Besides dYdX, what other decentralized sustainable contract platforms are there?
DYdX's Challengers: A Track Scan of a decentralized sustainable Contract Trading platform
Yuxuan Li, Mint Ventures
Decentralized sustainable contract trading platform track
The circuit value
Perpetual contracts are a type of Derivatives. According to a TokenInsight report (see resources at the end of this article), the volume of Derivatives trading overall surpassed Spot in Q4 2020 and continued to grow more rapidly in Q2 2020.
In derivatives, Perpetuals (or Perpetual Futures) dominate the market, as we can see from the monthly and sub-monthly charts of derivatives transactions below, with individual Perpetuals surpassing spot transactions and continuing to grow as a proportion (June, The volume of perpetual contracts is more than 1.5 times that of spot contracts!) Between April and June 2021, the total volume of perpetual contracts traded exceeded $18,857.2 billion, equivalent to more than $200 billion traded every day.
Of course, most of this volume is on centralized trading platforms (CEX).
Decentralized spot trading platforms began to flourish in the summer of DeFi in 2020. Currently, project tokens such as UNI, CAKE and SUSHI have entered the top 60 of cryptocurrency circulation market capitalization, while UNI once entered the top 10. At present, the project tokens of the decentralized perpetual contract trading platform have not entered the top 100 cryptocurrency market capitalization. In addition, we can see that at the regulatory level, the supervision of derivatives trading platform is stronger than that of spot trading platform. In this context, the significance of decentralization is more prominent.
Therefore, no matter comparing with the centralized trading platform or the decentralized spot trading platform, the track space of the decentralized sustainable contract trading platform is very broad.
The market situation
In 2021, the track of decentralized perpetuity trading platforms has progressed rapidly. With the rise of high-speed and inexpensive side chains, Perpetual Protocol became a decentralized perpetuity trading platform with over 100 million transactions per day in February. With the development of ETH Layer 2, the average daily transaction volume of dYdX successfully exceeded 1 billion at the end of August.
New projects are emerging in an endless stream. At present, the projects that have issued tokens and products containing decentralized sustainable contracts are as follows:
In addition, there are quite a number of unissued tokens, such as SynFutures, dTrade, etc., which are not included in our research for the time being.
In this paper, we select projects for evaluation according to the following two principles:
· Tokens have been issued
· The circulating market value of tokens exceeds $50 million or there are actual trading products online (at least the test network) and the average daily trading volume exceeds $100,000
The protocols selected include dYdX, Perpetual Protocol, GMX, MCDEX, Cap Finance, Deri Finance.
Some of the protocols shown above were not selected for the following reasons:
Injective Protocol, Mango Markets, Leverj and dYdX all adopt the order book model, and their trading volume is far different from that of dYdX. The order book model has little difference in the core mechanism of the product. Based on dYdX's first-mover advantage, Other products with an order-book model may have less chance of breaking through;
· Bonfida's leveraged trading products use a vAMM model similar to Perpetual Protocol V1;
· DerivaDEX has been tested on a small scale in Kovan, but its trading product has no publicly disclosed documentation of its mechanisms;
· Futureswap announced that v4 will be available in September, but there is no test network to try, and no complete product documentation;
· Vega Protocol trading products are not online yet;
We will take a brief look at each of these projects in descending order of market capitalization and then compare their core mechanics.
dYdX
Product introduction
The Layer 2 StarkWare service on Ethereum uses an order book model for trading and a capital fee mechanism to balance Naked positions. The core mechanism is almost identical to CEX's perpetual contract, and thanks to the StarkEx engine, users need to send transactions on the ethereum main network only when money is transferred to and from the margin account. There is no need for wallet confirmation (data is not linked up) for transactions, so the trading experience is almost identical to CEX.
DYdX also has a full range of features, including limit orders, depth charts, and capital rate trends, that are comparable to CEX.
Business data
Data Source:https://metabase.dYdX.exchange/pubpc/dashboard/
DYdX's trading floor will generate an average of $1 billion a day in trading volume for one week in late August and early September, the highest of any decentralized perpetuity trading platform and far higher than any of its competitors.
