Characteristics Needed for a New Generation of Decentralized Derivatives Exchanges
Intro
The current crypto landscape witnesses a swift surge in decentralized derivatives. Yet, the existing models don’t fully cater to the market’s demands, especially regarding efficiency, fairness, and scalability in trade mechanisms, alongside transparent and fair fee structures. These challenges pave the way for a new generation of decentralized derivatives exchanges.
In this article, we’ll delve into five crucial characteristics that this new breed of exchanges should possess. First, we’ll tackle trade, which should embody higher efficiency, fairness, and scalability. Then, we’ll focus on fees; a fair and transparent fee structure can attract more users and ensure the exchange’s competitiveness and sustainability. Following that, we’ll examine the importance of liquidity pools (LPs), which are integral to decentralized exchanges, providing essential market depth and stability.
Next, we’ll discuss growth strategies, determining the sustainable development and user growth rate of the exchange, alongside user experience and entry barriers. These factors ultimately affect the exchange’s competitiveness and market position.
Lastly, we’ll concentrate on risk management, crucial for safeguarding user assets and ensuring the exchange’s steady operation. In terms of risk management, we’ll tackle issues like liquidity crunch, squeeze risks under extreme market conditions, and oracle risks.
As we delve deeper into these five key areas, we’ll uncover the characteristics required for a new generation of decentralized derivatives exchanges, using MYX as an example to demonstrate how these traits can be achieved.
Trading
Features Needed for the New Generation of Exchanges:
1. Efficient and Safe Trading Mechanism
The new decentralized derivatives exchange should emphasize user asset safety, minimizing trade risks while ensuring fairness and transparency, and preventing potential adversarial practices between the exchange and users.
2 . Expandability of Trading Pairs
With the expansion of the decentralized finance ecosystem, an increasing number of cryptocurrencies and derivatives have emerged. The new generation of decentralized derivatives exchanges should be capable of flexibly expanding trading pairs to adapt to diverse market demands, providing users with a wider range of trading choices.
3. Low LP Scale Dependence
The new generation of exchanges should minimize dependence on high-value LPs through mechanism optimization, lowering market risk and enabling broader user participation in liquidity provision.
4. Liquidity Connectivity
Liquidity connectivity efficiently links decentralized perpetual exchange and CEX liquidity, forming a coherent, efficient market ecosystem. This can maximize liquidity, boost market efficiency, and depth, and create more trading opportunities, thereby improving user trading experience and mitigating the “liquidity islands” phenomenon — liquidity isolation among exchanges. Moreover, liquidity connectivity can channel more liquidity towards decentralized perpetual exchange, further enhancing its trading depth and appeal.
5. Robust Trade Carrying Capacity
The exchange needs sufficient trade carrying capacity to manage significant market fluctuations and large trading demands, ensuring stable and smooth transactions.
6. User-Friendly Trading Interface
Decentralized derivatives pose a high entry barrier for beginners. Therefore, the exchange should provide a more user-friendly and intuitive trading interface, lowering the user entry barrier and enhancing the user experience.
MYX’s Solutions
1. Trading Mechanism
MYX incorporates the P2Pool2P trading mechanism, an innovative approach designed to drastically reduce risk exposure and guarantee that all potential trading profits are fully reserved. This ensures that MYX will never be exposed to bankruptcy risk from counter-party betting. In essence, MYX offers unparalleled protection for both your assets and profits. Additionally, our intelligent exposure system further minimizes risk for Liquidity Providers (LPs), effectively mitigating the risk of significant market pullbacks.
2. Expandability of Trading Pairs
In MYX, each trading pair has an independent market, meaning each pair has its liquidity pool and pricing mechanism, with no mutual interference. Furthermore, users can provide liquidity for each independent market and earn corresponding LP tokens. This enhances trading pair expandability as users can participate in more markets by providing liquidity, reaping benefits in return. Thus, this design indeed boosts MYX’s expandability of trading pairs, offering users more trading and investment choices.
3. LP Scale Dependence
MYX establishes independent markets for each trading pair, a design that makes each market’s liquidity independent and controllable, reducing dependence on single, large-scale LPs and enhancing system stability and risk resilience. Moreover, the flexible LP participation mode encourages more users and small-scale LPs to join, further diversifying liquidity sources and reducing MYX’s dependence on large-scale LPs. Overall, through a unique liquidity management strategy and flexible LP participation mode, MYX successfully reduces dependence on LP scale, enhancing its adaptability to market changes.
