Summary
(1) Rage Trade is a full-chain perpetual futures trading platform supported by LayerZero, which aims to improve capital efficiency through deep liquidity.
(2) Compared with other perpetual trading platforms, its competitiveness and sustainability come from: innovative features such as circulating liquidity and 80/20 Vaults
(3) The Delta Neutral Vaults strategy minimizes the market risk of GLP stakers and brings benefits to USDC stakers
Background
Perpetual futures (perps) have become a cornerstone of cryptocurrency, allowing for leveraged trading, hedging, and speculation. Since BitMex first launched perpetual futures in 2016, the majority of trading volume has come from centralized platforms such as Binance and OKX. With the continuous development of DeFi, decentralized perpetual futures have gradually gained attention. The main reasons for this are:
(1) Users want to be able to keep their assets independently
(2) Traders wish to circumvent restrictions such as KYC, regulations, and geographical boundaries and conduct leveraged trading
(3) Users hope that the platform can run reliably and stably (more depends on the chain)
(4) Users hope 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 that slippage is minimized when trading, and users can get the best position. Low gas fees allow high-frequency trading, as the fees paid are negligible 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 solved. How does Rage Trade incentivize liquidity in a sustainable way? As mentioned above, for users, deep liquidity can provide a smooth trading experience. Let's take a look at the perpetual futures contract trading platforms currently on the market and see what problems exist.
Among the various decentralized perpetual futures trading platforms, dYdX and GMX are undoubtedly the most popular, with annual trading volumes of $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 yield relies on traders' losses.
dYdX uses a central limit order book (CLOB), so it needs 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 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 the central exchange to earn risk-free dYdX tokens. Eventually, once the price drops, token buyers bear the brunt of the selling pressure on the tokens, and market makers start to make money.
GMX, on the other hand, pays GLP returns based on traders' fees and losses. GLP holders earn a share of traders' losses, liquidated assets, and fees paid for each trade. Their entire revenue structure relies on traders' losses, as traders' gains are paid out of GLP. Liquidity providers also take on the risk that they may run out of liquidity because a trader makes a big profit. The yield offered is also based on trading volume, which cannot be guaranteed unless the trader uses GMX every day.
In addition, another popular platform, Perpetual Protocol, launched v2 of their protocol to reduce the various risks brought by the loss of insurance funds in v1. This is because they pay funding fees from the insurance fund, and large deviations in token prices will cause them to pay high funding fees.
With the launch of v2, real liquidity was added, making liquidity providers the counterparties to trades instead of insurance funds. However, providing liquidity to the v2 protocol resulted in losses when the price of the underlying token changed. Most of the liquidity was provided by the team themselves, and the team had to trade with their own liquidity to hedge losses. In the end, they had a negative PnL and had to sell their $PERP rewards to cover the losses. But issuing tokens would lead to similar problems as dYdX, where the tokens would essentially 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 deep liquidity provision mechanisms by recycling underutilized LP tokens from various chains, and how its capital efficiency and fee collection mechanisms 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 following figure shows the workflow of the protocol:
In short, Rage Trade has two main components to optimize liquidity for spot LPs and improve capital efficiency for its $ETH futures contracts with 10x leverage:
(1) Omni-chain recycled liquidity
(2) 80-20 vaults
Full chain circulation liquidity
Rage Trade has the potential to connect all ETH/USD yield generating pools like 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.) act 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 the 3CRV LP token is used as collateral on chain A, we are able to mint virtual liquidity into Rage Trade on Chain B.
80-20 Vault
This is a system pioneered by the Rage Trade team. Essentially, at least 80% of LP tokens will continue to generate yield 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 being able to enjoy the benefits of centralized liquidity on UNI V3. This 80-20 vault is in a dynamic balance and will not stay at a fixed 80-20 ratio. You can learn about the detailed working principle 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, which contains a basket of tokens. The following figure shows the composition of the tokens in the pool.
Source: GMX
GLP is composed of 39% USDC and 61% other currencies. Due to the volatility of currencies such as BTC and ETH, GLP will bring direct exposure and is prone to value fluctuations. Users are incentivized to stake GLP to profit from traders' losses and receive income in the form of esGMX and 70% platform fees. However, due to market risks, GLP stakers may still lose money despite the gains. The figure below shows the comparison of GLP's returns and rewards. Since its inception, GLP has a return rate of -13% due to market risks.
