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In-Depth Look at Derivatives DEX Rising Star Vertex: With a daily trading volume of around $40 million, why is it worth watching?

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Although the Derivatives DEX competition is fierce, Vertex has provided some innovative mechanisms to create better liquidity and higher capital efficiency.

The Derivative DEX field is highly competitive, with leaders like GMX, DYDX, SNX, second-tier platforms like Gains, MUX, Level, ApolloX, and a constant stream of new protocols launching.

Vertex is a recently well-performing Derivative DEX protocol. Since its launch in late April 2023, its recent daily trading volume accounts for about 10% to 15% of the Perpetual DEX market based on the funds pool model, and in June 2023, it received a strategic investment from Wintermute.

Note: This chart does not include DYDX data and compares the funds pool model Derivative DEX.

1. Business Data

Trading Volume: Primarily driven by trading incentives, it has created a high trading volume, with a recent 7-day daily average trading volume of about $40 million. The purple part represents derivatives, the yellow part represents spot trading, with derivative trading being the main focus.

The daily trading volume is lower than the top Derivative DEXs (DYDX/GMX/SNX), comparable to second-tier Derivative DEX platforms. Looking at the trading volume in the past 7 days, Vertex has entered the top ten.

TVL: $6.22 million, still relatively small in scale, including four tokens, with the specific composition shown in the following chart:

DAU: Total user count is 1842, with approximately 200 users active in the last 7 days. For comparison, GMX has daily active users exceeding 1000, DYDX around 700, and SNX around 500.

Open Interest: There are a total of 7 trading pairs, with BTC and ETH holding the majority share, and the current open interest is around $5.37 million. The position amount is also relatively low.

The open interest for DYDX is around $300 million, GMX is between $1.5 billion and $2 billion, Gain Network is between $30 million and $50 million, and Mux is between $20 million and $50 million.

Fee: The total gross revenue is around $540,000, with a maker rebate deduction of $86,000, resulting in net revenue of $460,000.

II. Team and Investors

Co-founder Darius, mainly responsible for external marketing activities.

Co-founder Alwin Peng, previously worked at Jump Trading as a blockchain engineer.

Vertex secured a strategic investment from Wintermute Ventures in June 2023. Wintermute Ventures is the venture capital arm of crypto market maker Wintermute. Wintermute provides market-making services for various well-known projects like Arb, OP, and Blur.

Wintermute announced its investment in Vertex, stating: "Vertex is led by a strong team of traders and engineers, with a solid track record in both TradFi and DeFi markets, at the forefront of smart contract and market innovation."

Previously, in April 2022, Vertex secured an $8.5 million seed round investment, led by Hack VC and Dexterity Capital, with participation from Collab+Currency, GSR, Jane St., Hudson River Trading, Huobi, JST Capital, Big Brain, Lunatic Capital, and others. Early investors received 8.5% of the tokens, meaning Vertex was valued at $100 million in its seed round.

Vertex was originally a project on Terra, but after Terra's collapse, the protocol migrated to Arbitrum.

III. Product

Providing a one-stop DeFi service, including spot, derivatives, and lending markets, mainly focusing on the derivatives market. Most trades involve perpetual contract trading, while spot and lending services are more geared towards supporting the derivatives market, hence classified as a derivative DEX.

Liquidity Supply Model: Hybrid Order Book - AMM Model

The liquidity supply model is the main difference between Vertex and other derivative DEXs. Vertex believes that off-chain order books processed through FIFO (first in, first out) can reduce MEV attacks and improve trade execution speed. On the other hand, on-chain AMMs provide permissionless liquidity support, allowing traders to execute trades forcibly and ensuring trade execution when order book liquidity is insufficient.

Vertex implements the hybrid order book - AMM model through the following components:

On-chain trading venue (AMM);

On-chain risk engine for fast liquidation;

Off-chain sorter for order matching.

Figure: Vertex Core Component Architecture

This means that in the Vertex trading platform, there are two types of liquidity coexisting: one is order book liquidity provided by market makers through APIs, and the other is LP funds provided by smart contracts.

These two liquidity types are combined through a sorter, presenting a unified liquidity on the frontend for trading at the best available price. The following image illustrates how the sorter utilizes order book liquidity and LP liquidity to facilitate trades.

Process Analysis:

The trading price of the ETH-USDC currency pair is $1200.

Alice wants to buy 75 ETH in the market and set the maximum slippage to 1%.

There is an order on the order book for 25 ETH at a price of $1200, so one-third of the trade is executed at $1200.

The next set of sell orders on the order book (totaling 60 ETH) is at $1210.

However, there is an LP position of 25 ETH within the price range of $1200 to $1210. Therefore, the next one-third of the trade is bought from the LP position at a price between $1200 and $1210.

The final one-third of the trade is executed at a price of $1210.

