Summary
(1) Rage Trade is a full-chain perpetual futures trading platform supported by LayerZero, aiming to improve capital efficiency through deep liquidity
(2) Compared with other sustainable trading platforms, its competitiveness and sustainability come from: innovations such as circular liquidity and 80/20 Vaults
(3) The Delta Neutral Vaults strategy minimizes the market risk of GLP pledgers and brings benefits to USDC pledgers
Background introduction
Perpetual futures (perps) have become the cornerstone of cryptocurrencies, allowing for leveraged trading, hedging, and speculation. Since BitMex first launched perpetual futures in 2016, most of the trading volume has come from centralized platforms such as Binance and OKX. With the continuous development of DeFi, decentralized perpetual futures are gradually receiving attention. The main reasons for this are:
(1) Users want to be able to keep their assets independently
(2) Traders want to circumvent restrictions such as KYC, regulations and geographical boundaries and conduct leveraged trading
(3) Users hope that the platform can operate reliably and stably (more depends on the chain it is on)
(4) Users wish to profit from arbitrage and delta neutral strategies
Liquidity depth and gas fees are the two most important aspects for users when choosing a decentralized perpetual futures trading platform. Deep liquidity ensures minimal slippage when trading and users can get the best possible positions. Low gas fees allow for high-frequency trading, as the fees paid are insignificant compared to the size of their positions.
Why do we need another perpetual futures trading platform?
Simply put, the liquidity problem has not been properly resolved. How does Rage Trade incentivize liquidity in a sustainable way? As mentioned above, deep liquidity requires a smooth trading experience for users. Let’s study the current perpetual futures contract trading platforms on the market and see what problems there are.
Among the various decentralized perpetual futures trading platforms, dYdX and GMX are undoubtedly the most popular, with annual trading volumes reaching $207.1 billion and $46.4 billion respectively. However, questions remain about the long-term sustainability of both protocols – dYdX uses token rewards to incentivize liquidity, while GMX’s yields rely on trader losses.
dYdX uses a central limit order book (CLOB), so it requires market makers to provide liquidity through limit orders. To incentivize them, 40% of the total token supply is dedicated to rewarding traders and liquidity providers. After each epoch, traders will earn a corresponding number of dYdX tokens based on their trading fees and holdings. Market makers are able to trade based on the liquidity they provide and hedge their positions on central exchanges to earn risk-free dYdX tokens. Ultimately, once the price drops, token buyers bear the brunt of the token’s selling pressure, while market makers start to make money.
GMX, on the other hand, pays GLP earnings based on trader fees and losses. GLP holders earn a portion of traders' losses, liquidated assets, and fees paid on each trade. Their entire revenue structure relies on trader losses because traders' gains are paid out by GLP. Liquidity providers also bear the risk that they may run out of liquidity as traders make huge profits. The yields offered are also based on trading volume, which is not guaranteed unless traders use GMX on a daily basis.
Additionally, another popular platform, Perpetual Protocol, launched a v2 version of their protocol to reduce the various risks associated with loss of insurance funds from v1. This is because they pay funding fees from an insurance fund, and large deviations in token prices can cause them to pay high funding fees.
With the launch of v2, real liquidity is added, making liquidity providers the counterparty to transactions rather than insurance funds. However, providing liquidity to the v2 protocol results in losses when the price of the underlying token changes. Most of the liquidity is provided by the team itself, and the team must trade with its own liquidity to hedge losses. In the end, they had a negative PnL and had to sell their $PERP rewards to cover their losses. But issuing a token would cause similar problems to dYdX, where the token would basically only incentivize liquidity providers.
As mentioned above, existing platforms such as GMX, dYdX, and Perpetual Protocol have issues with long-term sustainability. Rage Trade hopes to solve this problem by providing traders and liquidity providers with a smooth and capital-efficient platform with deep liquidity. This article will discuss how Rage Trade innovates a deep liquidity provision mechanism by recycling underutilized LP tokens from various chains, as well as illustrate how its capital efficiency and fee collection mechanism stand out from existing platforms.
