Delta-Neutral Perpetual Futures
Last updated
Last updated
Crypto's perps market started and flourished on CEX, where the funding rate mechanism mutually affects the prices of spot and perps. Perps trading has become the primary income source for most CEX. However, perps markets on CEX still have liquidity issues. Traders encounter liquidity crunch quite often in extreme market conditions. Pioneered by GMX, DeFi protocols improve liquidity situations by providing a perps pool, where liquidity providers can enjoy passive income by providing liquidity to perps traders. However, these LPs also risk their assets by doing so. vDEX innovates the perps market further by introducing an LP delta-neutral mechanism, away from the traditional funding rate system. For the first time, dex's liquidity issues and LP liquidation risks are solved simultaneously.
Zero Borrow Fee
Zero Funding Rate
Fee Reduction
Delta-Neutral Pricing
Perpetual contracts are a special form of futures contracts.
The major difference between perpetual contracts and normal futures contracts is contract expiration. Whilst the traditional form of futures contracts has a stated expiry date after which the contracts can no longer be traded, perpetual contracts have no expiry period. Thus, a trader’s position is valid for as long as they leave it open and maintain it.
Compared to other forms of futures contracts, the price of perpetual contracts is tightly maintained with the spot price of the traded asset. The perpetual contract price could stray away from the spot price in extreme market conditions, but this happens less often than seen in traditional futures contracts.
To further maintain the price of perpetual contracts with that of the spot markets, vDEX employs a delta-neutral pricing mechanism instead of funding payment.
vDEX introduces an avant-garde financial instrument: Delta-Neutral Perpetual Futures (Perps), engineered to fortify the fortitude and profitability of LPs. Grappling with the intrinsic volatility and market skew prevalent in providing liquidity, no matter blue-chip or long-tail assets, this innovation pivots on achieving LP delta neutrality.
LP Delta neutrality, a state where the sensitivity of an LP's portfolio to price fluctuations in the underlying asset is minimised, thereby shielding them from directional market risks and mitigating the threat of liquidation, is the cornerstone of this mechanism. There's no impermanent loss in this model as well.
By incorporating a skew-dependent premium/discount function, vDEX aims to incentivise delta neutrality through pricing, thus ensuring that LPs can maintain balanced positions regardless of market fluctuations.
By simulating the dynamic pricing seen in order book exchanges through price impact to safeguard against market manipulation, ensuring a balanced, open interest (OI) and facilitating efficient price discovery;
The thinking behind this is that funding rate as a mechanism might fail to improve LP's delta neutrality due to its set calculation frequency, funding interval, and the magnitude of the fee. In the traditional order book market, to counteract rapid/drastic delta imbalance in a highly volatile/one-sided market, market makers (LPs) should be able to adjust the price (spread) & monetise from the current market trend, while an AMM could not.
For monetisation, each pool has a built-in delta-neutral arbitrage vault, a further enhancement to the ecosystem by generating yields through arbitrage activities that balance the LP's delta, which is then reinvested into the liquidity pool, benefiting LPs and supporting the overall health of the platform. Additionally, the innovative approach of setting the funding rate to zero encourages active participation from traders, fostering a vibrant trading environment and enabling unique arbitrage opportunities.
We envision this mechanism lifting AMM towards the next stage, AAM (automated asset manager), where LPs can enjoy a truly "risk-free" high yield. From a different POV, vDEX is now 'Uniperp' as ANY assets' perp can be created permissionless.
