I am a pro trader turned protocol designer — and here are the top 7 things I love about Vega.
Having operated as an energy derivatives trader for 15 years, there are many things that I consider when choosing how and where I trade — capital requirements, fees, fair/efficient pricing, credit risk, anonymity (particularly important in power markets!), fungibility, liquidity, firmness of the hedge, effectiveness of the hedge, ease of access to the market.. etc. We have resolutely designed Vega to be attractive to pro traders and liquidity providers, so that individuals and businesses may usefully define and exchange real world financial risk without intermediation.
Vega achieves this by simultaneously taking advantage of new possibilities that arise from a decentralised paradigm, while also recreating the market features from the ‘traditional’ financial systems that just work. I believe what we have designed at Vega is remarkable and has huge implications for the future of markets— below are my favourite aspects.
- Liquidity that begets liquidity earns growth rewards
At the core of Vega’s design is an economic model that radically shifts the locus of power and accumulation of reward away from rent-seeking exchange owners, towards the liquidity providers of the markets. In an inversion of traditional exchange economics, liquidity providers become the primary beneficiaries of a market’s equity-like growth and this opens up a whole new set of business models, such as a “VC” like approach of incubating a portfolio of markets, or “buying in” to more mature markets. Vega is ultimately a marketplace of markets, with the bulk of rewards used to incentivise the fuel of markets: liquidity.
2. Markets for anything
Vega is a bridge to the real world of finance and trading, because markets on Vega can be derivatives on any underlying. I could trivially launch the energy futures markets I used to trade, which took 3 years and millions of dollars to achieve by a traditional exchange. I can experiment with responsive markets such as spinning up a pandemic index future, or Ethereum gas options, or given the programmatic nature of creating markets, perhaps I could build a bot one day that monitors various real world/spot dynamics and automatically proposes a hedging market when volatility exceeds a threshold.
A generalised oracle framework for market settlement permits vast experimentation and reach. Data may be provided by a pseudonymous entity that has built up reputation, a real world entity (such as a Goldman trading desk, S&P, CME), a blockchain’s data and even a signed HTTPS data feed! This is sure to open up weird and interesting markets. For example, with much cheaper and easier infrastructure and globally connected liquidity pool, it becomes viable to target risk at a more granular level, e.g. balance sheet futures, election day weather options at specific polling stations, a single farm’s crop output, delivery date of a project etc, or conversely more aggregated risk such as index options. Anyone interested in a futures market on the Big Mac Index?!
Also, I’ve been thinking about the embedding of derivatives within products. Consider the example of a cancelled flight triggering “settlement” of the insurance market, and my wallet automatically credited accordingly. Vega’s underlying infrastructure makes this kind of risk management possible.
As a trader, I’m really interested in how Vega opens up new markets and new flow, and I will be expanding on these thoughts in another blog post in the near future.
3. Capital efficient trading with automated cross margining
A fascinating aspect of Vega’s core trading protocol is the capital efficiency and liquidity gains that arise from live, automated cross margining.
The “live” aspect massively lowers margin costs. To understand this, consider that derivatives exchanges typically charge an initial margin on open positions and then conduct a daily mark to market across all traders with open positions. The initial margin can be thought of as their way of covering their risk that your position moves a lot in a day and you don’t pay up your margin call. Vega’s approach means the initial margin can be hugely reduced because it’s a much shorter timescale over which the risk of your position can move against you. Vega’s network basically runs SPAN type calculations on-chain!! Super cool.
Add to this a built-in cross margining system that routes a trader’s gains made on one market (realised and/or unrealised), to offset positions on other markets. This is the first example I know of that does cross margining in a fully decentralised way. It furthers my belief that the role of central counterparties (CCPs) and prime brokers will, one day, be partially or fully disintermediated.
The amount of leverage is dictated by the theoretical limits of Vega’s on-chain risk engine, and the “owners/operators” of the market, who are the incubators and major beneficiaries of the trading fees. Due to the near-live ability to recalculate risk, Vega’s on-chain risk engine can handle ~50x increase on leverage offered by CME, who only margins daily. Dramatically lowering capital costs like this means markets can exist that previously wouldn’t, (akin to CME’s success with mini futures/options on a greater and more mini scale!) which in turn opens up hedging instruments to a far greater range of people and businesses.