Of course, this has a lot to do with the platform's well-designed combination of trading mining, market-making mining, and pledge mining incentives, as well as the price of dYdX (prior to August, the dYdX experience was exactly the same as it is now, but the average weekly trading volume was around $200 million). In terms of financing, dYdX has included professional market makers in both round B and Round C financing, so as to bind the interests of professional market makers with dYdX. Professional market makers can obtain token incentives from dYdX platform in addition to daily market making benefits. On the other hand, the improvement of trading depth and trading data is also conducive to the valuation of dYdX itself, thus potentially improving the investment returns of market makers.
Tokens model
The total number of Tokens issued by dYdX is 1 billion and will be distributed within five years to all dYdX ecosystem participants, including community users, investors and dYdX teams. After five years, the community can vote to increase the dYdX token's inflation rate; The current maximum inflation rate is 2% a year
50% (500,000,000 dYdX) is allocated to the community as follows:
· 25% (250,000,000 dYdX) allocated to transaction mining users
· 7.5% (75,000,000 dYdX) allocated to retrospective mining users
· 7.5% (75,000,000 dYdX) allocated to market makers
· 5% (50,000,000 dYdX) allocated to community reserve funds
· 2.5% (25,000,000 dYdX) allocated to users participating in the liquidity pledge pool
· 2.5% (25,000,000 dYdX) allocated to participants in dYdX pledge (insurance pool)
The other 50% (500,000,000 dYdX) is allocated as follows:
· 27.73% (277,295,070 dYdX) allocated to past investors
· 15.27% (152,704,930 dYdX) allocated to dYdX Trading or dYdX Foundation members
· 7.00% (70,000,000 dYdX) allocated to dYdX Trading or future members of the dYdX Foundation
In addition to governance functions, dYdX currently receives a deduction for transaction fees. It is worth noting that owning dYdX does not earn the platform's transaction fees, which are currently earned by the dYdX project side (though there is the possibility of modifying the fee allocation through governance).
summary
DYdX's transaction data is not linked, which means that the core transaction data is not immutable. From this perspective, it seems that the degree of decentralization is indeed questionable. But if we accept dYdX as a "decentralized sustainable contract trading platform", then dYdX is currently the undisputed king of the circuit, both in terms of trading volume, in terms of total market value, and in terms of market attention to the circuit as a whole.
However, at the level of core trading mechanism, dYdX almost completely copied CEX, which can make CEX user experience seamless migration, and low risk of error; But on the other hand, there is plenty of room for newcomers to take dYdX's place by combining more innovative mechanisms with DeFi. Next, let's take a look at the potential competitors in the decentralized derivatives trading circuit that don't use order books.
Perpetual Protocol
Product introduction
Currently running is version V1, where transactions are performed on the xDai network.
After the user deposits USDC as the margin, they can conduct transactions. The transaction process uses the virtual AMM mechanism to price, and the virtual AMM refers to the X * Y = K model of AMM. We take ETH perpetual contract as an example: X indicates the number of ETH devices in the virtual pool, and Y indicates the number of USdcs in the virtual pool. Given the k value of the protocol, if a user opens more, the Y value becomes higher (the USDC corresponding to the user is charged into the virtual AMM pool), and the X value becomes lower, so that the price of ETH in the virtual pool (y/x) also becomes higher, so as to realize the simulation of price changes.
The benefits of virtual AMM are that single currency liquidity can be achieved, thus eliminating the problem of volatile losses, and the transaction process does not rely on a predictor. However, the disadvantage is that it is difficult to determine the k value. If the k value is too small, the transaction slip point will be larger; if the K value is too large, the price change in Perpetual's virtual AMM will be too slow, resulting in obvious arbitrage space. In Perpetual Protocol V1, the k value is manually maintained by the project side based on the liquidity of the corresponding Uniswap pool and has been attacked in the past due to the k value setting. In fact, Perpetual Protocol also abandons virtual AMM mechanism in V2 and uses Uniswap V3 real AMM instead, which explains the problems of virtual AMM mechanism.
In terms of naked position management, Perp also uses a capital fee mechanism to balance long and short positions, which uses the difference between the marked price (i.e. the price in the virtual AMM) and the index price (retrieved from the predictor). This encourages arbitrage users to hedge one-way, overpriced positions for the sake of capital rates, making the system more stable.
