Digital Derivative Contracts for Event-Specific Risk Isolation
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Solution Overview
Problem
Investors face challenges in isolating and directly investing in the economic impact of specific events due to individual investments being influenced by various factors, making it difficult to fully capture the effect of the occurrence or non-occurrence of a specified event.
Innovation Solution
The creation and trading of digital derivatives contracts, which allow investors to take positions based on binary variables related to specific events, settling at one of two predetermined amounts, enabling direct investment in the occurrence or non-occurrence of the event, with settlement amounts typically being $0 and a non-zero value greater than the contract price.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Adaptability or versatility
If traditional derivatives contracts are used, then investors can speculate on price movements of underlying assets, but investors cannot isolate and directly invest in the economic impact of specific events
Solution Approach 1:
The patent segments the investment instrument into digital derivatives contracts that are specifically designed to track and isolate the economic impact of predetermined events. Each contract is structured to respond only to its designated event, separating the event-specific risk from other market factors that would otherwise influence traditional derivatives.
Solution Approach 2:
The patent introduces digital derivatives contracts as intermediary instruments between investors and specific events. These contracts serve as mediators that translate event outcomes into investable positions, allowing investors to gain direct exposure to event impact without needing to construct complex portfolios of underlying assets.
2Measurement precision
If individual investments are made to capture event impact, then investors can potentially benefit from event outcomes, but individual investments are influenced by various factors making it difficult to fully capture the event effect
Solution Approach 1:
The patent extracts the specific event impact from the complex web of factors that influence individual investments. By designing digital derivatives contracts that are triggered only by predetermined events, the invention isolates and extracts the pure event effect, excluding other confounding factors that would otherwise interfere with measuring event impact.
Solution Approach 2:
The patent applies local quality by making each digital derivatives contract specialized for a specific event or event category. Each contract has tailored payout structures and triggering conditions that are locally optimized to capture only the relevant event impact, rather than using a generic investment approach that would be affected by multiple factors.
3Adaptability or versatility
If traditional derivatives require actual delivery of underlying assets, then the contracts are grounded in physical commodities, but modern derivatives are abstracted away from underlying assets making them less suitable for event-specific investment
Solution Approach 1:
The patent creates simplified digital representations (copies) of event outcomes that can be traded without requiring the actual underlying events or assets to change hands. These digital derivatives are cryptographic or data-based copies that capture the essential value proposition of event outcomes while eliminating the complexity of physical delivery and asset management.
Data Source
AI summary
An investment instrument is disclosed that allows investors to take risk positions relative to the occurrence or non-occurrence of a contingent binary event. The contingent binary event will have one of two possible outcomes. In a digital derivatives contract, a long investor agrees to pay a short investor a contract amount in return for the short investor agreeing to pay the long investor one of two different settlement amounts depending on the outcome as the contingent binary event. Typically, one settlement amount will be zero and the other will be an amount greater than the derivatives contract price.