An article to understand the liquidity solutions of derivatives trading protocol dYdX, Perpetual Protocol, and MCDEX V3

The trading volume of cryptocurrencies in centralized exchanges is mainly concentrated on contract transactions, of which perpetual futures contracts are the main ones. In decentralized exchanges (DEX), contract trading is considered to be a possible direction, but in terms of liquidity, trading volume, etc., there is no DEX that can achieve the same experience as centralized trading. With the collective launch of the second-tier expansion plan of Ethereum, the improvement in liquidity of MCDEX V3 and Perpetual Protocol V2, and the incentives for liquidity after dYdX issuance of governance tokens, the direction of decentralized perpetual futures contracts may usher in rapid development .


After the announcement of the issuance of governance tokens, the transaction volume of dYdX has gradually increased. Based on liquidity incentives and transaction mining, dYdX has become the largest decentralized derivatives transaction protocol with the largest transaction volume. dYdX encourages liquidity from multiple dimensions such as trading, holding positions, providing liquidity, USDC pledge, market maker zero interest unsecured lending, etc. The governance token DYDX will open the transfer function after 23:00 on September 8, 2021, Beijing time .

Transaction reward

dYdX will reward users based on the transaction fees and open interest paid to the agreement, which accounts for 25% of the total DYDX. Taking into account the user’s trading volume and holdings, it will be linearly released within 65 Epochs. Each Epoch will distribute 3835616 DYDX. The duration of each Epoch is 28 days. You can receive the reward of the previous Epoch about 7 days after the end of the Epoch.

Reward based on transaction fees. The transaction fee comes from every transaction in dYdX. If the transaction volume is less than USD 1 million in 30 days and the DYDX holding discount is not calculated, the fee ratios for pending orders and taking orders are 0.05% and 0.1% respectively; 30-day transaction When the amount is greater than or equal to 50 million US dollars, zero handling fees for pending orders can be achieved. If transaction rewards and governance token pledges are not considered, the transaction fee of dYdX is higher than that of centralized exchanges such as Binance.

Reward based on positions held. When a user holds a position in the dYdX contract, there must be other users holding positions in the opposite direction, so futures trading is also a zero-sum game. The positions held will be charged or paid a certain amount of funds based on the premium of the futures every hour. Incentives based on the amount of open interest are conducive to users holding positions in dYdX for a long time.

Transaction rewards will be distributed according to the proportion of transaction scores obtained by users in the Epoch, and each user’s transaction score will be calculated based on the payment fee and average open interest in the Epoch. The specific formula is as follows. Although the weight of the fee paid in the calculation of the transaction score is different from the weight of the average open interest, when the fee paid and the open interest increase by the same proportion, the transaction score will also increase according to this proportion.

An article to understand the liquidity solutions of derivatives trading protocol dYdX, Perpetual Protocol, and MCDEX V3

Liquidity provider rewards

It is used to reward liquidity providers who arrange orders at both ends of the market price, taking into account time, depth of both ends, bid-ask spread, and market participation.

This part of the reward is 7.5% of the total amount of DYDX, which is also linearly released in about 5 years, with 1150685 DYDX distributed to each Epoch.

The user’s reward in an Epoch is determined according to the share of the share, and a data point is recorded every minute. The calculation formula is as follows:

An article to understand the liquidity solutions of derivatives trading protocol dYdX, Perpetual Protocol, and MCDEX V3

Liquidity module

In order to attract market makers to actively participate in dYdX transactions, dYdX allows approved market makers to borrow from the agreement in an unsecured and interest-free manner. The first approved market makers are Wintermute, Amber Group, Wootrade (Kronos), Sixtant, and DAT Trading.

The market maker’s borrowing comes from the USDC pledged by users in the liquidity module. Users who pledge USDC here can allocate a total of 2.5% of the total DYDX, which is also released in about 5 years.

If the pledger wants to withdraw the deposit at the end of the current Epoch, he needs to request a withdrawal of USDC at least 14 days before the end of the current Epoch, otherwise it will automatically enter the next Epoch.