On the settlement mechanism, the user is clearing margin of 20% received by receiver, the rest into the risk margin account, risk deposit accounts at the same time need to profitable trader to honour the responsibility, that is, traders as a whole and risk margin account is negative and the game (as a result of the existence of transaction fees and liquidator), Traders lose money on margin accounts; Traders who lose risk margin accounts make money.
The UI is simple to use, but Perpetual Protocol does not support limit and stop-loss orders under the virtual AMM mechanism.
Business data
Data source tokenterminal
Before dYdX, Perpetual Protocol was the most traded Perpetual contract, with a record $550 million traded in a single day on May 19, a volatile day.
Tokens model
Perpetual Protocol's native token PERP was officially launched at the end of August 2020 with a total supply of 150,000,000 tokens. Among them:
· 7,500,000 PERP tokens (5%) for Balancer LBP (Pquidity Bootstrapping Pool) to be completed from 9th September to 12th September 2020, Transaction prices range from 1.05USDC to 2.3USDC.
· 31,500,000 PERP tokens (21%) are allocated to teams and advisors, which will be released six months after mainnet launch (June 15, 2021) and quarterly for the following 30 months, each releasing 2.1% of the total amount.
· 6,250,000 PERP tokens (4.17%) allocated to seed round investor Binance LABS, 1/5 of which was released after mainnet went live (December 15, 2020), 1/5 of which was released for each subsequent quarter, and 4/5 of which has been released so far, It will be released in December 2021.
· 22,500,000 PERP tokens (15%) are allocated to strategic round investors, 1/5 of which are released after mainnet launch (December 15, 2020), 1/5 of which are released for each subsequent quarter, 4/5 of which have been released so far and will be released in December 2021
· The remaining 82,250,000 PERP tokens (54.83%) are allocated to ecosystems and rewards, including liquidity mining, etc.
Remove The token release rules that remove the ecosystem rewards portion are shown below:
The data sourcehttps://docs.perp.fi/getting-started/perp-tokens
In V1, in addition to governance functions, PERP tokens can also benefit from transaction fees. To earn fee benefits, users pledge their PERP tokens, which serve as a supplementary Treasury for risk deposits to be redeemed in extreme circumstances.
Changes to Perpetual Protocol V2 (not yet live)
Service on Ethereum's Layer 2 Arbitrum. Different from the game between long and short traders in V1, LP was introduced into V2, forming a three-way game between LP, long and short. The virtual AMM mechanism is also integrated with Uniswap V3, but has essentially become true AMM, which means users are exposed to the risk of loss. Perpetual Protocol also plans to implement uncensored market creation and cross-margin features. On the token economy side, the system will assign more fees to PERP. The detailed implementation will not be known until the V2 version is released.
GMX
Product introduction
GMX provides services on Arbitrum, and the product has been officially launched on September 1. GMX also offers services on BSC. The project was previously called Gambit and the token was called GMT. This article mainly discusses GMX services provided by Arbitrum. The core mechanics are as follows:
Different from dYdX and Perpetual Protocol, the transaction process of GMX is a three-party game between parties, short parties and LP (liquidity provider, called GLP in GMX system).
Trading users can start trading after depositing USDC, ETH (WETH) or WBTC as margin. Currently, BTC and ETH can be leveraged up to 30 times. Trading can be done in real time according to the price of predictor, and earnings can be extracted in real time.
The counterparty of all transactions is GLP pool. GLP token is a special token composed of three currencies, BTC, ETH and USDC, in proportion. Users can start market making by deposing GLP token single coin in GLP pool. Since the counterparty of all trades is LP, there is also a zero-sum game between LP and trader: the margin of trader's loss will be directly allocated to GLP (reflected in the rise of GLP price), and the profit of trader will be directly obtained from GLP (reflected in the decline of GLP price).
In addition to the incentive of being able to get the platform token GMX, GLP holders also receive a 50% transaction fee.
GMX currently has no mechanism for dealing with naked positions and GLP holders need to hedge their own risk.
GMX front page is relatively simple, currently does not support limit orders, stop loss orders and other functions.
Business data
Since The launch of Arbitrum on September 1, GMX data is as follows:
The data sourcehttps://gmx.financial/dashboard
In just 20 days, the total trading volume has reached 400 million DOLLARS, and the daily average trading volume is close to 20 million dollars. Data performance is excellent.
