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The volume of cryptocurrency transactions on centralized exchanges is mainly concentrated on contract transactions, of which permanent futures contracts are the main ones. Decentralized Exchange (DEX) believes that contract trading can be an explosive direction, but no DEX can provide the same experience as a centralized exchange in terms of liquidity and trading volume. .. With the joint launch of Ethereum’s second tier expansion plan, improved liquidity in Derify V1 and Perpetual Protocol V2, and liquidity incentives after dYdX issues governance tokens, the direction of decentralized permanent futures contracts is rapidly evolving. It can be a pioneer.
Perpetual Protocol V1
Whether it’s a traditional order book or the AMM-style decentralized exchange (DEX) that has become popular with DeFi, market makers need to provide liquidity for their transactions. Only with AMM, liquidity providers need to deposit at least two tokens in the liquidity pool, and transaction liquidity can be filled without active management. Liquidity providers need to own funds and bear the risk of permanent loss. In leveraged derivative transactions, currency prices fluctuate, dramatically increasing the risk of users providing liquidity.
Perpetual Protocol has built a virtual liquidity market maker vAMM. This guarantees the liquidity of the transaction without the participation of the market maker. Without a real market maker, there would be no permanent loss.
The Perpetual Protocol vAMM uses the same x * y = k constant product formula as a regular AMM. However, unlike AMMs, vAMMs do not need to provide investors with real liquidity and user funds are stored in smart contracts that manage collateral. Perpetual determines transaction liquidity by defining a virtual value for k, which must also be within reasonable limits. If the value of k is too small, the liquidity of the transaction will be low, the user’s transaction deviation will be large, and it may affect the trading experience. If the value of k is too large, the arbitrator may need a large amount of money to keep the price constant.
The user is the vAMM itself, and the user always joins the USDC and eventually withdraws the USDC. Futures trading is a zero-sum game. The interests of all come from the losses of others. The vAMM model is used to calculate everyone’s income.
Perpetual Protocol V2 (Curie)
The V2 version of the Perpetual Protocol is named Curie and has been deployed on the Ethereum Layer 2 network Arbitrum. Curie uses Uniswap V3’s centralized liquidity pool to execute transactions with permanent contracts. All transactions occur between opposing trading partners. This protocol has stronger scalability, liquidity aggregation, and a free market. Creation and other properties. According to the official introduction, Curie will be implemented in four stages.
- Mainnet launch, centralized liquidity and market maker strategy using Uniswap V3 at Arbitrum.
- Limit orders and liquidity mining.
- Multi-asset collateral including USDC.
- Use Uniswap V3 to create an unauthorized private marketplace.
In addition to the benefits of cross-margins, reducing protocol reliance on insurance funds, creating unauthorized trading markets and improving fee sharing, Curie also offers multiple strategies to improve trading liquidity. To do.
Curie’s transactions are executed directly in Uniswap V3, and Uniswap V3’s centralized liquidity solves the problem of AMM’s liquidity fragmentation. Perpetual Protocol V1 uses vAMM, but liquidity is still widespread throughout the range. In Uniswap V3, liquidity is usually concentrated near market prices. This increases the liquidity of transactions and reduces slippage while improving capital efficiency.
Liquidity providers will now be able to use leverage (leverage LP) and market makers will be able to provide amplified liquidity with Uniswap V3. For an established market maker with a liquidity strategy, this will further increase earnings.
We will establish the Perpetual Economic System Fund and introduce charms, dHEDGE, lemmas, etc. to help improve liquidity. For example, Charm Finance is Uniswap V3’s Automatic Liquidity Manager. Charm works with the Perpetual Protocol to establish a liquidity vault (alpha vault) for perpetual liquidity providers. Market makers only need to deposit USDC in the charm’s liquidity vault to start earning transaction fees.
Perpetual Protocol V1 can guarantee the liquidity of transactions via vAMM without actual market making funds. The V2 version is deeply bound to Uniswap V3. Leverage LP further amplifies the profits of market makers, but the requirements of market makers are also high, and aggressive management strategies are required.