It should be noted that users who pledge USDC face the possibility of principal loss. If the borrower defaults, the liquid staking pool smart contract will provide the pledger with recourse to the borrower, but the repayment cannot be guaranteed.

dYdX provides incentives for all user behaviors in the agreement, including trading, holding positions, providing liquidity, staking USDC, and market maker borrowing. After dYdX announced the distribution of governance tokens, as of August 30, the total lock-up volume of the agreement rose to 429 million US dollars, which has increased by 136% that month. The liquidity in dYdX is enough for ordinary investors to trade, and it is not even weaker than many centralized exchanges.

An article to understand the liquidity solutions of derivatives trading protocol dYdX, Perpetual Protocol, and MCDEX V3

Perpetual Protocol

Perpetual Protocol has been operating normally for more than half a year, and its transaction-related part is on xDai. Perpetual Protocol once occupied more than 80% of the transaction volume of decentralized derivatives. Currently, Perpetual Potocol v2 will be combined with Uniswap V3 and launched on Arbitrum. Both versions of Perpetual focus on solving liquidity problems in derivatives transactions.

Perpetual Protocol V1

Whether it is a traditional order book or a decentralized exchange (DEX) in the form of AMM that has become popular with DeFi, market makers are required to provide liquidity for transactions. Only in AMM, the liquidity provider only needs to deposit at least two tokens in the liquidity pool, and the liquidity of the transaction can be satisfied without active management. Liquidity providers need to own funds and need to bear the risk of impermanent losses. In the derivatives trading with leverage, as the currency price fluctuates, the risk of users providing liquidity will increase exponentially.

Perpetual Protocol constructs the virtual liquidity market maker vAMM, which can guarantee the liquidity of transactions without the participation of market makers. Without a real market maker, there will be no impermanence losses.

Perpetual Protocol’s vAMM uses the x*y=k constant product formula like regular AMM. But unlike AMM, vAMM does not require investors to provide real liquidity, and users’ funds are stored in smart contracts that manage collateral. Perpetual uses a virtual definition of a k value to determine the liquidity of the transaction, but it must be within a reasonable range. If the value of k is too small, the liquidity of the transaction is less, and the slippage of user transactions may be greater, which affects the trading experience; if the value of k is too large, arbitrageurs may need larger funds to keep the price consistent.

The user’s counterparty is vAMM itself, and the user always participates in USDC, and finally withdraws USDC. Futures trading is a zero-sum game. Everyone’s profits come from the losses of others. The vAMM model is used to calculate everyone’s income.

Perpetual Protocol V2 (Curie)

The V2 version of Perpetual Protocol is named Curie and is deployed on the Arbitrum layer 2 network of Ethereum. Curie will use Uniswap V3’s centralized liquidity pool and execute transactions in its perpetual contracts. Each transaction takes place between opposing counterparties. The agreement will have stronger scalability, liquidity aggregation, and free market Create and other characteristics. According to the official introduction, Curie will be implemented in four stages:

  • The mainnet was launched, and Uniswap V3 was used to centralize liquidity and market-making strategies on Arbitrum.
  • Limit orders and liquidity mining.
  • Multi-asset mortgage including USDC.
  • Create a license-free private market with Uniswap V3.

In addition to cross-margin, reducing the agreement’s dependence on insurance funds, creating a license-free trading market, and improving fee sharing, Curie also provides a number of strategies to improve transaction liquidity.

Curie’s transactions will be executed directly in Uniswap V3, and the centralized liquidity of Uniswap V3 will solve the problem of decentralized liquidity in AMM. Although the Perpetual Protocol V1 version uses vAMM, the liquidity is still scattered throughout the range. In Uniswap V3, liquidity is usually concentrated near the market price. While improving capital efficiency, it also increases transaction liquidity and reduces slippage.

Liquidity providers will be able to use leverage (Leveraged LPs), and market makers can provide amplified liquidity on Uniswap V3. For mature market makers with liquidity strategies, this will further amplify revenue.