Tokens model
A total of 13.25 million GMX have been issued and 6,490,428 GMX have been circulated so far. The token allocation is as follows:
· 6 million coins (most of which are currently in circulation) were migrated from XVIX and Gambit (previous GMX projects)
· 1 million GMX and ETH in Uniswap V3 form LP as initial liquidity
· one million GMX provides additional liquidity after the GMX price exceeds $20.00
· 1 million GMX for market making award of GLP
· 1 million GMX for pledge reward of GMX
· 2 million GMX is assigned to the floor Price Fund (floor price Fund is used to support GMX prices)
· 1 million GMX for marketing, partnerships and community developers
· 250,000 GMX tokens are allocated linearly to the team over 2 years
In addition to its governance functions, GMX can also be pledged for 30 per cent of the platform's transaction fees, additional GMX rewards, and "multiplier points" (tools to incentivize long-term ownership of GMX, rules of which have yet to be released).
MCDEX
Product introduction
The latest version of MCDEX, V3, is served on Ethereum's Layer 2 Arbitrum. The product was officially tested on September 1st. MCDEX's products have been around for 20 years, but the September release of V3 will completely replace the previous version, so we'll just look at MCDEX V3.
Like GMX, MCDEX is a three-way game between long, short and LP (liquidity provider). Its core mechanism is as follows: First of all, the counterparty of all transactions is LP, and MCDEX LP provides USDC's single currency liquidity, so it is not troubled by volatile losses. At the same time, since LP is the counterparty of all transactions, there is also a zero-sum game between LP and the trader: if the trader loses, LP gains, and if the trader gains, LP loses.
In terms of the determination of transaction price, MCDEX adopts the "complex AMM" mechanism: when users initiate a transaction at any moment, the transaction price will be determined according to the total depth predictor price of LP and the net position of all trading users: When the net position of all trading users is multi-party, the trading price determined by the complex AMM mechanism will be higher than the price of the predictor, thus encouraging users to open short to reduce the overall net position of trading users. When all users are net short positions, the complex AMM mechanism trades at a lower price than the predictor, encouraging users to go long.
We can see that the price determination mechanism of MCDEX also includes the management of naked positions. Compared with the traditional capital fee method, MCDEX's naked position management will be more direct, directly reflected in the underlying price.
As a counterparty, LP can not only obtain the trading commission of the trader, but also obtain the price difference between the user's buying and selling price and the price of the predictor, the capital cost paid by the trader when long and short are not balanced, the penalty of forced liquidate, and the MCB incentive of additional issuance under the complex AMM.
On the product page, MCDEX shows the liquidity of the AMM mechanism as an order book for better depth, and also supports limit and stop loss orders. Overall, the product features are perfect and the experience is excellent.
Business data
The data sourcehttps://app.mcdex.io/pool/
Currently, the trading volume of MCDEX is mainly from the officially certified trading pool, which uses USDC as margin to support the trading of ETH perpetual contracts and BTC perpetual contracts. Since its launch on September 1, the cumulative trading volume has exceeded 130 million US dollars, and the trading volume has increased significantly. At the same time, the thickness of LP has also exceeded $8 million, and the development trend is good.
In addition, since the risks and benefits of LP are not determined in nature, MCDEX also discloses the "net asset value" in each pool in order to avoid the confusion before LP market making, which represents the net value change of each USDC deposited in LP pool. In fact, it also shows the historical profit and loss of market making from the side. We can find that, although the online time is not long, but overall, THE share value of LP is rising, that is to say, LP is generally positive returns, while traders are generally negative returns, which is also consistent with our intuition.
Tokens model
MCDEX's original token is MCB. MCB's token model underwent a major change in early 2021, from 100 million to 10 million. Currently, there are 2.3 million MCBS in circulation, of which 1 million belong to teams, advisors and investors:
· The development team won 484,000 MEDALS
· Advisor received 75,000 pieces
· 109,000 pieces for angel investors
· Obtained 332,000 pieces in private placement
· MCDEX DAO is responsible for the rest of the new release. 75% of the new release is for community incentives and 25% is for developers.
The primary use case for MCB is governance, and there is currently no repo destruction token or dividend design.
Cap Finance
Product introduction
Cap Finance provides services on Ethereum's Layer 2 Arbitrum, and the product is released with the opening test of Arbitrum on September 1.
