What Is Overlay Protocol?

(Source: OverlayProtocol)

Overlay Protocol (referred to as "Overlay") is a decentralized platform that enables users to take positions on a wide range of non-manipulable, unpredictable data sources—without needing a traditional counterparty. In Overlay, users effectively bet against the entire protocol and all OVL token holders, rather than opposing a specific trader. This architecture allows for deep trading capacity even in the absence of standard liquidity pools.

A Diverse Set of Market Types

Overlay expands the range of tradable markets to areas that traditional finance cannot access, including:

• Non-traditional crypto markets: Bitcoin hash rate, gas fees, BTC mining difficulty, NFT floor prices, social tokens, yield rates, and more.

• Non-crypto markets: Esports and sports events, sneaker prices, political event predictions, natural science data, and more.

Overlay can convert any data source that is non-manipulable and unpredictable into a tradable market.

Counterparty-Free Model

With Overlay, users do not trade against a single counterparty, but with the protocol and all OVL holders as a collective. When a trader profits, the protocol mints new OVL tokens to pay out the gains; when there are losses, the protocol burns the corresponding amount of OVL tokens. This model offers several benefits:

• No reliance on traditional liquidity providers or market makers

• Inherently deep liquidity

• Wider market coverage

• Minimized slippage and reduced trading costs associated with liquidity shortfalls

Overlay’s Pricing Mechanism

Overlay does not use conventional real-time matching for prices. Instead, it relies on oracles to periodically source pricing data, with adjustments made by protocol-level mechanisms. Any data source that is sufficiently unpredictable and non-manipulable can be integrated into Overlay. This structure prevents prices from being skewed by short-term manipulation, while ensuring transparency and market integrity.

Overlay’s Trading Mechanism

Overlay requires users to lock OVL tokens as collateral in a smart contract.

• When in profit: The protocol mints OVL tokens matching the net profit and credits them to the user.

• When at a loss: The protocol burns an equivalent amount of OVL tokens, removing them from circulation.

• At breakeven: No tokens are minted or burned.

This dynamic mint-and-burn mechanism allows OVL’s supply to flex in line with aggregate market profits and losses.

Overlay’s Contract Features

Overlay contracts resemble perpetual contracts but differ in several key respects:

• No expiry date

• No need for physical settlement

• Counterparty is the protocol and all token holders, not an individual trader

This design enables users to hold positions indefinitely and trade with greater flexibility.

Governance and Community Involvement

Overlay Protocol is governed by PlanckCat DAO. In the future, OVL token holders will receive voting rights. The voting weight structure is:

• 1 PCD NFT = 100,000 votes

• 1 OVL token = 1 vote

The DAO is responsible for core decisions like market listings and removals, risk parameter settings, and more. Even without a PCD NFT, community members can engage in discussions via Discord and forums to influence the direction of governance.

Overlay Tokenomics

Overlay's protocol dynamically adjusts the total OVL supply. The initial allocation is 88,888,888 tokens. The token’s core utilities are:

• Trading and margin: Users must lock OVL as collateral to open positions, and all profit and loss (P&L) is settled in OVL.

• DAO governance: Holders can vote on key market rules, risk controls, allocation of protocol resources, and more.

• Market participation: OVL is the primary asset for liquidity, forming the protocol’s main capital pool.

Risk Disclaimer

While Overlay Protocol pioneers a new counterparty-free market structure, trading still entails risks, especially when leverage is involved, which can result in capital losses. Overlay leverages emerging technologies. While security measures are in place, the protocol cannot fully guarantee zero risk.

Spot trading for OVL will open on August 14, 2025, at 17:00 (UTC+8). To learn more about Web3, register here: https://www.gate.com/

Conclusion

Overlay Protocol’s innovation lies in redefining market structure—transforming the counterparty from individual traders to the protocol and token holders as a whole and utilizing a dynamic mint-and-burn mechanism to ensure ongoing market function. This not only solves liquidity challenges but also unlocks new possibilities for data-driven markets. As more unconventional data sources are onboarded, OVL could become the foundation for decentralized markets, providing the crypto ecosystem with greater freedom and more trading options.