Establish the Perpetual Economic System Fund and introduce Charm, dHEDGE, Lemma, etc. to help improve liquidity. For example, Charm Finance is the automatic liquidity manager of Uniswap V3. Charm will cooperate with Perpetual Protocol to establish an Alpha Vault for Perpetual liquidity providers. Market makers only need to deposit USDC into Charm’s liquidity vault to start earning transaction fees.

Perpetual Protocol V1 uses vAMM to ensure the liquidity of transactions without real market-making funds. The V2 version is deeply bound with Uniswap V3. Leveraged LPs further amplify the income of market makers, but the requirements for market makers are also higher, requiring active management strategies.


When summarizing the experience learned from the V2 version, Liu Jie, the founder of MCDEX, said: “Take liquidity as the first principle of financial products. These include high capital efficiency, good trading experience, low friction, and low liquidity costs.” When designing MCDEX V3, MCDEX thought about how to obtain more by improving capital efficiency and the expected benefits of liquidity providers. fluidity.

Liquidity strategy

MCDEX V3 AMM uses index prices and risk exposures for pricing. The average transaction price of the transaction will be based on the formula by the number of transactions, the index price provided by the oracle, the slippage parameters, the positions held by AMM, and the margin of the liquidity pool. Decide.

By introducing the index price, the price of AMM will follow the market changes according to the price provided by the oracle, reducing the participation of arbitrageurs. This can reduce arbitrage opportunities and avoid unnecessary losses for liquidity providers. This is similar to some mechanisms of DODO.

Multiple AMMs are allowed to share the same liquidity. Multiple AMMs using the same collateral can use a liquidity pool to maximize the benefits of liquidity providers.

Liquidity is concentrated near the index price. The V3 AMM function flattens the curve near the index price. While improving the user experience, it maximizes capital efficiency so that the funds of the liquidity provider can intensively meet the trading needs near the index price. As shown in the figure below, as of September 2, MCDEX V3 AMM has been deployed on the Arbitrum One mainnet, and the liquidity gathered in the market is higher than other adjacent prices.

An article to understand the liquidity solutions of derivatives trading protocol dYdX, Perpetual Protocol, and MCDEX V3

Risk control and return

The role of Operator is introduced in V3 AMM. Operator is the creator of a perpetual contract. It manages various risk parameters according to the authorization of the liquidity provider to increase the liquidity provider’s income and reduce risks.

Adjust the risks faced by AMM transactions by controlling risk parameters. Transactions that increase AMM’s risk exposure will be suppressed, facing greater slippage, larger spreads, more transaction costs, and smaller maximum positions, while transactions that reduce AMM’s risk exposure will enjoy price and Cost advantage.

AMM is the counterparty of most traders and must hold the opposite position to most people. If most users are long and AMM is short, then the long pays the funds to the short; if most users are short and AMM is long, the short is to pay the longs.

The main income of liquidity providers comes from spreads, payment of capital fees, transaction fees and other income. AMM uses the above-mentioned index price adjustments to adjust pricing, share liquidity, liquidity aggregation, and adjust spreads, capital costs, transaction costs and other parameters. To reduce the risk of liquidity providers and increase returns.

The main innovation of MCDEX V3 AMM is that according to the index price, the transaction price can be adjusted without the participation of arbitrageurs. At the same time, the liquidity in the agreement is concentrated near the index price. Operator is introduced for parameter management to reduce the risk of liquidity providers. To maximize revenue.


dYdX, Perpetual Protocol V2, and MCDEX V3 have optimized liquidity, and they are all deployed on the second layer of the Ethereum protocol to meet the low cost and fast confirmation required for transactions.

As a representative of the order book DEX, dYdX will provide token incentives for all links in the agreement, such as transactions and liquidity provision, for five years. In the just-concluded Epoch0 stage, this incentive may exceed the transaction requirements. the cost of.

Perpetual Protocol V2 is deeply bound with Uniswap V3, and cooperates with active liquidity management protocols such as Charm. When providing liquidity, it can also leverage and amplify the benefits of liquidity providers, but requires active strategies to adjust positions.

MCDEX V3 AMM uses a liquidity strategy to concentrate liquidity on the market, and uses an oracle to make the transaction price follow the market price change, plus various parameter adjustments to increase the income of the liquidity provider.


Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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