The product logic of Cap is very simple. Currently, the margin and LP supported are ETH. After the trading user selects the corresponding target and leverage multiple, they can open a position and deposit the corresponding amount of ETH. Traders can directly withdraw ETH from Vapt if they make a profit; Conversely, if the trader loses money, the margin of the trader's loss will also be attributed to LP's Vapt.
LP can currently earn transaction fees.
As for naked positions, there is no hedging scheme in the system at present. Cap Finance advises LP users to hedge their own positions in the official documentation.
The front page of the product is minimalist in style, with no K-chart and no support for stop-loss orders or limit orders
Business data
In terms of data, Cap also adopts a consistent minimalist style, and discloses on its website that the total transaction volume since its launch has exceeded us $85 million (over 29,100 ETH), equivalent to US $4 million per day
The current capacity of LP is 24 ETH, but the current balance of LP has reached 54ETH, LP has significant gains (which means that traders suffer heavy losses).
Tokens model
The original token of Cap Finance is Cap, and there is little disclosure about the token model from the project side. At present, we know that Cap was a project issued in 2020, and the total number was originally 10 million, but was later reduced to 100,000.
According to the document on its official website, in addition to governance of the agreement, CAP can also pledge to obtain transaction fees, but currently there is no pledge entry on its front page.
In general, the current products of Cap Finance are not mature yet, but with the succinct logic and the dongfeng of Arbitrum, its monthly trading volume is likely to exceed 100 million DOLLARS, which has been quite successful as a cold start.
Deri Finance
Product introduction
Deri Finance offers services on the BSC, ETH, Polygon and Heco chains, and the trading product went live earlier this year. In addition to perpetual contracts, Deri also has perpetual options. We take BSC chain as an example to introduce Deri's transaction process of perpetual contract below:
Deri's logic is similar to that of GMX and Cap, in that trading users can directly trade on various indexes according to the price of the predictor. Trading users can start trading after depositing BUSD, WBNB or CAKE as deposit. Trading can be done in real time according to the price of predictor, and the profits can be extracted in real time.
The counterparty of all transactions is LP pool. Users can deposit BUSD, WBNB or CAKE to become LP and start market making. Because it is single currency liquidity, there is no trouble of volatile loss. The counterparty of all transactions is LP, so there is also a zero-sum game between LP and traders: the margin of trader's loss will be directly allocated to LP (reflected in the rise of LP share value), and the trader's profit will be directly obtained from LP (reflected in the decline of LP share value).
Deri's sustainable contracts are currently divided into main zone, innovation zone and open zone. The main zone mainly supports mainstream assets, and the trading subject supports BTC ETH BNB, sharing the same LP pool. Innovation zone supports the trading of AXS, MBOX, AGLD and other new assets, sharing the same LP pool; In the open zone, users can create pools without permission. Users can customize basic assets and underlying assets.
Deri balances the naked position through the capital fee mechanism. Because IN addition to the long and short parties, Deri also assumes the role of the counterparty, so the capital fee will also be allocated to LP.
LP, as a counterparty, will receive 80% of trading fees, a portion of capital fees, and 50% of clearing proceeds, in addition to the Deri bonus issued by the system.
The Deri trading page, shown above, also does not currently support limit and stop loss orders.
Business data
Deri Finance does not currently have a disclosure panel for trading data, but according to the monthly reports disclosed by Deri Finance, the monthly trading volume of Deri perpetual futures has been above $10m in each of the past three months.
Tokens model
Of the 100 million DERI native tokens that are capped at 1 billion, 400 million are allocated to teams, investors, and treasuaries. About 600 million are mined, and currently about 111 million are in circulation. Recently, the team announced that some tokens belonging to the team will be allocated to the vault instead, and the specific rules are waiting for the disclosure of the team.
In addition to governance capabilities, DERI tokens capture 20% of transaction user fees (through periodic repo destruction), and the team has documented use cases that plan to give DERI clearing eligibility and fee credits.
Mechanism of contrast
After understanding the basic logic of the above projects, let's take a closer look at the mechanics:
We believe that for any trading platform, the core factors that determine the experience are as follows:Transaction depth, underlying availability (whether unlicensed listing is supported or not), liquidity provider (LP) earnings.
