With the rapid development of blockchain technology, the landscape of the crypto market is quietly changing. Investors’ demand for transparency, efficiency, and decentralization is becoming stronger and stronger, and cryptocurrency transactions, which were previously dominated by centralized exchanges, are beginning to move to the chain.
According to the latest data from Coingecko, the spot trading volume of CEX and DEX has reached a ratio of 55:45, with little difference. In contrast, in the derivatives trading market, the daily average trading volume of cryptocurrency derivatives on the entire network reaches 100 billion US dollars, but the on-chain trading volume only accounts for 1%, and there is still tens of billions of room for growth in on-chain derivatives trading.
Data source: The Block
After continuous iteration and optimization, the current on-chain derivatives track is mainly based on two solutions:
The first is the Vault model represented by GMX and Hyperliquid on Arbitrum. LP acts as the counterparty of the trader, and the transaction price is determined by the Oracle price feed.
The second is the order book model represented by dYdX, which combines off-chain matching and on-chain settlement, such as AEVO, Vertex, etc.
Of course, with the development of the DEX market, many projects generally combine these two methods to further enhance the user trading experience, and further optimize and improve the trading depth and liquidity, so as to provide users with stable spot asset trading quotes and decentralized leveraged contract products. For example, Drift Protocol, based on the Solana ecosystem, has performed well in the recent market, with a significant increase in the number of users and total TVL, attracting the attention of a large number of investors.
This article will explore in depth the core mechanisms and technical features of Drift Protocol, the on-chain derivatives protocol of the Solana ecosystem, as well as how to solve the risks faced by on-chain derivatives transactions and provide traders with a safe and reliable on-chain trading environment.
About Drift Protocol
Drift Protocol is an open source decentralized trading platform built on Solana. It was founded in 2021 and mainly provides users with low slippage, low fees, and high-efficiency trading experience. At present, Drift Protocol mainly provides four products: spot trading, perpetual contract trading, lending, and passive liquidity supply. The goal of Drift Protocol is to improve capital efficiency while protecting user assets by establishing a complex cross-margin risk engine, while becoming a derivative and spot trading liquidity layer on the Solana ecosystem.
Drift Protocol launched V2 in January 2022, using a new hybrid liquidity solution, which significantly improved trading volume and user experience. On May 16, 2024, the Drift Protocol airdrop was launched, airdropping 12% of the total supply to early users and supporters, and achieving continuous breakthroughs in TVL and trading volume. According to DeFillama's data, Drift's TVL currently ranks third among all on-chain derivatives platforms, making it a dark horse in the field that cannot be ignored.
Data source: DeFillama
For traders, the loss of transaction fees in crypto derivatives trading is a very important indicator. Drift Protocol has the advantage of low transaction fees, which helps users reduce transaction wear and tear and gain more profits. Currently, the Taker fee for perpetual transactions of BTC, ETH, and SOL is only 0.025%. If investors pledge 10K USDC in the Insurance Fund of Drift Protocol, the transaction fee can be reduced to 0.01%. For other currencies, Drift Protocol's transaction fees are only 0.03%-0.1%. Coupled with Drift Protocol's official rebate discounts and rewards, the transaction fees are already better than most CEX exchanges.
According to official website data, Drift Protocol has currently accumulated US$26 billion in transaction volume, processed more than 17 million transactions, has accumulated more than 190,000 users, and has achieved explosive and sustained growth in recent years.
Data source: Drift
Drift Protocol project consultant Arthur Hayes is the CFO of BitMEX and CIO of Maelstromfund. Drift has also received attention from capital. The project has received two rounds of financing, including a seed round of US$3.8 million from Multichain Capital and Jump. In October 2023, it received US$23.5 million in the A round of financing, and the institution has not yet been announced.