How does Rage Trade work?
You can refer to the official documentation of Rage Trade, as well as the Twitter Threads of BizYugo, 0xjager, and 0x_d24.eth to learn more about the movement mechanism. The figure below shows the workflow of the protocol:
In a nutshell, Rage Trade has two main components to optimize the liquidity of spot LPs and increase the capital efficiency of its $ETH futures contracts with 10x leverage:
(1) Omni-chain recycled liquidity
(2) 80-20 vaults
Full chain circular liquidity
Rage Trade has the potential to connect all ETH/USD yield generating pools such as GMX, Sushiswap, etc. and provide circular liquidity to Rage Trade through LayerZero. How can another protocol’s LP token (hosted on other chains like Polygon, Avalanche, Solana, etc.) serve as liquidity on Rage Trade’s Arbitrum? The answer is to use LayerZero. LayerZero is essentially a messaging protocol that allows messages to be passed from chain A to chain B. Taking the 3CRV Vault as an example, when 3CRV LP tokens are used as collateral on Chain A, we are able to mint virtual liquidity into Rage Trade on Chain B.
80-20 Treasury
This is a system pioneered by the Rage Trade team. Essentially, at least 80% of LP tokens will continue to generate revenue on the original protocol. The remaining 20% will be used as virtual liquidity for Rage Trade. This mechanism is like being able to enjoy the benefits of UNI V2 while still enjoying the benefits of centralized liquidity on UNI V3. This 80-20 vault is in dynamic equilibrium and will not stay at a fixed 80-20 ratio. You can learn how it works in detail here.
Other Products: Delta Neutral Vault
GMX has been a popular perpetual trading platform, with over $384 million in liquidity in its GLP pool as of January 2023. GLP is a liquidity pool similar to Uniswap’s LP that contains a basket of tokens. The image below shows the composition of each token in the pool.
Source: GMX
GLP is composed of 39% USDC and 61% other currencies. Since the volatility of BTC, ETH and other currencies will bring direct exposure, GLP is prone to value fluctuations. Users are incentivized to stake GLP to profit from traders’ losses and receive returns in the form of esGMX and 70% of platform fees. However, due to market risks, GLP stakers may still lose money despite receiving gains. The chart below shows GLP’s returns versus rewards. Since inception, GLP has returned -13% due to market risk.
Source: Ape/rture
Rage Trade aims to solve this problem by reducing market risk to ensure that GLP stakers receive returns. This is achieved through the Delta Neutral Vaults product, specifically, by minimizing BTC and ETH risk exposure by shorting on Aave and Uniswap. They have two complementary independent vaults: Risk-Off Vault and Risk-On Vault.
Risk-On Vault acquires BTC and ETH via Flash Loan on Balancer, which are then sold on Uniswap for USDC. This USDC, along with some USDC from the Risk-Off Vault, is used to borrow BTC and ETH, which are then repaid to Balancer. This effectively creates a short position on AAVE, as Risk-On Vault borrows BTC and ETH. Every 12 hours, the position is reopened to collect fees, rebalance PnL between shorts on AAVE and GLP collateral, and rebalance the hedge based on the composition of GLP deposits.
Source: Rage Trade
The Risk-Off Vault is key to providing collateral to the Risk-On Vault, which is used to maintain the health factor of AAVE lending (1.5).
Source: Rage Trade
Here's a comparison between Risk-On Vault and Risk-Off Vault:
How has the market responded to Delta Neutral Vaults? At launch, both Vaults were immediately sold out within minutes, showing the insane demand for Vault products. In terms of Risk-On Vault's performance compared to GLP, it returned about 25% on profits compared to GLP's -13%, with Vault performing better.
Source: ape/rture
Currently, Rage Trade dominates in terms of GLP value compared to other protocols built on GLP, with a total of approximately $6.5 million in GLP.