4. Liquidity Connectivity
MYX realizes DEX and CEX liquidity connectivity by introducing market makers. As professional liquidity providers, market makers can effectively increase market liquidity and trading depth. Moreover, as MYX’s trading volume grows, liquidity imbalance issues in CEX can be effectively hedged on the MYX platform, forming a complementary, bidirectional liquidity channel. This solution successfully breaks the “liquidity islands” phenomenon, ensuring market liquidity stability and offering users a more efficient, flexible trading experience.
5. Trade Carrying Capacity
The enhancement of MYX’s trade-carrying capacity primarily comes from its unique LP mode and liquidity management strategy. By setting independent markets and liquidity pools for each trading pair, MYX achieves liquidity decentralization and market independence, reducing mutual influence among markets and enhancing system stability and carrying capacity. Furthermore, the flexible LP participation mode attracts more liquidity providers, further expanding liquidity pool size and boosting MYX’s trade carrying capacity. In sum, MYX’s trade carrying capacity is exceptional.
6. User-Friendly Trading Interface
MYX provides a user experience close to CEX, significantly reducing users’ learning costs. This intuitive and easy-to-understand design makes MYX extremely user-friendly, allowing both cryptocurrency novices and experienced traders to easily conduct trading and investments on MYX.
Fees
Features Needed for the New Generation of Exchanges:
1. Transparent and Reasonable Fee Rates
Transparent fee rates enhance user trust, while a fair fee structure balances exchange revenues and user experience.
2. Funding Fee
In trades conducted via Oracle price feeds, the Funding Fee primarily ensures an overall balance of long and short positions, automatically adjusting to counteract market bias, and creating profit opportunities for strategic traders.
MYX’s Solutions:
1. Tiered Fee Structure
MYX employs a tiered fee structure, meaning fees are set based on a user’s trading volume or asset size. This design principle aims to attract high-volume traders while keeping retail traders’ costs manageable. The structure allows for lower fees for users with higher trading volumes or larger asset sizes and ensures retail traders’ costs are not excessive, striking a balance between exchange revenue and user experience.
2. Dynamic Funding Fee Adjustment
In MYX, trading is conducted directly via Oracle price feeds. This shifts the primary role of the Funding Fee to maintain a balance between long and short market positions. If there is a market bias, such as excessive long or short positions, the Funding Fee automatically adjusts to balance the market. This auto-adjustment mechanism not only ensures market balance but also offers traders additional profit opportunities.
LP Pools
Features Needed for the New Generation of Exchanges:
1. LP Model
The role of Liquidity Providers (LPs) extends beyond providing market liquidity; they also enhance market depth and stability. Importantly, next-generation exchanges should allow LPs to participate flexibly, such as choosing to provide single or multiple assets, thereby attracting more users, expanding market size, and enhancing market vibrancy and competitiveness.
2. Impermanent Loss Control and Hedging
Impermanent loss is a significant issue in decentralized exchanges, negatively affecting LPs’ enthusiasm. Hence, next-generation exchanges must prioritize minimizing or controlling impermanent loss as a key development objective.
3. High DeFi Scalability
With the rapid growth of DeFi, user demand for exchanges is also increasing. Next-gen exchanges should be highly scalable, and adaptable to ever-changing market needs. Whether it’s supporting more trading pairs, handling high-volume transactions, or integrating various DeFi protocols, these are essential characteristics for the new age exchanges.
MYX’s Solutions:
1. LP Model
MYX adopts a unique single-coin pooling model, setting up an independent market for each trading pair. This allows LPs to flexibly deposit Index tokens or USDT, or both, according to their preference. This design maximizes asset utilization and maintains market independence and stability.
2. Impermanent Loss
In MYX’s single-coin pool model, by simply depositing a single asset, one can become an LP for that market, effectively reducing impermanent loss risk. Additionally, it allows for hedging in other markets to decrease impermanent loss, offering higher yield guarantees for LPs, thereby attracting more users to provide liquidity.
3. Defi Scalability
MYX boasts high DeFi scalability. Its single-coin model allows various trading pairs to exist in independent markets, providing a foundation for enhancing market liquidity and depth while enabling MYX to swiftly adapt to market demand changes. Additionally, MYX’s smart funding rate adjustment mechanism ensures market balance while enhancing stability and health. Furthermore, MYX’s growth mechanism attracts a wide user base, providing strong momentum for future market growth. Lastly, MYX’s robust transaction processing capacity and rich liquidity enable it to seamlessly integrate more DeFi products and services, offering robust trading support for lending, prediction markets, or any other DeFi applications. These key features collectively endow MYX with high DeFi scalability.
Growth
Features Needed for the New Generation of Exchanges:
1. User Growth Strategy
A clear user growth strategy is necessary for the long-term, stable development of an exchange.
