# Morpher Protocol

The Morpher protocol is a set of smart contracts on the Ethereum blockchain empowering users to gain exposure to the price development of various markets. Supported markets range from traditional exchange-traded assets like stocks and commodities to alternative asset classes for which markets do not yet exist such as corporate fundamentals (e.g., price-earnings ratios) or Bitcoin transaction costs.

Users interact with the Morpher protocol via MPH tokens, a standard ERC20 tokens on the Ethereum blockchain issued by Morpher (see Token Owner's Guide). Users select the number of MPH token they want to stake on the price development of an underlying market. If the market develops as predicted, new token are minted by the protocol and added to the user’s stake. If a prediction is incorrect, a portion of the staked token are burned.

A key feature of the protocol is the lack of a counterparty. Traditional marketplaces like exchanges are platforms where buyers and sellers meet and transact via intermediaries like brokers. The Morpher protocol eliminates the need for intermediaries along with the need for a counterparty of a trade.

Takeaway

The lack of intermediaries enables 24/7 trading of any market with zero fees and infinite liquidity.

# Virtual Futures

Users interact with the protocol by staking MPH token on the price development of a market. Every stake is recorded on the blockchain and called a Virtual Future.

Staked MPH token get burned when a Virtual Future is created. Upon closing a Virtual Future, MPH token are minted proportionally to the current value of the Virtual Future, and the Virtual Future is deleted from the blockchain.

1.

100 MPH is staked to buy Apple stock.

2.

Apple's stock price moves up 10%.

3.

Close the stake and get 110 MPH.

1.

100 MPH is staked to buy Apple stock.

2.

Apple's stock price moves up 10%.

3.

Close the stake and get 110 MPH.

Virtual Futures replicate the economics of trading the Apple stock without trading the underlying. Unlike regular futures, Virtual Futures do not expire and track the price development of the underlying until the Virtual Future is either closed by the user or gets liquidated (see Liquidations).

Virtual Futures are always denominated and settled in MPH token. Just like with regular trading, a user benefits from rising market prices by buying (going long) with their Virtual Future. The reverse is true for falling prices, users that created sell (short) positions benefit.

Virtual Futures can be created with a fraction of one MPH token. On traditional exchanges only whole numbers of shares, options, or contracts can be bought or sold. The Morpher protocol does not impose minimum capital requirements and supports fractional Virtual Futures. Users simply specify the amount of MPH Token they want to allocate to a market instead of having to worry about buying whole shares.

Example

  1. The Amazon stock trades at USD 2,000
  2. A user creates a Virtual Future by staking 100 tokens on the price of Amazon
  3. The investment increases/decreases proportionally to the Amazon price

# Trading Mechanics

# Leverage

The Morpher Protocol allows the creation of Virtual Futures with a leverage of up to 10. A leverage of x simply multiplies the price change of the observed underlying market with a factor of x.


Leverage Example Diagram

The maximum platform leverage may be increased or decreased in the future.

Takeaway

There are no fees for leveraged trading.

# Spreads

All markets on Morpher have a spread, i.e. a small difference between the bid and the ask price. Spreads on Morpher are comparable in size to spreads on traditional two-sided exchanges. They help replicating the trading mechanics of traditional exchanges and mitigate predatory scalping and arbitrage. Spreads on Morpher are not fees. They are not collected, and we do not profit from them. Moreover, spreads serve an economic purpose. Every opening/closing of a Virtual Future implicitly burns a tiny amount of MPH Tokens.


Spread Example Diagram

Spreads scale with leverage. Creating a 10x leveraged Virtual Future comes with a 10x wider spread than an unleveraged Virtual Future.

# Liquidations

Every Virtual Future has an associated liquidation price computed at its creation. The liquidation price denotes the price/value of the underlying market at which the Virtual Future becomes worthless. The liquidation price depends on the direction of the Virtual Future (buy/sell) and its leverage.

Long/buy Positions: liquidationPrice = entryPrice * (leverage - 1) / (leverage)
Short/sell Positions: liquidationPrice = entryPrice * (leverage + 1) / (leverage)


Liquidation Example Diagram

If the market price reaches the liquidation price of a particular Virtual Future, the staked MPH tokens are permanently destroyed. The Virtual Future is liquidated and deleted from the blockchain.

# Oracle

The Ethereum blockchain is a self-contained system with no connection to the outside world. The Morpher Protocol depends on market data for computing Virtual Futures, trading profits, and losses. Morpher hosts a service called ‘Oracle’ connecting its protocol to data from the outside world. The Oracle connects to various API endpoints of third-party data vendors providing real time market data.

To ensure the Oracle always has correct real-time market data, multiple redundant data-feeds are collected, cleaned, and consolidated in real time. If there are deviations between data feeds observing the same underlying, the spread of the market is increased temporarily by the maximum price difference between the feeds until the feeds are back in sync again.

Whenever a user requests a trade, the current price of the market is written to the blockchain by the Oracle.

# Sidechain & Plasma Scaling

As of June 2020, the Ethereum blockchain can manage no more than 20 transactions per second. That is nowhere nearly sufficient for a protocol like Morpher, aiming to become the world’s biggest and most active trading platform.

To enable a throughput of several thousand transactions per second while keeping transactions free of charge, the Morpher Protocol is deployed both on Ethereum and on a proof-of-authority sidechain hosted by Morpher.

Sidechain RPC Endpoint

https://sidechain.morpher.com

As suggested by Vitalik Buterin and Joseph Poon in their paper Plasma: Scalable Autonomous Smart Contracts, the sidechain is linked with Ethereum via the root hash of its Merkle Tree. The state of the sidechain, i.e. all its balances and positions are hashed and merkelized. The root hash of the sidechain Merkle Tree is updated on the Ethereum blockchain in periodic intervals (initially: 1 hour). This way there is cryptographic proof of all balances, token, and transactions of the sidechain on Ethereum. Should the sidechain ever break down or seize to operate for whatever reason, all MPH token and Virtual Futures held there can be recovered on Ethereum.

Users can choose whether to interact with the protocol directly on Ethereum or via Morpher’s sidechain. Both methods come with their own advantages and disadvantages.

# Mainchain Trading

Advantages: Trading on the Ethereum blockchain provides the user with the robustness of a decentralized protocol. MPH token balances and Virtual Futures are recorded directly on Ethereum. MPH Token can be moved between accounts or to an exchange.

Disadvantages: Trading is significantly slower, as Ethereum has an average block-time of 15 seconds, and a trade needs at least two blocks to complete. Morpher does not provide a graphical user interface for trading on Ethereum. Users need to have a good understanding of how to interact with smart contracts on Ethereum, and pay gas costs (the fees for using the Ethereum network) for every transaction in Ether, Ethereum’s native currency. The transaction throughput is limited on Ethereum, which may lead to high costs or long delays in times of increased network activity.

# Sidechain Trading

Advantages: There are no costs for trading on the sidechain and users do not have to own Ethereum to trade. Morpher provides a convenient graphical user interface for interacting with the protocol. Trades settle within few seconds, and the sidechain can handle a throughput of more than 1000 transactions per second.

Disadvantages: MPH token need to be redeemed from the sidechain to Ethereum mainchain before they can be moved between accounts. If the sidechain ever stops operating it takes 72 hours before users can redeem their token and Virtual Futures on Ethereum.