For traders who prefer an orderbook approach to trading, dYdX is an ideal place for a decentralized world. dYdX is the only permanent trading protocol that uses traditional order books. USDC acts as a single margin asset stored in a cross-margin account. Fifteen markets are available for trading and the markets are added by the core team of protocols.
Orderbook-based dYdX provides traders with more advanced order types compared to AMM-based platforms. In addition to the Good-Till-Date, Fill or Kill, or Post-Only order options, market orders, limit orders, stop orders, and trailing stop orders are available. Market makers need to provide liquidity to each market and tend to provide liquidity algorithmically via dYdX’s API interface.
As with traditional permanent markets, dYdX charges the imbalanced side of the transaction for funding rates. The funding rate is calculated algorithmically based on the index price and the permanent midmarket sample price. These payments are facilitated by the protocol, but are exchanged only between traders (the exchange does not pay or receive).
Derify Protocol is an innovative decentralized derivative trading protocol. Taking into account the characteristics of derivative transactions, the Derify protocol has created a hedged automated market-making mechanism and position mining rules.
HAMM (Hedged Automatic Market Maker)
Orderbooks have always been the most classic and mature trading model of traditional financial trading products and can also be applied to centralized exchange products in the field of digital assets. In order book mode, the user’s transaction costs (average transaction price / slippage) depend on the depth of the opponent’s market (price, quantity, and other factors of optimal position). In addition, the depth of the market also affects the mark price of the perpetual contract system (for example, the depth of the market is poor and it is easy to cause a pin-pin market), which can ultimately lead to innocent risk. Clearing the position of. Therefore, liquidity trading in order book mode is essential for user experience and system security.
To provide better trading liquidity to users, exchanges need to introduce as many professional market makers as possible to place orders on the trading market (derify’s founding team was once the head of many exchanges in the industry. In terms of blockchain performance and cost (which was a market maker), traditional orderbook models cannot create decentralized trading products with a better user experience. With the success of Uniswap’s AMM mechanism, more and more people are understanding how well the AMM mechanism fits into distributed products. Like spot trading, trading contracted products can solve liquidity issues through the AMM mechanism.
The hAMM and AMM paths to reach the goal are consistent. That is, the system state transitions triggered by each transaction in the system create the appropriate arbitrage space for the system, and an external arbitrage jar performs and restores risk-free arbitrage. A system state that balances the status (in AMM, the internal price is consistent with the external market).
Holding a position means providing liquidity to Derify. Therefore, unlike regular liquidity mining projects, Derify does not have a separate “liquidity pool” for miners to bet their assets and generate liquidity. Derify calculates all liquidity in the position pool and all positions generate liquidity, so Derify rewards all positions held directly, regardless of direction, quantity or position holder. There is a position mining mechanism that can be.
Traders are also Derify miners by monetizing every position they hold. This has multiple benefits. First, liquidity miners use leverage to provide liquidity and leverage leverage to generate profits and improve capital efficiency and return on investment. Second, traders can profit directly from their daily trading activities. Third, it’s easier for everyone to participate in liquidity mining than splitting money into different mining pools that incur gas charges.
On the other hand, the position pool is always somewhat imbalanced and the liquidity of longs and shorts is not equal, so if there are few longs and shorts, Derify’s liquidity exposure will be very large. Therefore, Derify also dynamically adjusts mining rewards. If the position pool has more long positions than short positions, there will be fewer long position holders than short positions.
Generally speaking, to get mining rewards, all you have to do is open a position and hold it.
The future of DEX: trade-offs and evolution
On behalf of the Orderbook DEX, dYdX provides a 5-year token incentive for all links within the protocol, including transactions and liquidity supplies. In the just-finished Epoch0 stage, this incentive can exceed transaction requirements. Cost.
Perpetual Protocol V2 is closely tied to Uniswap V3 and works with active liquidity management protocols such as charms. When providing liquidity, leverage can be used to increase the profits of liquidity providers, but adjusting positions requires a proactive strategy.
Derify Protocol uses unique innovations to retain mining and HAMM to bring a better product experience to Dex users