportunities for early ecosystem participants, including early association members, advisors, and AMM liquidity providers.
Conclusion
Through a decentralized, interconnected ecosystem design and innovative, fair token incentive mechanisms, SOFA.org is reshaping the path of on-chain derivative development. With its outstanding products and sustainable token incentives, SOFA.org is poised to construct a growth flywheel within the ecosystem, bringing transformative power to the derivative track.