· The importance of trading depth is self-evident, especially for margin trading. Better trading depth not only means lower slip point, but also means less possibility of pin bursting.
· The availability of the underlying currency is also easy to understand. We should have more or less used the experience that we wanted to speculate or hedge a currency by going long or short through leveraged trading, but failed to find a suitable trading place.
· For most protocols that do not use the order book model, liquidity providers (LP) are counterparties to the trading users, and for the trading platforms, the trading users are their real customers, and THE LP is their incentive. CEX has already started to offer different rates for Maker and Taker, and even some trading platforms have negative rates for Maker, and even launched "single mining" to encourage users to become Makers. Because Maker was a liquidity provider, or counterparty, to Taker's deal. We also know what happened in DEX. The competition between DEX and TVL (also known as LP) was fierce.
In fact, if we replay the explosion of DEX in 2020 represented by Uniswap from the above perspective, we can see that in addition to benefiting from the flourishing and combinability of DeFi itself, on the one hand, they motivated the average user to become LP in a simple and effective way, Thus making DEX comparable to CEX for the first time in __ transaction depth __; On the other hand, any user can easily and completely uncensored list any currency on Uniswap, thus providing a wealth of target availability to transaction users. Uniswap V3 is improving on the benefits of LP (capital efficiency).
Of course, in addition to the factors mentioned above, trading speed, complete functionality (such as whether limit orders or stop loss orders are supported), trading fees and other factors are also of great concern to trading users. In terms of transaction speed, the above derivatives trading platforms are generally established on the public chain or Layer 2 with high TPS, so there is no significant difference in the speed of pure transaction execution. As for the DEX project, which is still in the exploratory stage of continuous contract, it is far from the stage to rely on transaction rates and complete functions to snatch users. In addition, although the above problems are important, they can be solved, so we will not involve these factors in the following analysis.
In addition, we also pay attention to the protocol's treatment of naked positions (too high naked positions will not only cause potential losses to LP, but also affect the security of the entire protocol), as well as the performance of the protocol in composability.
The depth of the deal
For any trading platform, trading depth is the core competitiveness of the product. In the above projects, the design of transaction depth can be roughly divided into three categories:
· The first category is order book design, represented by dYdX. The depth of the order book model depends on the counterparty.
· The second type is XYK model, and the K parameter determines the transaction depth, which is divided into two sub-types: Perpetual V2 for planned use of AMM, Perpetual V1 for virtual AMM, and V3 for MCDEX. The trading depth of such models depends on the K value, that is, for the AMM model, depends on the depth of the corresponding LP, and for the virtual AMM, depends on the K value setting.
· The third category adopts the "global shared liquidity" mechanism, which is characterized by trading directly at the predictor price, including GMX, Cap Finance and Deri Finance.
From the perspective of design, the third category is the best in terms of transaction depth, because for this kind of design, the transaction depth is theoretically infinite (transaction price will be exactly the same regardless of transaction 1 ETH or 10,000 ETH), mainly because the transaction itself does not need any liquidity. The transaction depth of order book model depends on the counterparty, the depth of XYK model depends on K value, and the transaction depth of type 3 model only has a soft upper limit, that is, the amount with LP pool. This is because LP bears the responsibility for the payment of traders. When the transaction amount is close to the balance of LP, the payment ability of the whole system may have some concerns.
For the first and second categories, it is more important to see how the project side encourages the transaction depth. For example, it is relatively difficult to motivate the transaction depth in order book mode. However, dYdX adopts the combination of sophisticated transaction mining -- market making mining -- pledge mining and deep binding with stakeholders. DYdX became the first derivative agreement to achieve more than $1 billion in daily volume, and the depth of the performance is also very good; Although the virtual AMM mechanism was also abandoned by Perpetual Protocol, Perpetual Protocol did use this mechanism to become the first Perpetual futures Protocol with over $100 million daily turnover.
In addition, the transaction depth of order book and XYK model design cannot be shared under normal circumstances, that is, BTC's perpetual contract depth has nothing to do with ETH's perpetual contract depth. Expanding more trading pairs without sharing depth requires incentivise more liquidity in general. MCDEX's current USDC pool supports both ETH and BTC transactions, which is equivalent to aggregating the liquidity of the two pools, thus providing users with better transaction depth.
