The First Batch of Cronos Ecosystem Grants was announced on the 26th of the previous month. When bootstrapping an ecosystem, grants are a good way to bring talent in. This way entire ecosystem flourishes. In batch #1, there have been 6 projects disclosed that received the grant. Today, we are going to focus on Entropyfi: a DeFi application that uses blockchain technology to build prediction markets with an innovative approach. The application of Entropyfi hasn’t been fully built on Cronos yet but the team is actively working on integrating it to the Cronos Chain since they had the chance to take the grant from Cronos Ecosystem Grants.
Entropyfi is a decentralized platform that can potentially enable DeFi users to amplify their yield for 10x by playing lossless games (e.g., market prediction, insurance, etc.) Along with a new approach to prediction markets, Entropyfi also has a so-called soft hedge and soft leverage products. These are adjusted versions of hedging and leveraging functionalities with a relatively low-risk approach that is focused on keeping the principle capital of the investors. Furthermore, they retain the possibility of capturing the upside and making a profit.
Farming and staking are options in the Entropyfi ecosystem within their unique approach, but in this article, we are not going to feature those. You can check this article we wrote to learn about liquidity farming, yield farming, and staking in DeFi.
The traditional on-chain prediction markets are loss-realized, meaning users will take a loss on their principal if they made the incorrect prediction. The loss-realized characteristics make it difficult for traditional prediction markets to scale, as users who suffered losses might stop engaging with the product resulting in a drop in liquidity.
The approach of Entropyfi substantially raises the possibility of supply for capital to be staked in prediction markets which makes them more liquid and efficient. Lossless games introduce demand for all types of investors and forge a new way to make prediction markets more fruitful. People are incentivized because they like the idea of earning money without jeopardizing their principal capital.
How does it work?
When investors deposit money into the lossless games prediction markets, their capital would be staked into a DeFi protocol to earn interest. The total amount of all interest generated by the prediction market pool would be reserved for an epoch. At the end of the epoch, people who guessed the right outcome would be rewarded from the fees generated by the total staked amount. People who guessed wrong would get their principal back without earning any additional fees. This way everybody would have a shot at winning extra capital without risking any of their own. In summary, fees generated by staking the entire pool of funds would still generate rewards for the winners of the prediction epoch where users retain the potential upside without risking any capital of their own.
Users can become a sponsor of the prediction pools by depositing tokens. Currently, the sponsors are receiving a total of 8000 $ERP tokens in the Polygon network (application is still under development for Cronos Chain.) Each sponsor receives a portion of the daily rewards according to a particular sponsor’s partial share within all sponsors.
The interest that will be rewarded to those who predict the right outcome in the market will not only come from the people who deposited stable coins into a prediction market as they have made a guess. The sponsors’ staked capital will also nurture the reward base of the prediction market pool. A couple of questions come into mind: Why be a sponsor if the rewards generated by the principal capital of sponsors are not going to reward them instead of the players of the prediction pool? What are the benefits of the sponsorship?
First, being a sponsor of the protocol. Creating efficient prediction markets for the greater good. Efficient prediction markets prevent intentional misinformation by incentivizing truth with capital. This is not so much of a direct throughput for investors, and it skews towards idealism instead of hyper-capitalism. Let’s get to the other two.
Second, being rewarded with the governance token of the Entropyfi. $ERP token is a hard-capped governance token that can also be staked within Entropyfi protocols to earn more $ERP tokens. The non-inflationary nature of $ERP is an advantage for the token to appreciate in the future. Also, the team is planning other utilities soon for the governance token. So far, the utility is simply yield farming with the crypto you already hold to earn the governance token itself.
Third, when you sponsor to a pool you increase the rewards of that protocol. This means if you participate in that pool as a player and when your forecast is accurate, the sum of the return is higher by the interest generated from the sponsors without risking the principal you put into use by staking to earn governance token. This is two birds with one stone situation. When you sponsor a prediction market pool, you raise the amount of reward that will be generated which you also can win those rewards if your prediction is correct, furthermore, you get to earn the governance tokens daily by your staked capital as a sponsorship.
When it comes to creating interesting and innovative products Entropyfi does not stop. They created a dual product called soft hedge and soft leverage. The traded token to be used for this product is $VSQ so far, a token that is aiming towards becoming a reserve currency.
A soft hedge is being used by those who believe the market will go up in the long term but depreciate in the short them. They want to rebase their positions with a lower entry point to capture more value for themselves. In the scenario that the market goes down in the short term, they make a profit by the soft hedge. In the scenario where the token appreciates, well, they never sold their tokens, to begin with.
Soft leverage is being used by those who would like to capture more of the upside while the market goes up without risking their capital being liquidated or taking a risk of a big loss in case things don’t go as planned.
Just as prediction pools, the winners are funded from the staked $VSQ tokens that are being collected and rewarded to those who took the right position whether it was soft hedge or soft leverage. In the worst situation possible, players are entitled to their principle.
As it can be seen in the 4 box matrix when someone soft hedges VSQ reserve currency token and the price goes up, the token appreciates and the person who hedged the market against a negative price movement didn’t lose any money but they didn’t get any additional reward. If the price of the VSQ goes down when hedged, the player gets the rebase rewards from their soft hedge position and captures some value from their position even though they didn’t sell meanwhile the token they hold drops. In some cases, the capital lost by holding $VSQ is managed by the hedge that can even offset the entire impact of price depreciation.
In the case of soft leverage, if the price goes up, the token appreciates and there would be rebased rewards along with it. If the market goes down, the principal capital is secured but there is no rebase reward collected from the position.
The complicated nature of the product can be intimidating but learning about these types of applications can give the users a head start relative to other market participants. New and innovative projects in crypto can provide asymmetric returns that are not probable in already established projects.