Written by Etherboy
With the vote to deploy Uniswap V3 to the Ethernet Layer 2 network Arbitrum passed, the competition for DEX in the Layer 2 network has entered a white-hot phase. Meanwhile, DeFi’s derivatives track is still in its infancy due to the high fees, high latency, and poor liquidity of traditional AMM model. However, with the gradual implementation of the Layer2 scheme of Ether, the problems of high Gas fee and high latency will be solved. As the most imaginative product in the financial market, derivatives may become the new breaking point of DeFi market.
MCDEX V3 (MCB) is a decentralized perpetual contract priced using the “Index Price + Complex AMM” approach. Its liquidity provision is based on a centralized AMM model similar to Uniswap V3, which automatically concentrates liquidity in a single band. The benefits are threefold: first, centralized liquidity, as the V3 AMM is 1000 times more liquid than the constant product formula AMM; second, it reduces slippage, which is very conducive to contract trading; and third, LPs do not have to bear impermanent losses.
On the second tier track, MCDEX, the first officially recognized project to officially migrate to Arbitrum, has been supporting Arbitrum since the third quarter of last year and has successfully deployed the Arbitrum mainnet. With the imminent deployment of Arbitrum on Uniswap V3, Arbitrum has now taken the lead in the Layer 2 race. the MCDEX team has flagged that it will consider using Uniswap V3’s Oracle directly as the Oracle source for MCDEX V3, which means that DEX will For the first time, it will be completely free from centralized exchanges and will have decentralized pricing for both spot and futures products. In a way, it fulfills Vitalik’s vision that UNI should become a prophecy machine token.
V3 AMM’s trading slippage has been significantly reduced
Very concentrated liquidity in the V3 test online marketplace
Market maker risk and the way to deal with it
V3 AMM brings very concentrated liquidity, but the biggest risk is market maker risk when the market is imbalanced between long and short. Suppose there is a surge of short Ether orders in the market, the LP portion will act as a counterparty to the spread portion and take a big risk.
MCDEX V3 deals with market maker risk by charging counterparties a capital fee, automatically adjusting quotes (premium discount) and setting the spread on the market. When the market is dominated by short positions, the system imposes a funding fee on the short position, and a portion of the funding tax paid will go to the LP.
In the AMM design, the principle of quote adjustment is to discourage trades that further increase AMM risk and encourage trades that reduce AMM risk. Suppose there is a surge of short orders in the market, at which point the AMM lowers the price and encourages arbitrageurs in the market to go long on MCDEX, creating a dynamic equilibrium. In other words, AMM is selling its positions at a discount, encouraging traders to pick up their positions so that AMM risk is reduced.
In addition, LPs can earn spread gains through the intraday spreads, giving back to the LPs, and secondly, they can avoid the problems caused by the imprecise quotes of the prophecy machine, which is also a way to balance the risk. In contrast to the CEX, the essence of the intraday spread is also the source of revenue for the automated market maker.
These risk parameters are dynamically controlled by the role of the Operator, who, under the authority of the LP, can dynamically adjust these risk parameters to market conditions at any time within a range that creates a better balance.
Operator’s setup: allowing anyone to create contracts without permission
The Operator can freely create perpetual contracts and set the initial parameters of the perpetual contracts (e.g. margin rate, AMM risk parameters, etc.). Adjust the AMM market making risk, trading depth, slippage, order spreads, etc.
The Operator purchases (or provides directly) Oracle services for the contract. Operator can also provide its own Oracle data for perpetual contracts.
The Operator can dynamically adjust the risk parameter settings within a valid range based on market conditions.
The Operator can initiate a governance proposal when it wishes to adjust the range of parameters.
Operato can profit from operational fees and thus from each transaction.
MCDEX V3 allows users to create contracts without a license, much like Uniswap allows for the free creation of various trading pairs. It is possible to greatly enrich the variety of the contract market and quickly access many long-tail assets. As you can see, this is a very free market.
In addition to Operator, there are five roles in MCDEX: Liquidity Provider, Trader, Keeper, and Delegator. Maintain decentralized operation.