Source: Dune
Why do we believe Rage Trade will outperform?
The potential of the Arbitrum ecosystem
With Arbitrum successfully launching its Nitro upgrade and Arbitrum Odyssey underway, projects within the Arbitrum ecosystem have been attracting attention. The Arbitrum ecosystem is booming, with daily transaction volumes hitting all-time highs. Moreover, Arbitrum has one of the lowest fees in L2 and inherits the security of Ethereum, making it the best choice for developing protocols.
Source: The Block
Source: L2fees
Unified liquidity across the entire chain
We firmly believe that the future will be a public chain landscape in which multiple chains coexist, so we have invested in LayerZero and now Rage Trade.
Most liquidity is distributed across chains and is isolated and decentralized. This is where LayerZero helps protocols like Rage Trade gather liquidity. Rage Trade can not only utilize the liquidity of the Arbitrum protocol, but also the liquidity of Ethereum (Compound, Sushi, etc.), Avalanche (Trader Joe, Benqui, etc.), BNB Chain (Pancake Swap, etc.), Polygon (Quickswap, Aave, etc.) and other chains fluidity.
Circular mobility innovation
Rage Trade innovatively incentivizes liquidity in a sustainable way. Given the success of protocols like GMX and Tri-crypto, users can deposit their LP tokens to provide liquidity to Rage Trade. Most notably, this incentivizes users to deposit their yield LP to gain additional yield without having to release too many tokens. Secondly, this establishes the composability of DeFi over traditional finance – all of these LP tokens being used secondaryly, as liquidity provision is just one example.
Best Arbitrage Platform
Most GMX traders are arbitrageurs looking to profit from the price difference between GMX and CEX. Likewise, Rage attracts arbitrageurs when prices diverge from oracle prices. However, Rage using vAMM pricing may be more attractive to arbitrageurs than GMX using GLP pools and oracles because the vAMM model does not have an oracle to tie the price to the asset price. vAMM is an independent market, so arbitrageurs can hedge their positions on CEX and profit based on price differences.
Huge growth opportunity
Compared with traditional centralized exchanges, the field of decentralized perpetual futures is still in its early stages. Data from The Block, Tokenterminal, and Dune Analytics show that the market size of perpetual futures is $389 billion as of December 2022. Decentralized perpetual futures account for only about $2.5 billion, or just 0.8%. Compared with centralized spot exchanges, decentralized perpetual futures contracts have huge room for growth.
Source: The Block, Tokenterminal, Dune Analytics
Imagine the future
The rapid action on the initial CRV treasury shows strong demand for LP token recycling. We look forward to using Vaults from on-chain protocols such as Polygon, Avalanche, Solana, Aptos, Sui, etc. in the future. Currently Rage Trade only provides ETH-USDC trading pairs; we believe that more trading pairs will be launched in the near future to provide users with more choices.
Rage’s protocol code is open source and partners can use their SDK to integrate, combine and develop financial products on the most liquid ETH Perp. Other possible products that can be built on Rage Trade are the Delta Neutral stablecoin and various structured products, delta hedge your options positions, or use their bot to earn fees and become an administrator of the system. Collaborators including Abracadabra, UXD Protocol and Sentiment offer leveraged returns to Delta Neutral Vault stakeholders, Sushiswap allows users to stake idle LP into Rage to earn returns, Resonate offers fixed returns on Delta Neutral Vaults, and Sperax allocates Its 10% USD collateral is held in Risk-Off Vault.
The trust these partners put in using and building their products proves that Rage Trade is secure enough. Since its launch, Rage Trade has purchased insurance against smart contract vulnerabilities and ensured the normal operation of the protocol through some deposits.
Rage Trade has many key innovations, such as circular liquidity and 80-20 Vaults to provide users with a quality trading experience, and Delta Neutral Vaults to provide yields to stakers. Based on the team’s emphasis on sustainability and security, we are confident in the success of Rage Trade.