4. Safe and sustainable trading
As a trader, I want to know that my capital is safe, the system is fair and transparent, and that the market owners/operators are incentivised to keep my business by running quality markets.
There’s a lot in Vega’s design that addresses this, but the most compelling things to me are:
- Transparency of all market operations and no ability for a more “valued” client to exert influence at any stage of the trade lifecycle.
- Anti-frontrunning protection at the consensus layer! Our blockchain researcher, Klaus Kursawe, has designed a pre-protocol widget, called “Wendy”, that provides cryptographic proof that a trader has had fair access to the order book. Not even the most sophisticated traditional exchanges offer that. We are building Vega with our eyes wide open about dark forest dynamics.
- A built in bicameral governance system that splits decision making between governance token holders (incentivised by the overall success of the network of markets) and the liquidity providers of a specific market (who are competing with other Vega markets for my business). Running a good market involves a bunch of decisions that should sit with the market owners/liquidity providers who have the ability to build up pseudonymous reputation according to their governance decisions.
- Live, free market data!! I’m tired of traditional exchanges charging a lot of money for this. Let’s have a fair playing field, where small participants have the same rights and access as larger participants.
- Management of tail risk using algorithmic circuit breakers that are transparently specified — e.g. placing a market into a “price protection” auction or handling low liquidity scenarios via auctions and/or alternative price determination methods.
5. Efficient price discovery
As a trader, I want efficient price discovery, and Vega offers a fully decentralised, on-chain, continuous limit order book with subsecond latency in tandem with price protection mechanisms/circuit breakers and auctions in low liquidity regimes to discover true market prices.
Vega will, in the near future, support markets runing in a discrete frequent batch auction mode, which is an innovation of market microstructure researchers at Chicago Booth who propose this as a more economically useful price determination method.
Eventually, there will be a full library of price determination methods that market owners / liquidity providers will utilise to suit their market’s needs (on our research agenda, for example is implied order books and hybrid AMM/limit order books).
6. Competitive and minimal fees
All fee revenue remains within the Vega ecosystem and is not extracted by a centralised operator/rent seeker. There is only one single price taker fee. No settlement and clearing fees!
Fees are paid only when a trade executes. Unlike many on-chain DEXes, there are no fees for placing/removing/amending orders. This permits costless pricing information to accrue to markets, making them an oracle source in themselves.
The price taker’s fee is transparently split between the infrastructure providers, the price maker and the liquidity provider so traders know exactly what they’re paying for. Liquidity providers of a market set the liquidity component (which is expected to form the bulk of the fee). They are incentivised economically to maintain fees at a competitive rate to keep traders on their market.
7. Easy technical integration
Vega offers binary (gRPC) streaming APIs (best absolute performance), REST APIs (simplest for quick integrations and scripting), and GraphQL APIs that including streaming prices and other data over WebSockets (best for building trading apps and front ends).
Developing with these APIs is very similar to integrating with a centralised exchange except that you connect to a node in the Vega PoS network rather than a central server. It’s an explicit goal that Vega provides high quality, rich, and well documented APIs and that the integration is cheap and easy to maintain. We have fairly comprehensive documentation, along with some example repositories on GitHub and client libraries (i.e. for Python). We’ll be providing access to API documentation at the same time that our testnet goes public, and we’re always eager to hear your thoughts on our Discord server, and through our community forum.
We’ve also built a wallet application that can also be used and administered as a server, including multiple “accounts”, each with as many cryptographic keypairs as needed. This gives a number of options for allowing developers to build for Vega without giving them access to the private keys, or for managing wallets centrally within an organisation (it’s also how we run the Vega hosted testnet wallet that allows us to provide access for testnet users without them having to create keys, etc.).
I will be running an interactive walk through on How To Create & Launch A BTC/USD Futures Market on Vega at Dystopia Labs: Liquidity 2020, 10.30am PT on Sunday 18th October 2020. Please come join! You can register here
If you’re interested in joining one of our private testnet onboarding sessions where I will walk you through our protocol in more detail, please sign up here on our website.
