GM, this is your Daily Bolt briefing
In today’s edition, we’re sharing some notes on Vertex Protocol, an Arbitrum DEX featuring both spot and perpetual trading, as well as money markets.
Also; be sure to tune into EP.4 of The Macro Show at 11AM EST. The market is fixated on social tooling and other narratives, but it’s important to remember how imperative macro events are to crypto price action.
Stay alert, stay informed ⬇
1/ 0xResearch – Vertex: Built for Cross-Margin and Low-latency Trading
Preview: Sam and Dan host Darius & Alwin to discuss Vertex's design, risk management, future strategies, and more! Click here to listen to the full episode (85 mins).
Read our Note (7 mins) and save 78 mins.
Vertex Protocol is a vertically-integrated DEX on Arbitrum featuring spot, perpetual, and integrated money markets.
Vertex's Design and Strategy
Alwin says that they chose Arbitrum over Cosmos because they believed Arbitrum would perform better and be a safer choice, given its EVM compatibility.
Sam asks about how Vertex differentiates itself from other margin indexes in the space.
Alwin describes Vertex as a capital-efficient, fast, and user-friendly decentralized exchange that functions similarly to centralized exchanges. He credits their speed advantage over FTX to a centralized server's efficiency, which makes things more performant.
Dan asks about the design features that enable Vertex to be faster.
Alwin highlights the use of centralized servers and the optimistic processing of trades and order placements. They've compromised by allowing users to self-custody their assets but handle trades centrally for better performance.
Sam discusses the value of Vertex's cross-margin account architecture and asks why others in the space haven't implemented it.
Alwin explains the benefits of cross-margining and the complexity of implementing it. It allows users to pool all assets together for collateralization. Darius adds that cross-margining is less risky and offers benefits over isolated margin trades.
Darius explains that perps do more volume than spot due to capital efficiency and inventory management. He mentions that while they have considered making spot trading more profitable, it's not a current priority.
Sam asks about the primary use of AMM in Vertex and what happens in "Slo-Mo Mode" if the off-chain sequencer facilitating the order book goes down.
Alwin says that the AMM serves as a fallback and a place to park funds, while "Slo-Mo Mode" is not expected to occur. If it does, it means there's a significant problem, and users should withdraw their funds.
Darius adds that "Slo-Mo Mode" ensures an orderly end if they fail to do their job properly, allowing users to withdraw their funds safely.
Alwin explains that in Slo-Mo mode, all transactions are usually pipelined through the sequencer. Users can also write their transactions directly to the chain. If the sequencer hasn't processed a withdrawal in a set time, users can forcibly process it themselves.
Sam asks about the 10% fee charged on trades as a sequencer fee and asks if it's a revenue source for the team.
Darius says that it's 10 cents, not 10%, and that they run at a loss on the sequencer. The fee is there to cover some costs and prevent spam transactions.
Alwin explains that the flat fee structure is due to the gas costs they have to pay for every processed match, but he expects this number to trend downwards over time.
Sam asks about the plan to decentralize the sequencer, and if it's a priority.
Alwin says that they are not solving the same problem as L2 teams, and their focus is on reasonable decentralization. They are considering having a leading sequencer that outputs a tape of incoming orders for others to check. He says this approach won't have significant latency issues.
Discussing Stork, Cross-Chain Strategy, & Risk Management
Sam asks why they chose Stork, a less-tested Oracle provider, and if there are any concerns.
Alwin praises Stork for their customer support and explains that their design works well with their architecture. The off-chain price generation saves gas and suits their needs.
Dan asks if they are interested in adding support for other chains or staying on Arbitrum.
Darius says they want to provide assets across multiple chains, possibly using a cross-chain messaging service. Though the plan is not yet mapped out, they are confident in their ability to execute it.
Alwin adds that the ideal UX would hide the bridge from users, and he expects an almost cross-chain wallet where users could sign in on different chains and interact seamlessly.
Sam asks about the performance of the risk engine, specifically the day when news about XRP was released, which led to a 70% increase in the value of XRP.
Alwin explains that the risk engine has been doing well, with no single day where the insurance fund has been drawn down. He describes how the system is set up with a summary bot that tells the status, and says that the insurance fund and the liquidator have made money. He explains how the matching engine constantly looks for accounts to be liquidated, making the system robust.
Dan asks about the insurance fund, asking if a portion of trading fees is used to fund it.
Alwin explains the process of liquidations, where if an account is underwater and has BTC, he buys the BTC and gives USDC in return. He says that the purchase price is computed using the Oracle price of Bitcoin, and a slight discount incentivizes him to liquidate. A part of the gap between the Oracle price and the liquidation price is sent to the insurance fund.
Sam asks about the point at which the insurance fund would be tapped into and its purpose.
Alwin explains that the insurance fund may be used when an account goes underwater, citing cases where funds from insurance were used to top up accounts. He explains that if there is a remaining liability after all assets are bought and liabilities are paid off, the amount needed to reset the account will come from the insurance fund.
Alwin explains that if the liability is tied to a specific asset, it's spread among all depositors of that asset, and if it's linked to a specific position, it's spread among participants in that particular market.
Vertex's Security, Token Strategy, and Future Plans
Dan asks about avoiding exploitation on Vertex, referencing an incident with Mango Markets.
Alwin believes the attack on Mango Markets was not a model failure but a problem with parameters, assuring that Vertex won't make the same mistake.
Darius highlights the focus on depth and liquidity and a constantly evolving risk framework. He talks about having the ability to respond to large unexpected withdrawals, which provides an additional security layer.
Darius talks about the strategies for staying competitive focusing on having a high-quality product and rewarding users with tokens. He mentions their airdrop strategy and highlights the importance of word-of-mouth promotion.
Alwin shares his thoughts on the token's function, aiming for strong demand and utility. He mentions models like Curve or Yearn that they might follow.
Dan asks about the dynamics of incentivizing both traders and market makers in Vertex's ecosystem, and how to balance the supply and demand of the market.
Darius explains the importance of having both market makers and price takers. He compares the token to an old exchange (ex-CME, CBOT) membership, giving benefits and participation in decision-making. He stresses the importance of various participants, including professional traders and retail. He sees the VRTX as a way of increasing the expected value of trading on Vertex.
Dan asks whether market makers will always need to be incentivized, or if a profitable system can be built to retain them.
Alwin says that order books make more sense for continuous liquidity and that market makers should continue making money, thus having no reason to turn off a profitable operation.
Sam asks about the end goal for Vertex and their focus on product excellence and a good trading experience, asking about the features they want to launch in the next year.
Darius highlights cross-chain functionality, wallet UX, isolated margin, and neatly integrating a fiat on-ramp. He talks about owning the user from start to end to minimize friction and meet user demands.