ABCDE: Why we invested in Surf Protocol

Source: ABCDE

Surf Protocol, led by ABCDE, is a permissionless AMM derivative trading protocol that supports the creation and trading of the widest range of crypto assets. If we were to describe it using a familiar model, Surf is the contract version of UniSwap, with a key innovation: allowing anyone to provide perpetual contracts for liquidity on any chain without permission. Everyone can open contract pools.

Compared to GMX and dydx, which only have 9 and 37 assets respectively, Surf's advantage is that it does not require permission to open a pool and can provide perpetual contracts for any token with just one click. In the future, Surf will have thousands of perpetual contract trading pairs for long-tail assets.

一. Trader Extractable value—交易者可提取价值

One. Trader Extractable value - the value that traders can extract.To understand the key innovation of Surf, it is necessary to understand the role of Trader Extractable Value in the AMM derivatives field.

When describing MEV, we often compare the blockchain to a dark forest, because it is filled with various robots and scientists searching for potential profit opportunities in the unconfirmed transaction pool (mempool) through various means of arbitrage. This is also the origin of MEV - Maximium Extracable Value.

However, MEV is more inclined towards various arbitrage opportunities in the areas of spot DEX and lending settlement for the entire block, and in certain niche areas, there are even more refined concepts.

For example, A16Z has published a detailed article on LVR - relative loss rebalancing for Dex LP reverse selection costs, and I will not repeat it here.

For example, Trader Extractable Value (TEV) refers to the arbitrage space generated by various factors such as price differences between spot and derivative products in the encryption industry.

In simple terms, the Ava price manipulation that occurred on Avalanche last year by GMX is a typical TEV. When the cost of spot price manipulation is less than the friction cost on the futures side, scientists can profit.

You may question why Avax can be relatively easily manipulated in terms of price due to its own liquidity, but BTC and ETH cannot be played in the same way.

Also right, also wrong.

Correct, it is because the depth and consensus of BTC and ETH make it much more difficult to control the spot price, which is why GMX V1 only has BTC and ETH as trading pairs on Arb.

It's not correct because GMX's GLP TVL is only three to five billion. Imagine if GLP's TVL was thirty to fifty billion, there would be big players willing to spend "a lot of money" to manipulate the prices of BTC and ETH, just like what happened in the AVAX trading pair. As long as GLP's trading depth is sufficient, GMX's fixed trading friction cost will result in spot price manipulation cost < futures friction cost. As GLP's TVL increases, the possibility and success rate of TEV also increases, which is why GLP's AMM TVL is stuck at the "equilibrium" threshold of three to five billion US dollars.

二. 人人都可以开交易所的交易协议- Surf 的解决方案与创新

Translation:

II. Everyone can open a trading platform - Surf's solution and innovation for trading protocols

How to motivate greater TVL in derivative products and create an innovative trading protocol?

Surf's solution is actually very straightforward. In order to maximize LP incentives, Surf has made an interesting innovation in the LP mechanism by creating a B2B2C transaction protocol. Typically, the transaction fees earned by LPs will be 70-80% for LPs and 20-30% for the protocol itself. Surf has made a very important innovation by allocating 80% of the transaction fees to LPs, 10% to the protocol, 5% as a reward to the creator of each pool, and 5% as a reward to the contributor with the largest TVL in each pool.

Under this incentive system, LPs will be more active in creating trading pairs for non-blue chip long-tail assets. At the same time, because the LP with the highest TVL can receive 5% of the pool's transaction fees, a layer of real game is formed on TVL, encouraging "big and loyal" TVL to continue providing LPs, thus bringing better experience and depth to traders.

Also, how to solve the friction cost of futures?

As long as the friction cost on the futures side is transformed into a non-fixed dynamic cost, the method is to introduce homogeneous trading pairs with different rates similar to Uniswap V3.

Simply put, in the Surf Protocol, each transaction automatically creates five different pools, each with unique fees, forming various liquidity pool structures across different assets. In theory, highly liquid assets like BTC are expected to have a large portion of liquidity in low fee pools, while less popular assets like PEPE may have more liquidity in high fee pools.

For traders, these pools are transparent, and when opening a position, they will automatically match with the pool with the lowest fee first. Once the lowest fee pool is full, it will automatically flow to the next pool with a higher fee. For LPs, choosing different pools is also a market game, where they can earn higher fees and dynamically choose to act as a trader before the market closes. For the overall system, during more stable periods, fees may significantly decrease (as more LPs choose lower fee pools), possibly reaching the theoretically feasible minimum level. During extreme market activity, costs may increase to prevent scenarios where the price manipulation of trading pairs like GMX Avax continuously depletes GLP.

Three. Permissionless - The True Meaning of Cryptography

Those familiar with the early development history of cryptocurrency, the OGs, know that the earliest days of Bitcoin were focused on Permissionless rather than Decentralization. Satoshi Nakamoto himself used the term Permissionless in both the whitepaper and forum posts, rather than Decentralization.

In other words, Decentralization is just a form caused by the Permissionless core.

Uniswap has achieved the victory of spot Dex with its mechanism of permissionless listing and LP.

On the derivatives side, although GMX V1 benefits from GLP's innovative invention, its mechanism restricts the establishment of non-permissioned transactions, and the majority of blue-chip and long-tail asset derivative trading still focuses on Cex. That's why we had GMX V2 recently.

We need a more free and healthy on-chain derivative financial mechanism, a fairer trading market, and an era of transitioning gradually from centralized contract markets to decentralized ones.

The battle for permissionless derivative trading has just begun.

We have reason to believe that by introducing a "homogeneous but different value" trading pool with game-like properties and an innovative LP reward mechanism, Surf has the potential to take AMM derivative TVL to new heights. This will provide traders with a better trading experience while better protecting the interests of LPs, achieving a "win-win" situation.

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