Drift Protocol Core Mechanism
Different from the common on-chain derivatives trading solutions represented by Hyperliquid and dYdX, Drift V2 adopts a hybrid liquidity mechanism that combines and optimizes the two solutions, aiming to provide more collateral and reduce risks. There are four main types of liquidity in Drift Protocol V2 to ensure that traders are provided with the best price when executing orders:
Just-in-time (JIT) auction liquidity
vAMM Liquidity
Decentralized Order Book Liquidity
Market Making Vaults
Just-in-time (JIT) auction liquidity
When a user (Taker) submits a market order, a personalized Dutch auction with a specific starting price, end price, and duration is automatically triggered. The auction forces market participants to compete to meet user needs at a price better than or equal to the current auction price. If no market maker participates after the initial window (about 5 seconds), the user can complete the transaction on Drift's AMM.
JIT auction is a supplementary liquidity mechanism that allows market makers (MM) to provide instant liquidity. Through this Just in time approach, traders can get a zero-slippage trading experience in their transactions.
vAMM Liquidity
Drift's vAMM is the designated liquidity provider for the transaction. If the market order is not executed by JIT and the trigger price of vAMM execution is met, the transaction will be executed by the vAMM pool.
In Drift V2, Backstop AMM Liquidity (BAL) is included, which allows users to add liquidity to a specific pool and receive a share of its acceptance fees. BAL further supplements the liquidity of vAMM, reduces slippage, and improves the execution quality of orders.
vAMM provides a continuous source of liquidity for all traders. Even without external market makers, Drift Protocol can support new markets without relying on external market makers to bootstrap liquidity (although there is the additional risk of unsettled P&L being immediately available).
Many safeguards are also used in the protocol design, such as limiting risk exposure, effective market making, revenue pool utilization, insurance fund rules, etc. to mitigate and isolate the risks of a single market. vAMM requires a reliable oracle for the perpetual market spot reference asset. For example, Drift's SOL-PERP perpetual market will reference the SOL/USD spot oracle as a price reference and combine other channels to ensure the accuracy of the quote.
Decentralized Order Book Liquidity
Drift’s decentralized order book is powered by Keeper Bots. Keeper bots are responsible for recording, storing, and matching and executing submitted limit orders. Each Keeper bot has its own off-chain order book. Orders are sorted by attributes such as price, time, and position size. When an order reaches the trigger price, the Keeper submits the transaction against the DAMM. In return, the Keeper receives transaction fees based on a ratio determined by a mathematical formula.
If there are buy and sell orders with exactly the same parameters, Keeper can match them directly without going through vAMM, which maximizes efficiency.
Market Making Vaults
Market Making Vaults is a Delta-neutral market making and liquidity provision strategy. Drift Protocol further improves liquidity and trading experience by integrating Circuit's Market Making Vaults, and captures more profits for liquidity providers.
The strategy generates returns that are uncorrelated with overall market performance by hedging against price fluctuations of the underlying asset. Users can deposit USDC into Vaults and earn returns based on the market-making activities performed by Circuit on Drift Protocol. Currently, Supercharger Vaults APY reaches 47.06%, and Turbocherger Valult APY 36%.
Drift Protocol Features
Perpetual Trading
1. Open the official website and log in using the phantom wallet
2. After logging in, we can enter the perpetual contract trading interface. First, we need to activate the account and deposit assets. Click Depoist on the page to activate it. It costs a small amount of SOL to activate the account.
3. In the lower left corner, you can choose to switch between the professional version pro and the simple version Lite, as well as set RPC and transaction gas settings, etc.
4. After depositing assets, you can select the transaction target, enter the price and leverage ratio to place an order. The leverage ratio can currently reach up to 20 times. The transaction varieties include most of the current mainstream currencies.
Spot Margin Trading
Select "Trade-Spot" in the upper left menu to enter the spot margin leverage trading page. Drift provides a leverage ratio of up to 5 times, and a leverage ratio of up to 10 times for the stablecoin USDT-USDC.
