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Crypto Trading Protocol Drift Relaunches Into Rocky Solana DeFi Landscape

Danny Nelson - CoinDesk
2022-12-19 15:03
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As Solana decentralized finance (DeFi) staggers through the rubble of FTX, a long-absent player of its crypto derivatives trading scene is ready to take the stage once again.

Drift, a Solana-based perpetual swaps trading protocol that handled billions of dollars in volume during the 2021-2022 bull run before collapsing during the Terra crash, is going live with its revamped second version on Friday.

Version 2 of Multicoin-backed Drift has bigger ambitions than simply derivatives: It seeks to be a one-stop-shop crypto exchange for all the many transaction types DeFi can offer. Many of those services are in short supply in the Solana ecosystem right now, making Drift’s return a potential bright spot.

The relaunch will test whether Drift’s expanded offerings can overcome the doldrums currently depressing all of Solana DeFi, where decentralized exchange (DEX) trading volume has fallen 96% in a single month – the worst of any major chain in reaction to FTX meeting its doom.

Read more: Solana DeFi Sees Almost $700M in Value Wiped Out on FTX Fallout

But it will also measure whether the traders who remain are willing to trust Drift specifically. The protocol only escaped most of the bear market because it was among the first to fail.

Drift is hopeful it will. Buoyed by the “patient” venture backers who bailed it out of its first crisis, and convinced that its novel liquidation tech – the process by which it auto-liquidates people who get margin called – is better than anyone’s, the protocol’s team of over 20 people is now going for the redo, said co-founder Cindy Leow.

At the heart of the revamp is a rather complex method for keeping trades – buying, selling and liquidations of the collateral of levered users whose bets sour – moving. The key has always been limiting slippage, or the difference between a trade’s expected price and the one it actually gets. Big orders can miss their mark badly during market volatility, which is also the time when big liquidations are prone to happen.

Drift’s retooled execution mechanism should cut down on slippage for big trades, Leow said. Instead of solely relying on market-making firms (as centralized exchanges do) or “automated market makers” (AMM, DeFi’s code-based trading engines) to fill buys and sells, v2 sends trades through three layers of liquidity to find the best price.

The first step – called a “just-in-time auction” – sees market makers compete to fill orders. If they pass on a trade, Drift’s AMM will take it. Meanwhile, the protocol’s orderbook is on standby to fill trades when the price is right.

This “liquidity trifecta” is a lot more complex than Drift’s original setup, basically an AMM that processed all liquidations. But the original liquidation setup flopped. Drift v1 imploded during May’s Terra-triggered market collapse; a proverbial “run on the bank” by highly levered traders cannibalized millions of dollars of user collateral.

Drift secured $15 million in emergency financing so it could pay back its users, Leow said. She declined to state the terms or who provided it, but said Drift’s investors were involved. Though team developers quickly patched the bug, the protocol remained offline until November, when mainnet testing for v2 began.

Drift’s torpedoing at the start of 2022’s industry havoc may have actually sheltered it from much of the chaos that tormented other DeFi protocols. Its relaunch comes shortly after FTX’s collapse and a series of exploits felled well-known protocols like Mango Markets and Solend.

“Seeing the attacks made us wait a bit longer,” Leow said, adding that developers spent more time battle-testing the protocol and adding features, too.

Drift v2 is positioned to capitalize on the lack of competition. It plans to support spot trading, borrowing and lending, and asset pool staking in addition to trading perpetual swaps – its original focus.

“Obviously, it's not great that they’re down. We like being in an ecosystem,” Leow said of the competitors. “When we were building this the motivation for us to build borrow and lend and bake that into a perpetual protocol wasn’t to be the only live one.”

A perhaps more existential threat than Drift’s competition is its choice of platform. Solana DeFi was knocked hardest by last month’s disintegration of Sam Bankman-Fried’s empire, especially the death of Alameda Research, a key market maker and one of Drift’s venture backers. The entire ecosystem is now short on liquidity, Drift included.

On Drift v2 “you can’t just yeet a 5 figure position market order like at GMX,” said one v2 beta user, referring to the popular DEX based on Arbitrum. One reason: low liquidity.

Leow said Drift will ultimately go where the traders do – so long as the tech can take the heat. For now, at least, that means Drift’s sticking with Solana.

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