Funding Efficiency: Universal Cross Margin Expands Margin Scope

Vertex aims to improve funding efficiency through the concept of "Universal Cross Margin," primarily by expanding the margin scope.

Currently, in derivative trading, there are two common margin modes. One is the Isolated Margin mode, where each trading pair has a separate isolated margin account. Specific assets related to a trading pair can only be deposited, held, and borrowed within that isolated margin account. Each isolated margin account has an independent risk limit calculated based on the assets and liabilities held under that trading pair. Risk isolation is maintained for each isolated margin account, and in the event of liquidation risk, it does not affect other isolated margin accounts.

The other mode is Cross Margin, where generally a user has a single cross margin account, allowing trading of all supported assets. Assets within the account cross-collateralize each other and are collectively used; the risk limit is calculated based on all assets and liabilities under the cross margin account. In the event of liquidation, all assets under the account are liquidated.

It can be seen that the funding efficiency of the Cross Margin mode is higher than that of the Isolated Margin mode. Building upon this, Vertex introduces Universal Cross Margin.

Users can use all their funds on the platform (deposits, holdings, and unrealized P&L) as margin, including unclosed positions in spot, perpetual contracts, and the currency market. For example, by providing liquidity to a spot pool, users can earn fees and use their LP funds as margin for contract trading. This increases funding efficiency.

Universal Cross Margin also allows portfolio margin, unrealized profits to be used to offset unrealized losses or as margin for existing positions or opening new positions.

To help users better manage the risk of their accounts, Vertex also provides an account risk level indicator, which allows users to see the health of their accounts directly on the page.

Accounts can be in two states: Initial and Maintenance. Under the Initial state, based on the margin-to-debt ratio, they can be classified as low, medium, and high risk. A Maintenance state means that the initial margin usage has exceeded 100%, new positions cannot be opened anymore, and the margin needs to be replenished as soon as possible to avoid liquidation.

Due to Universal Cross Margin, liquidation also occurs in full position mode and will be liquidated in the following order:

Orders are canceled, releasing order funds;

LP assets are unwound and sold;

Assets are liquidated (i.e., spot balance / contract position);

Liabilities are liquidated (borrowings).

If the initial health status of the account recovers to above 0 during the liquidation process, the liquidation will stop.

Lower Trading Fees

Vertex's trading fees are relatively low. Whether for spot or futures, the maker fee is currently 0, and the taker fee ranges from 0.01% to 0.04%.

To incentivize maker trades, makers who contribute to more than 0.25% of the total trading volume within a specific period (28 days, one epoch) can also receive rebates. The rebate rates are as follows:

Compared to several major derivatives DEX markets, GMX has higher transaction fees, with opening and closing fees both at 0.1%; DYDX has transaction fees ranging from 0.02% to 0.05%, decreasing with trading volume growth; Kwenta has transaction fees ranging from 0.02% to 0.06%.

IV. Tokenomics

VRTX is the governance token of the Vertex Protocol, with a total supply of 1 billion tokens, of which 90.08% will be distributed within 5 years.

The token distribution is as shown in the chart, with 46% allocated to community incentives, where 9% is for initial stage token incentives, and 37% is for ongoing incentives; 41% is allocated to the team, treasury, ecosystem fund, and future contributors; 8.5% is allocated to early investors; and another 4.5% is for liquidity. It is worth noting that this distribution chart was disclosed to the public in early June 2022 and does not include the Wintermute investment portion. Typically, new investors may receive an allocation from the treasury.

The Vertex token will be distributed six months after the mainnet launch, which is expected to take place in October 2023. The token release schedule is as follows:

The initial token phase involves using a portion of the tokens for pre-launch trading incentives, which users can track on the Vertex application's rewards page, with the website specifying that the related incentives can be claimed in October 2023.

Initial token phase consists of 6 epochs, each lasting 28 days, with each epoch rewarding 15 million tokens, currently on the 3rd epoch. Transaction Incentive Tokens are distributed based on transaction fee weight. Additionally, different trading pairs have different rewards as shown in the following chart:

As the Vertex Protocol token has not been issued yet, the existence of transaction incentives makes it impossible to avoid wash trading behavior. Currently, the launch of derivative DEX protocols relies on transaction incentive measures, with Vela implementing transaction incentives in its beta version to boost trading volume. Even after the majority of protocols go live, they continue to maintain transaction incentive measures, such as DYDX, Kwenta, etc. The significant adoption of Vertex at this stage indicates a positive view of protocol tokens by funds.

5. Summary

The competition in derivative DEXes is already fierce. Many projects are following the GMX fork model, deploying on new blockchains or Layer 2 solutions, offering high APR to attract funds and earn returns. In comparison, Vertex has provided some innovative mechanisms to create better liquidity and higher capital efficiency, making it worth watching.

One risk to note is that while its Universal Cross Margin enhances capital efficiency, it also increases users' asset exposure, requiring traders to implement appropriate risk controls.