Original article: "The interaction volume exceeds Uniswap, how does Vela Exchange, which has confirmed the airdrop, interact?"

Author: Jaleel

Due to the recent airdrop expectations, Vela Exchange, a perpetual contract protocol of the Arbitrum ecosystem, has received great attention in many crypto communities. According to Dune Analytics data, Vela's contract interaction activity has skyrocketed, far exceeding Uniswap, and the trading volume has also grown rapidly, with a turnover of $341 million in the past 24 hours. In comparison, Arbitrum's DeFi leader GMX's turnover in the same period was only $111 million, which also includes its traffic in the Avalanche ecosystem.

This article will sort out the basic structure and operating mechanism of Vela Exchange, its characteristics that are different from protocols such as GMX, and a simple interaction process.

Mechanism Introduction

Vela Exchange is a decentralized perpetual contract platform that aims to improve the transaction speed and security of DeFi derivatives using a hybrid model of off-chain order books and on-chain settlement. According to official documentation, Vela users can open positions based on the performance of synthetic assets with a leverage ratio of up to 100x. The reward structure of Vela Exchange is carefully balanced to manage token and reward supply while maintaining high incentives for liquidity supply and trading.

basic structure

Vela Exchange's infrastructure consists of 4 main parts. The off-chain server caches specific on-chain data to improve performance, such as historical transaction data, notifications, profile data, language settings, etc. The on-chain protocol has all open funds, collateral, VLP/Vela staking functions, position management triggers are hosted on the server to improve performance and pushed to the chain when conditions are met. The data portal exposes APIs to third parties and extracts data from oracles and data providers.

All asset prices are fully operated and maintained by the Vela team through a proprietary price feed service called Vela Stream, and is designed to ensure performance, security, and flexibility. The platform currently pulls data directly from several CEXs and on-chain sources into a proprietary Vela Exchange price feed. Vela Stream's price feed is published on-chain and is transparent for every tradable asset and reflects a single aggregated price from the top CEXs in the ecosystem.

In order to be able to perform trigger funding, fund management, liquidation, and delayed transactions (to reduce front-running transactions), Vela Exchange has role permission access rights and can destroy or mint USD stablecoins in the protocol, but such stablecoins are not transferable and tradable. In emergency situations such as protocol updates and contract changes, Vela administrators have the right to suspend key contract functions on the protocol except withdrawals.

Trading Mechanism

Vela uses collateral and leverage to define the amount of collateral and the available leverage level. For example, if a user chooses a 10x leverage level and $500 in collateral, the amount of funds purchased is $5,000. In terms of trading assets, Vela offers three types of assets: cryptocurrency, foreign exchange, and market capitalization.

Vela’s liquidation mechanism is innovative in design. The price at which liquidation occurs is a function of the number of assets [Q], the average entry price [E], the collateral [C], the liquidation plus financing fee [F], and a slippage risk factor [f] (1% for non-FX assets and 0.3% for FX assets), which accounts for a built-in safety net to protect the protocol from losses exceeding the collateral. The formulas for position liquidation allowable loss [A] (left) and forced liquidation price [L] (right) are:

In case of liquidation, the trader will get back part of their collateral based on slippage [S], which represents the difference between the actual liquidation price and the position. The collateral returned to the trader is:

For example, assume that the number of BTC/USD long trades using $1000 collateral is 1.25 BTC, the average entry price is 16,000, the total liquidation fee is $20, and the corresponding liquidation price is 15,376. Due to the rapid drop in prices near the liquidation price, the funds are not forced to close until the price of 15,350, resulting in a slippage of 26.00. In this case, the protocol will return a total of $167.50 to the trader. Vela's VLP Vault can withstand up to fE=160.00 slippage without loss.

Anyone can trigger a liquidation in addition to the Vela team's liquidation wallet, but currently 100% of the liquidation fees go to the VLP's LP as a reward for providing liquidity. In addition, Vela has established open interest (OI) limits for long and short positions, which is to protect the protocol from the total OI exceeding the TVL (in this case, the liquidity supported by the VLP). For each tradable asset, these limits are based on a percentage of TVL at the user and asset level. Since risk profiles vary by asset, these rates may change in the future.

Fee Mechanism

When trading on Vela, you will need to pay two types of transaction fees: holding fees and funding fees. Holding fees include the maximum fee that users pay when opening and closing positions, which is 0.1% of the opening funds for non-FX assets and 0.01% of the holding funds for FX assets. Funding fees include interest calculations at the time of opening a position based on how much money is borrowed from the vault and the current funding rate. The longer the funds remain open, the higher the funding fee, which is paid when the position is closed.

Tokenomis VELA & esVELA

Vela's native token is VELA (see the figure below for the initial distribution and unlocking cycle). After staking, you can get the staking certificate esVELA. esVELA will continue to unlock the same amount of VELA during the 6-month linear staking period. The esVELA used for staking cannot receive staking rewards. Claiming any amount of VELA or adding new esVELA to the staking contract will reset the staking period. All esVELA rewards for staking are provided by VELA's repurchase model.

VLP

VLP is the LP Token of the Vela Protocol, which is used to provide incentives for token holders and pledgers. VLP is based on USDC pledge and can be redeemed for USDC at any time. Anyone can pledge USDC to mint VLP and earn fees based on the transaction volume generated on the platform.

VLP also provides liquidity to traders, allowing them to hold leveraged positions. If traders lose, then VLP holders will make a profit, and if traders make a profit, then VLP holders will lose. Although the value of VLP is market neutral and not directly affected by crypto market fluctuations, holding VLP still carries risks. In exchange for taking on these risks, VLP stakers can earn up to 60% of the platform fees generated by trading activity.

Interaction process

Visit the official website of Vela Exchange and connect your wallet, where you can view your portfolio, standard assets, transaction history, navigation menu and social links. Use the deposit button to deposit some USDC, and then you can start trading, staking and claiming rewards on the platform.

After jumping to the "trade" tab, the options are: first select the trading pair, go long or short, set collateral (minimum 5$), and select leverage (up to 30x for Crypto and 100x for other assets). After the parameters are selected, you can open a position.

Once you are on the Stake page, you can mint or redeem VRP on the VLP tab. Stake to earn VLP rewards or unstake when needed. On the Vela - eVela tab, you can buy Vela, Stake/Unstake for additional rewards.

Blockbeats reminds that although the Vela contract has been fully audited, users still face some potential risks. For example, counterparty risk. If the trader makes a profit, the profit will be paid to the trader from the VLP pool. There is also the risk of decoupling. If USDC decouples, VLP will be directly affected. In addition, the available positions of perpetual contracts are limited to the total amount of USDC available in VLP. If the platform's positions reach or exceed the total TVL of VLP, traders cannot open new positions.