The advantage of the protocols of the third type model lies in that they can share the depth of all trading pairs theoretically, which will bring better experience to trading users (more trading objects without sliding points) on the one hand and increase the income of LP on the other hand.
Availability of subject matter (unlicensed listing)
In terms of the availability of the subject matter, we mainly investigate whether the above project parties support the listing of the subject matter without permission and the dependent conditions of the listing process.
· dYdX: Similar to CEX, it adopts a centralized approach to decide the listing target.
· Perpetual Protocol: In VERSION V1, Perpetual Protocol is still a centrally determined listing object (due to the manual setting of K value). In V2, Perpetual Protocol plans to implement the listing of transaction objects without permission. There are no implementation details.
· GMX: no information on the subject of unlicensed listing was found. GMX currently supports all 7 cryptocurrencies (BTC, ETH, pNK, AAVE, YFI, SUSHI, UNI) that Chainpnk offers quotations on Arbitrum.
· MCDEX: Any user can list the target without permission (i.e., create a trading pool), and the operator of the pool can also receive a certain percentage of the trading commission. However, due to the complex mechanism of MCDEX, many parameters need to be filled in the process of building the pool. Besides the number of LP stored by users, parameter setting will directly affect the transaction depth of the pool. Overall, the operation is relatively complicated. There are a few user-created pools, but they are less mobile.
· Cap Finance: No information on the subject of unlicensed listing was found. Cap has also supported all 7 cryptocurrencies that Chainpnk offers quotations on Arbitrum
· Deri Finance: supports the listing of labels without permission, which is much easier to operate than MCDEX. At present, there are 3 pools created by users. Pools are also not very mobile.
In fact, due to the heavy dependence of the perpetual contract project on the Prophetic machine, the support of the Prophetic machine is required at the present stage even without license. Except for TWAMM supported by MCDEX for Uni V3 as the prophetic machine, Chainpnk is widely used in other projects. Therefore, at the present stage, The ultimate determinant of which trading pairs are supported on the perpetualcontract trading platform is which currencies Chainpnk supports to offer on that chain.
Therefore, the current decentralized sustainable contract self-built pool is more limited than Uniswap's self-built pool, which is completely independent of any external data.
However, as the Prognosticator project itself continues to evolve, the permissionless, easily marketable and sustainable contract trading features will become increasingly important in the future.
The benefits of the LP
LP's capital efficiency will determine earnings. Of course, the most important factor to determine capital efficiency is the trading volume of the platform.
In the projects of GMX, MCDEX, Cap Finance and Deri Finance, LP can obtain benefits including the following categories:
· Transaction commission
· Reward for additional issuance of platform tokens
· Losses of trading users (subdivided into realized losses and blown margin)
The main potential losses are:
· Monetization of transaction users
It is impossible to predict the profit and loss of trading users, so we mainly compare the distribution of transaction fees and additional issuance of tokens on the platform.
· GMX: LP can obtain 50% of the transaction fee and get additional token issuance
· MCDEX: LP can obtain 68.75% of transaction commission (official pool) and can also obtain additional token issuance
· Cap: LP gets all transaction commission fees and does not get additional issuance of tokens
· Deri: LP can obtain 80% of the transaction fee and get additional token issuance
In addition, it should be mentioned that for GMX, Cap Finance and Deri Finance, which adopt the global shared liquidity scheme, LP is only responsible for the payment and will not directly act as the counterparty of the transaction, so they have the motivation to aggregate all LP. Because greater liquidity means better payment guarantees (unless the project side is deliberately segregated from risk considerations, such as Deri differentiating between main, innovation and open zones), LP is also happy with this because supporting more transaction pairs means capturing more fee gains.
As for MCDEX, which adopts complex AMM mechanism, the current USDC transaction pair also supports the transaction of BTC and ETH at the same time, which improves the capital efficiency of LP and brings higher returns.
Naked position management
For the whole trading platform, if the net position held by trading users in a certain direction is too high, combined with sharp market fluctuations, it may cause systemic risk, because the margin of the loss party is limited, while the theoretical profit amount of the profit party is unlimited.
For the continuous contract trading platforms (including CEX and dYdX) using the order book model, the difference between the floor price and the marked price shows the total naked position held by users. Therefore, the order book trading platform uses the difference between the floor price and the marked price to charge the capital rate to reduce the total naked position of users.