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 the risk exposure of BTC and ETH 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 in exchange for USDC. These USDC, along with some USDC from Risk-Off Vault, are 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 (1.5) of AAVE lending.
Source: Rage Trade
Here is a comparison between Risk-On Vault and Risk-Off Vault:
Risk-On Vault
Risk-Off Vault
Target
Short BTC and ETH with Flash Loan
Risk-On Vault Collateral
Staking
sGLP, USDC (Convert to sGLP)
USDC
income
~25% (backtest)
5%-8%
Revenue Sources
GLP income + ETH rewards automatically reinvested into GLP
A portion of ETH rewards from GLP + interest from AAVE
risk
If BTC and ETH increase by 50% before the 80-20 rebalance, liquidations are triggered, traders gain, GLP loses
Liquidation during downtime according to Arbitrum Sequencer (Aave vulnerability)
How is the market response to Delta Neutral Vaults? Upon launch, both Vaults were instantly sold out within minutes, showing the crazy demand for Vault products. In terms of the performance of Risk-On Vault compared to GLP, it has a profit return rate of about 25%, while GLP is -13%, Vault has performed 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 have outstanding performance?
The Potential of the Arbitrum Ecosystem
With Arbitrum’s successful launch of its Nitro upgrade and the ongoing Arbitrum Odyssey, projects within the Arbitrum ecosystem have been receiving much attention. The Arbitrum ecosystem is thriving, with daily transaction volumes hitting record highs. Moreover, Arbitrum’s fees are one of the lowest in L2, and it 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 with multiple chains coexisting, so we invested in LayerZero and now Rage Trade.
Most liquidity is distributed across chains, which is isolated and scattered. This is why LayerZero can help protocols such as Rage Trade to collect liquidity. Rage Trade can not only use the liquidity of the Arbitrum protocol, but also the liquidity of chains such as Ethereum (Compound, Sushi, etc.), Avalanche (Trader Joe, Benqui, etc.), BNB Chain (Pancake Swap, etc.), Polygon (Quickswap, Aave, etc.).
Innovation in circular liquidity
Rage Trade is able to innovatively incentivize liquidity in a sustainable way. Given the success of protocols such as 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 earn additional yield without releasing too many tokens. Second, this establishes the composability of DeFi over traditional finance - all of these LP tokens are used secondary, and providing liquidity is just one example.
Best Arbitrage Platform
Most GMX traders are arbitrageurs who want to profit from the price difference between GMX and CEX. Similarly, Rage will attract arbitrageurs when the price deviates from the oracle price. However, Rage, which uses vAMM pricing, may be more attractive to arbitrageurs than GMX, which uses GLP pools and oracles, because the vAMM model does not have an oracle to peg 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 opportunities
Compared to traditional centralized exchanges, the decentralized perpetual futures space is still in its early stages. Data from The Block, Tokenterminal, and Dune Analytics show that as of December 2022, the market size of perpetual futures is $389 billion. Decentralized perpetual futures only account for about $2.5 billion, or just 0.8%. Compared to 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 vault shows the strong demand for LP token recycling. We look forward to using Vaults of on-chain protocols such as Polygon, Avalanche, Solana, Aptos, Sui, etc. in the future. Currently, Rage Trade only offers 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 Delta Neutral stablecoins and various structured products, delta hedge your option positions, or use their robots to earn fees and become an administrator of the system. Collaborators including Abracadabra, UXD Protocol, and Sentiment provide leveraged returns to stakeholders in the Delta Neutral Vault, Sushiswap allows users to put idle LPs into Rage to earn returns, Resonate provides fixed returns on Delta Neutral Vaults, and Sperax allocates 10% of its US dollar collateral to deposit in the Risk-Off Vault.
The trust these partners have placed 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 that provide users with a high-quality trading experience, and Delta Neutral Vaults that provide returns to stakers. Based on the team's emphasis on sustainability and security, we are confident in the success of Rage Trade.