2. Diversified Products
Offering a variety of trading products can attract more users and lower the entry barrier.
3. Market Maker
Market makers are an essential part of decentralized derivative exchanges. They provide liquidity, thereby activating the market.
MYX’s Solutions
1. Market Maker
MYX has introduced market makers, who make the market more active by providing liquidity, thus attracting more users to trade, which will help the exchange grow.
2. Invitation mechanism
MYX’s invitation mechanism incentivizes users to promote the platform, extending the exchange’s influence to a wider user base, and effectively attracting new users. It creates a mutually beneficial environment, encouraging existing users to participate in the exchange’s growth.
3. Copy Trading
MYX has introduced Copy Trading, lowering the learning curve for novice users, improving their trading efficiency, and attracting more new users. This not only increases the user count but also trading volume, having a positive impact on exchange growth.
Risk Control
Features Needed for the New Generation of Exchanges:
1. Effective Response to Liquidity Exhaustion
In cases of worsening market conditions or liquidity shortage, the exchange may face the risk of liquidity exhaustion. Under these circumstances, the exchange must have an effective mechanism to deal with liquidity exhaustion and ensure the normal operation of the market.
2. Prevention of Extreme Market Squeeze
Under extreme market conditions, such as market surges or plunges, the exchange may face the risk of a squeeze. The exchange needs appropriate defensive measures, such as automatic position reduction and margin adjustment, to ensure stable market operation.
3. Mechanism Attack Prevention
The operation mechanism of a decentralized exchange could be exploited by malicious users or hackers, executing so-called “mechanism attacks” like liquidity attacks, flash loan attacks, etc. The exchange needs appropriate defenses to ensure market fairness and security.
4. Oracle Attack Prevention
Oracles provide off-chain data to decentralized exchanges, but they could also be targets for attacks. The exchange needs appropriate defenses to ensure the accuracy and security of the data obtained from oracles.
MYX’s Solutions
1. Response to Liquidity Exhaustion
MYX uses D2D/D2C dual liquidity channels, unleashing the potential of on-chain transactions, and significantly improving MYX’s liquidity so users can conduct large transactions on MYX without affecting market prices. This also creates more earning opportunities for liquidity providers (LPs).
2. Extreme Market Squeeze
Under extreme market conditions, MYX prevents squeezes via the Auto Deleveraging (ADL) mechanism. The ADL mechanism automatically activates during severe market fluctuations, reducing positions that exceed the risk threshold to ensure the overall health and stability of the system.
3. Mechanism Attacks
MYX dynamically adjusts user position limits based on market conditions and risk levels, preventing market manipulation or disruption by a single user or a small group of users. This dynamic user position limit strategy can not only prevent potential market manipulation but also limit users’ potential losses when risks increase, protecting users’ interests.
4. Oracle Risks
MYX adopts a dual oracle mechanism, using Chainlink-provided prices as the data source for transactions to achieve zero slippage trading. MYX also independently developed an oracle for verifying Chainlink’s quotations. If there is a large price discrepancy between the two, MYX will immediately suspend the order-placing function to avoid the risk of an oracle attack.
Conclusion
- Trading: To ensure fair, efficient trading with good scalability, next-generation exchanges need to introduce lower-risk trading mechanisms, such as the “P2Pool2P” trading mechanism we discussed. This mechanism needs to be able to reduce risk exposure, fully reserve all potential trading profits, and protect users’ profits and assets.
- Fees: Next-generation exchanges need to set reasonable and transparent transaction fee rates, establish different rates according to users’ trading volume or asset size to ensure fairness and attract users of different scales. At the same time, exchanges also need to dynamically adjust funding rates to maintain a balance between long and short positions, enhancing market stability and health.
- Growth: Growth strategies are an integral part of next-generation exchanges. Exchanges need an effective growth strategy, such as introducing multi-level commission systems and copy trading systems, to attract more users and enhance the user experience.
- LP Pools: Next-generation exchanges need to adopt flexible LP models and have effective strategies to hedge against impermanent loss. Exchanges need to support various trading pairs in independent markets to provide necessary market liquidity and depth.
- Risk Control: Risk management is at the core of next-generation exchanges. Exchanges need an effective risk control strategy, including responses to liquidity exhaustion, mechanism attacks, oracle attacks, and extreme market squeezes.
These key features together constitute the foundation of the next-generation decentralized derivatives exchanges, meeting market demands and maintaining a leading position in the competition. Next-generation exchanges need these features to adapt to the development of the cryptocurrency market, meet user needs, provide better services, and thus achieve success in the market.