By default, margin is not enabled. Users who need to use leverage can enable margin mode through settings. Before enabling margin mode, you need to set up a sub-account. The funds in each sub-account are independent and will not affect the main account and other sub-accounts. The corresponding activation funds will also be refunded when the activated sub-account is deleted.
Click the setting icon in the upper right corner of the page to enter the Settings page, select Margin/Leverage to make settings.
After completion, we can select the corresponding leverage ratio for margin trading in the transaction.
Swap Transactions
Drift Protocol also provides users with Swap spot transactions through cooperation with Jupiter. In addition, Swap transactions can also provide a leverage ratio of up to 5 times, which requires opening a sub-account.
Insurance Vaults and Market Maker Vaults
By depositing funds into the insurance vault, users can earn fees from perpetual trading, borrowing, and liquidation, ensuring the solvency of the protocol. Pledgers can receive rewards from the income pool. Currently, the APR yield of USDC can reach about 37%.
The market maker vault is a delta-neutral market maker and liquidity provision strategy provided by Circult, which can significantly increase investors' returns. There is a 7-day redemption period for deposited funds.
Drift Draw Rewards
Drift Draw is a lottery event. For every $1 traded, Taker can get up to 10 tickets. The lottery is held every Monday at 2:00 pm UTC. One of the three prize pools is randomly selected and allocated to the winning user. Three lucky users will randomly draw the top prize, and another 30 users will receive a special consolation prize. Currently, the prize pool is as high as $280,000 as of the next lottery draw.
Token Economics
The main purpose of the DRIFT governance token is to give Drift users actual ownership of the protocol and to have a voice and vote in the future development of the protocol through the Drift DAO. By distributing power and decision-making throughout the ecosystem, rather than centralizing it, Drift ensures sustainable and healthy development with the most active participants.
The total amount of DRIFT is 1 billion, with 53% allocated to the community, of which 43% is used for ecosystem development and transaction rewards, 10% is used for Launchpad airdrops; 25% for protocol development; and 22% for protocol contributors.
On May 16, $DRIFT officially launched the airdrop, distributing 120 million tokens to more than 150,000 early users, and supporting users to deposit $DRIFT into the protocol as collateral. The airdrop deadline is August 17, 2024. The launch of the $DRIFT token has also received widespread attention in the industry, and its token $DRIFT has also been listed on mainstream CEX exchanges such as coinbase, gateio, kucoin, and huobi.
Drift’s future potential
The recovery and continued prosperity of the Solana ecosystem has brought more liquidity and users to the chain, as well as more trading demand. According to Coingecko data, 4 of the top 10 DEXs are native DEXs of the Solana ecosystem, with Jupiter, Orca, and Raydium ranking first, third, and fourth respectively. This indirectly reflects that transactions on the Solana chain have surpassed ETH and become the most active public chain.
By adopting the core mechanism of integrated liquidity, Drift Protocol has initially demonstrated its great potential and has achieved great improvements in TVL, trading volume, and number of users. At present, Drift is already the number one derivatives protocol in terms of TVL and trading volume on the Solana chain. In the future, Drift is likely to become the liquidity layer of the entire Solana ecosystem and provide power for the ecosystem.
In addition, Drift is also very fast in supporting the Solana ecosystem. At present, the popular currencies in the Solana ecosystem, such as WIF, W, TNSR, KMNO, etc., can be traded in Drift. This also shows from the side that Drift is also very fast in supporting the popular currencies in the Solana ecosystem. This kind of keeping up with the market is also a key factor in achieving rapid growth in users. At the same time, with the arrival of the bull market, the cryptocurrency market will once again usher in rapid development, which is also an important opportunity for Drift to achieve overtaking.
Final Thoughts
The bull market has just begun. In the future, with the help of Solana's efficient and low-cost infrastructure, as well as active on-chain users and transactions, Drift will continue to capture more liquidity and transaction needs, and grow strongly with the entire ecosystem, and may even surpass EVM-based derivatives protocols.