Deployed to Arbitrum mainnet, planned to be officially available to users by July
MCDEX has gone through V2 version, V3 uses Arbitrum Rollup for Layer2 solution. There is a limit to the size of the contract. So use Arbitrum Rollup.
On May 17, MCDEX V3 was successfully tested on Arbitrum testnet 5, and the results were smooth: fast and low Gas. Arbitrum opened its mainnet to developers on May 28, and MCDEX V3 was then deployed to the Arbitrum mainnet. The team says that the MCDEX V3 mainnet will be officially available to users by July.
Community Vote: Token Destruction and $7 Million Fundraising
On April 16, the MCDEX community initiated a proposal to raise $7 million for the DAO, raising $6 million from institutional investors such as Multicoin Capital, Distributed Capital, and DeFiance, and giving MCB holders a $1 million follow-on line of credit. The financing is priced at $10/MCB and has a strict lock-up plan with performance-based releases. All proceeds from the financing will go into the MCDEX DAO vault, which will be shared by all MCB holders. After the launch of V3, these funds will be used primarily to add liquidity to the V3 AMM.
Release MCB based on performance to incentivize long-term growth
In addition, a few months ago MCB was destroyed through a community vote. 90 million MCB tokens have been destroyed, reducing the total number of MCBs from 100 million to 10 million and protecting existing MCB holders. 75% of the newly issued MCBs were used for community incentives, and strict rules were set for issuing additional tokens.
As you can see, the team is adhering to the free market theory, where the team or active community contributors propose the governance, and then vote on it after a thorough discussion within the community, finding a balance between democracy and centralization.
In terms of DeFi’s combinability, there is ample scalability as any ERC20 token can create its own contract in V3. On the other hand the team is considering using the MCDEX perpetual contract product as an underlying asset for other projects. For example, the MCDEX LP Token can be used as an underlying asset for projects like BarnBridge and Saffron to achieve full composability, expand capital utilization and impact, and build the Lego blocks of DeFi.
is one of the few decentralized exchanges sticking to the order book model, using an off-chain order book and on-chain settlement for transactions, and has not yet launched a governance token. Its Layer2 version has been officially launched and can be seen to have a lower disk spread, but not as deep as MCDEX in terms of disk concentration. The reason for this is that MCDEX’s AMM’s have higher capital efficiency.
Perpetual is a futures Dex that uses a virtual AMM (vAMM) mechanism for pricing. vAMM uses the x*y=k method of AMM for pricing, but instead of actually converting the two currencies, the AMM formula provides the price and then the funds come in and out of the pool (Vault) instead of directly from the AMM pool The advantage of the vAMM mechanism is that it allows traders to play against each other without LPs as counterparties, either in the same direction or between traders with long and short counterparties, avoiding unearned losses/counterparty risk for LPs.
The essence is similar to Synthetix’s dynamic debt design, which is a bet between traders. However, the vAMM mechanism does not allow for effective pooling of capital efficiency and can generate large slippage.
Write at the end
MCDEX V3 adopts a centralized AMM mechanism to concentrate funds on the market, which can effectively enhance the trading experience as the trading depth goes up and the slippage problem is solved. The use of discounted prices and arbitrageurs to hedge market maker risk can be seen as essentially devolving arbitrageurs, market makers, and contract creators, and community governance to the market. Of course this also means that LP providers will take on a higher level of risk.
In the future, all ERC20 tokens will be able to create their own perpetual contracts in V3, and from this perspective MCDEX creates a completely free marketplace similar to Uniswap that can cater to the trading of perpetual contracts for a large number of long-tail assets. On the Arbitrum network, trading can reduce network fees by at least 90% and transaction times are faster, closing the gap with centralized exchanges in terms of trading experience and bringing more fresh blood to decentralized derivatives trading. The centralized exchanges, which once held an absolute advantage in the derivatives track, will also officially meet the challenge of the decentralization wave.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/read-mcdex-v3-reinventing-decentralized-derivatives-with-a-centralized-amm-mechanism/
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