Virtual Futures: How We "Copied" Financial Markets on Ethereum

Trading is one of the biggest industries in the world, mostly because it has been screwing over its users. In the US alone, it generates revenues of over 250 billion dollars. Globally, it’s worth over 1 trillion dollars per year (in fees that are taken from us, the people using it). 

Crypto markets have become a great alternative, but what if we could move all financial markets to the blockchain and fix the entire industry for good? As it turns out, we can and we have. In this article, I explain how we used Ethereum to create Morpher, a trading app that has “virtual copies” of over 700 markets on the blockchain, from Apple stocks to gold, allowing everyone to trade them without having to pay any fees.

Let’s say you want to invest in an exchange traded fund (ETF), which are baskets of securities and stocks which are very popular right now. To do it,  first you need to go to a bank to get your money, then you have to go to a broker that sells you an ETF that is listed on an exchange which is issued by yet another entity. That means you have to go through at least four middlemen to buy that ETF. This is terrible because they all charge you fees, but even worse, they can also default as we have seen in the 2008 crisis.

Martin Froehler, the CEO of Morpher, experienced these limitations first-hand when he was 16 and started trading the markets while still in highschool. Back then, he had to go to the bank and was charged an arm and a leg to trade US stocks. After going to university to study mathematics, he ended up managing his own quantitative hedge fund and acquired even more experience trading the markets. What he learned is that regardless of who you are, whether you are a small retail trader or a hedge fund manager, trading is costly, burdensome, and unfair. You have to deal with middle men, have limited access to markets, have difficulty diversifying your portfolio, and you have to spend a lot on fees. The system sucks, no matter who you are. That’s why he decided to start a company and use blockchain to fix it.

Yes, trading can be too complicated for normal people. Most platforms won’t let you short markets, for example, which means you can’t bet against them. So if you are not an institutional investor, you can’t make money when markets are going down. You also can’t trade traditional markets outside of business hours. If you are working during the day, and your job is not trading, you are at a disadvantage.

To trade certain markets, you have to be rich already. Commodities, for example, are usually traded via futures, and futures require a lot of capital. Want to participate in the gold market? A single contract of 100 troy ounces trades at about 175,000 dollars at the Chicago Mercantile Exchange.  

But hey, sometimes things suck for institutional investors too. A good example of that is “slippage,” something that happens to nearly every market in the world. Have you ever looked at an order book’s depth chart? Take a look at the image below. If you want to trade Ethereum, you may assume that you can trade it at the price listed on any exchange. In this case, $4,407. But you can usually only do that if you buy a very small amount of it. If you buy more than that, you usually have to pay a lot more than the listed price. If you wanted to buy all ETH available on the market at that point in time, you would have to pay more than $4,480 for the last lot.

For many people living in developed countries, access to investment opportunities may not be an issue. But the reality is that financial markets have always put up barriers for entry, especially for people living in developing countries.

As a result, billions of people are still excluded from access to capital markets either by regulations, by brokers rejecting them as customers, or simply by steep initial capital requirements. With limited investment opportunities, the poorest people in the world are the ones with the smallest chances of improving their situation.

Blockchain technology excels at eliminating the middlemen and replacing them with  software. In other words, it eliminates the need for a trusted party in a value transfer. That’s why we used Ethereum to create a set of smart contracts that observe the price of all kinds of exchange-traded assets globally and in real time. The Morpher Protocol replicates the economics of holding that asset on the blockchain. We issued our own native token MPH, an ERC20 token on Ethereum that can be used to stake (place bets) on any of the markets that we observe. In order to create an asset on Morpher, all we need is a reliable data feed in real time.

We chose Ethereum because it's the most mature and decentralized smart contract platform out there: it has the most developers in the space, most development activity, and most support in terms of wallets and UX. The biggest drawback of Ethereum are its high transaction costs, which is why we developed our own scaling solution, a plasma side chain, where users don’t need to pay any fees.

Morpher is easy to use. Users select a market they wish to stake their tokens to. Should their position earn a profit, the smart contract mints a proportional amount of tokens in return. If the user realizes a loss, the contract destroys a proportional amount of staked tokens. So 100 MPH token invested in Apple stock become 110 MPH, if the price of Apple goes up 10 percent, or 90, if the price goes down 10 percent.

By giving users a smart contract instead of a person as a counterparty, Morpher fixes trading and investing for good. Morpher has perfect liquidity, so every trade gets filled immediately independent of its size or direction. There is no need to wait for a counterparty and there is zero slippage -- you get any asset at the current market price, regardless of how much of it you want to buy or sell. This also makes using leverage and shorting extremely easy. These critical trading features are just parameters in the Morpher smart contracts. 

The smart contract also gives Morpher the ability of offering unlimited markets. The protocol needs just a reliable data feed to create a market. That is how Morpher already supports more than 700 markets and keeps adding more (that’s 10 to 20 times more than offered by other synthetic asset protocols). There is also a huge variety of markets Morpher would be technically able to support, from the weed spot price to NYC real estate or even corporate fundamentals. This is something we plan to do in the future.

In the aftermath of the pandemic, with the central banks printing money at will, people are struggling financially. They see that the money on their bank accounts become worth less and less over time. People also had more time during the pandemic to worry about their financial future because they had the time to reflect on how they had been affected personally by the pandemic. A lot of people also flocked into trading and tried it out as a new way to create or preserve wealth.

With Morpher, we want to increase their odds of achieving financial success. We have given users a platform where they can easily trade over 700 assets with no bureaucracy and no commissions. We have also built a business model where their financial success is tied to our own. It’s like they are trading directly with a central bank that increases or decreases money supply according to the performance of the markets they are trading. And since the company is paid with a small percentage (0,015%) of new tokens which are minted every day based on the total supply, the more successful our users, the more successful we are.