In the projects we studied above, Perpetual Protocol, MCDEX, and Deri Finance all have mechanisms for managing naked positions. Perpetual also balances naked positions by using the difference between V-AMM price and mark price. The mechanism is similar to CEX and dYdX.
While MCDEX and Deri, because of the existence of LP, LP always passively acts as the counterparty of the transaction, and the naked position held by trading users is the opposite position held by LP as a whole (for example, if the total net holding of trading users of 50 ETH multiple orders, It is equivalent to LP's total net holding of 50 ETH's empty bills). Therefore, in order to hedge LP against this risk, in addition to encouraging trading users to open opposing positions, both MCDEX and Deri also pay a portion of the fees they charge for net long positions to LP.
GMX and Cap Finance, which are relatively new to the project, do not have a naked position solution. They all advise users to hedge themselves.
composability
The development of DeFi benefits from composability, which mainly depends on two aspects: whether the product of other protocols can be used, and whether the product of its own protocol can be used by other protocols.
For decentralized sustainable contract agreements, the core of "using the products of other agreements" is whether the assets generated by other agreements can be used as collateral. In this regard, we can see that Deri on Polygon supports the use of amUSDC, AAVE's USDC deposit voucher, as a base token (both as margin and as LP market making), This gives users the opportunity to trade in perpetual contracts without losing the return on their AAVE deposits, which is a notable application of composability today.
"The product of one's agreement is used by other agreements" may be more difficult for a decentralized perpetuity agreement, because it depends on other agreements' understanding and cognition of the decentralized perpetuity agreement. There are usually only two products of the decentralized perpetual contract agreement, one is the position of the trading user, and the other is the pledge certificate of LP. Whether these two products can interact with other protocols in some way to improve the user's capital efficiency at the cross-protocol level is the next issue to be considered for each decentralized sustainable contract agreement.
On the whole, the exploration of the combinability of decentralized perpetuity contract is still in the early stage, which is related to the fact that the whole circuit is in the early stage of development. When the influence of decentralized perpetuity contract becomes more and more important, we also expect that the combinability of protocol will continue to develop in the cognition of users and the market.
summary
The author believes that in the future competition of decentralized sustainable contract trading platform, the design of core transaction structure is very important. Moreover, the success of the AMM mechanism in decentralized spot trading platforms does not necessarily apply to decentralized derivatives trading platforms.
GMX, Cap Finance and Deri Finance have all adapted the "trade at predictor price and all LP payments" approach created by Synthetix, a leading synthetic asset firm. Synthetix's synthetic futures, which will soon be tested on Testnet, can also be classified as perpetual contracts. For more information on Synthetix, see Mint Ventures In-depth Research. Unlimited liquidity in derivatives markets), so far, has worked well. In my opinion, compared with AMM, a decentralized derivative project that trades at predictor prices and all LP's are jointly responsible for payment is more likely to succeed. Because this mechanism naturally has:
· Nearly unlimited and shareable liquidity
· The simplest listing process for new targets (except for the predictor, it is almost independent of any external conditions, so it is easier to achieve unlicensed listing)
· Higher capital efficiency for LP
conclusion
This paper introduces several perpetual contract protocols that have been put online from the perspective of product mechanism, and compares these protocols from the aspects that the author values more, such as the trading depth, the availability of the subject matter (listing without permission), LP income, naked position management and composability.
Quantitative valuation analysis is not involved in this paper, because the current trading volume is still too small compared to the future development space of the decentralized sustainable track, which is still in its early stage of development.
Compared with projects that apply the core mechanism of CEX or spot DEX, the author is more looking forward to having a team with a deep understanding of the nature of the product of perpetual contract and combining with DeFi's incentive means, so as to produce paradigm innovation similar to AMM's on spot trading platform: A new model, the cornerstone of open finance, and the market space of billions of dollars.
The resources
https://docs.google.com/spreadsheets/d/1An5qiN09QqpZ_0uaW1_TDgizda2octg4ee8Hw1iMMhk/edit#gid=0
https://www.chainnews.com/articles/578853748247.htm
https://tokeninsight.com/report/2835
https://gmxio.gitbook.io/gmx/trading
https://docs.mcdex.io/mai-protocol-v3
https://blog.cap.finance/cap-v1.html
The original link
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