Original author: @cmdefi
Original source: X
The derivatives track has always been a missing part of DeFi Summer. Although there has been a wave of growth in the trading volume of on-chain derivatives after the collapse of FTX, in fact, except for the relatively brief highlight period of GMX and dYdX, the entire track seems to have never really exploded.
The object of this analysis is SynFutures @SynFuturesDefi, which has raised a total of 38 million US dollars and has not yet issued tokens. It has gone through V1 - V3 since 2021. The following mainly compares the differences with mainstream products such as dYdX and GMX, as well as the breakthrough points in the derivatives track.
Currently, the more mature derivatives DEXs on the market are dYdX and GMX:
(1) GMX adopts a liquidity pool model, which enables LPs and traders to form counterparties and enables LPs to capture interest and fees. Gains Network and Jupiter Perps both adopt similar mechanisms.
(2) dYdX adopts an order book model, and its trading experience is closest to CEX.
Although these DEXs seem to offer very similar product experiences, they have begun to carve out their own market niches. For example, more than 50% of the trading volume on Gains Network comes from the foreign exchange market, while GMX trading volume is mainly ETH and BTC. dYdX has become the preferred choice for institutional traders, and as an order book, its user experience is closest to CEX.
SynFutures' market positioning is to provide transactions for any long-tail crypto assets, without permission and in a decentralized manner. Its core mechanism is built around the Oyster AMM model, and its key innovations can be summarized into two points:
1 No permission required
Users can freely create new trading pairs or markets without the approval of the platform, which is not possible on traditional derivatives DEXs such as GMX and dYdX, especially the GMX model that adopts a liquidity pool. The creation of token trading pairs without the need for a liquidity pool may bring greater risks to the entire system. In SynFutures, each trading pair has a corresponding liquidity pool, rather than a unified vault. Adding a shit coin trading market will not affect mainstream markets such as BTC and ETH. In theory, it can support the use of all ERC20 Tokens on the market as margin without increasing the risk of the overall system. Full openness and freedom are given at the protocol level, realizing the ability to create derivatives trading markets for any token at the Uniswap level. Although SynFutures provides this possibility from a mechanism perspective, corresponding risks and problems still exist, such as how to motivate users to provide liquidity for the shit coin derivatives market. Good liquidity can only be formed when their returns are sufficient to resist the risk of impermanent loss and price decline.
We can see that the liquidity of mainstream assets is relatively abundant, but the TVL of altcoins in the community sector is relatively limited. At the same time, related projects are currently using points to incentivize liquidity pools.
2. Combination of centralized liquidity and order books
In Oyster AMM, liquidity can be concentrated within a preset specific price range, which means that LP only needs to pay attention to the price range of its choice. This mechanism is similar to Uniswap v3. This method improves the efficiency of fund use by concentrating funds in the price range where transactions are more likely to occur.
For example, if LP provides liquidity at [3000, 4000] of ETH-USDB-PERP, this price range will be divided into several price points, each of which will be allocated an equal amount of liquidity, and each price point can be considered as an order quote on the order book.
In fact, compared to the traditional order book model (off-chain processing), SynFutures implements on-chain limit orders by allowing users to provide liquidity at specified price points, thereby simulating an order book mechanism that is completely on-chain.
In addition, due to the existence of a centralized liquidity mechanism, LP only needs to provide a single token when providing liquidity, and the system will automatically handle transactions between this token and other assets in the AMM.
----------
Next, we will further explain the details of the operating principle:
What are the key mechanisms by which Oyster AMM manages this concentrated liquidity when market prices change?
(1) First, understand a concept - Pearl structure
In the Oyster AMM model, the Pearl structure is a key data structure that is used to store and manage all relevant liquidity and orders at the same price point. It is a key mechanism for combining the advantages of centralized liquidity and traditional order books.
- Aggregation of concentrated liquidity and limit orders: The Pearl structure contains all concentrated liquidity and open limit orders at the same price point. This means that any time a trader wants to trade at a specific price point, the system will look up the Pearl at the corresponding price and execute the trade from it.
- Liquidity index storage: Each Pearl is indexed by price in the smart contract, allowing for rapid lookup and transaction execution, improving the system’s responsiveness and efficiency.
(2) Automatic adjustment of price points
In Oyster AMM, the adjustment of price points is mainly driven by market forces. Whenever a transaction occurs, the price will automatically adjust according to the supply and demand relationship between buyers and sellers.
When a trade request occurs, the system first checks whether there are any unfulfilled limit orders in the order book (i.e. Pearl) at the current price point (P0).
- If available, those orders will be filled first.
- If the order book at the current price point cannot fully satisfy the transaction demand, the transaction will move to the next price point (P1).
This process ensures that available liquidity at a given price point is maximized and that price movement occurs naturally based on market supply and demand.
(3) Adjustment of the scope of concentrated liquidity
The adjustment of the concentrated liquidity range is based on the movement of market prices and the strategic decisions of LPs. This is basically consistent with Uniswap V3, which requires LPs to manage the range of concentrated liquidity to adapt to the current market price.
When market prices move outside the boundaries of concentrated liquidity, the corresponding liquidity may be automatically reconfigured or removed.
- If the AMM price exceeds the price range set by a certain LP, the liquidity may be automatically converted to the target asset, or the liquidity provider may be required to readjust its price range.
- This is usually accompanied by some form of fee or reward to incentivize liquidity providers to maintain or adjust their liquidity to always be within the price range.
----------
Summary
In general, the derivatives DEX track is currently very crowded, but there are no projects similar to Uniswap and Curve in DeFi Summer. The core reasons are:
1. In the special era of DeFi Summer, the movement of withdrawing coins has emerged, and users have begun to pay attention to the control of funds.
2. Uniswap realizes a decentralized and permissionless solution for everyone to issue and list coins, and asset trading no longer relies on CEX.
3. Derivatives pay more attention to the privacy of transactions, and on-chain implementation requires the development of privacy protocols, but spot transactions are not very sensitive to this.
4. Derivatives trading has high requirements for trading performance and usually requires a user experience that matches that of CEX.
The above factors indirectly lead to the fact that users currently do not have enough motivation to migrate or change their usage habits. In addition to providing some additional incentives, the on-chain derivative DEX is also building a moat around their respective market positions. It can be said that there is a situation of a hundred schools of thought contending, which is expected to continue for a long time in the future.
