- Crypto / Web3
an on-chain decentralized derivatives trading hedging tool
Scale, an on-chain decentralized derivatives trading hedging tool
Introduction Cryptocurrency has now passed fourten years since its inception in 2008. Satoshi Nakamoto didn't envision it would grow into a trillion-dollar behemoth more than a decade later (at one point it briefly topped $2.5 trillion in 2021) when he came up with the idea. Along with the growing size of cryptocurrency assets, so have the financial markets. Over the past 14 years, Bitcoin's value has gone from buying two pizzas to trading over ten billion dollars a day. As more and more institutions and capital entities set their sights on this market, there is no doubt that we will witness the cryptocurrency market become an even more influential investment underlying in the next five to ten years. Currently, there are approximately 100 million users worldwide who currently trade or have held cryptocurrency, and the majority of these people conduct the transactions on centralized exchanges. With the increasing of regulatory requirements and tax scrutiny, in the future, more and more practitioners will choose to trade their assets in decentralized trading protocols on chain. Last month (Aug, 2022), active addresses of Uniswap surpassed Ethereum for the first time, which is a major victory for decentralized trading.
Overview Derivatives trading has become an important part of the financial market since its inception. In the cryptocurrency market, derivatives trading is more attractive due to the sharp volatility of the market and the trading mechanism of 7*24.Speculators try to extract excessive profits from them, while mature traders are also accustomed to using derivatives to achieve hedging in order to construct risk-free portfolios and avoid unexpected losses due to unexpected extreme market conditions. For traders, the current encryption derivatives trading market is arguably not user-friendly enough,with centralized trading platforms occasionally unable to provide services due to network issues (especially during high volatility market conditions), poor trading depth and many restrictions make it difficult for traders to fully implement their trading strategies on the platforms. Not to mention the occasional withdraw restrictions, the onerous KYC requirements and the tightening regulatory issues. All these led to repeated discussions about whether people need a decentralized trading scenario that is built to run stably on the chain. However, the current decentralized derivatives market is still underdeveloped(in centralized exchanges, the size of derivatives trading and spot trading is about 1: 1, while in decentralized trading market, the ratio is far from that) . The reasons for this are the cumbersome process (vAMM model), relatively low leverage ratio (the highest leverage generally stays around 25~50 times), slightly high gas fee (more or less common to Ethereum and its side chains) and poor trading transaction depth (orderbook model) all contribute to the difficulty of using decentralized trading platforms for beginner ordinary users. Scale Protocol hopes to rebuild a highly decentralized derivative trading hedging tool on the chain based on high performance public chain and accurate and fast prophecy machine quotes. It will continue to iterate afterwards based on community feedback, in order to provide users with a similar experience to that of a centralized reading platform. While lowering the user threshold, it does not degrade the user experience. Derivatives Trading Scale Protocol uses dealer quotes to aggregate user trades.When a trader uses Scale Protocol, depending on the pair he chooses,he gets two quotes from the Dealer, one for the buy and one for the sell price. To smooth out market volatility, the spread between the two fluctuate in line with maket conditions. When a trader chooses to open a position, the dealer will arrange the transaction for him and record it on the chain. With each subsequent margin movement, the dealer then queries the position for the trader until the trader closes the position or bursts the position due to poor risk management. Relying on the high performance of APTOS chain, Scale Protocol provides users with up to 125x leverage, helping them to improve their capital utilization with higher risks. Experienced traders can also choose to use a more suitable leverage multiple to achieve risk control management and thus to facilitate hedging of traders' asset trading risk. Peer to Pool&LAMM The biggest problem that traders face when engaging in derivatives trading is the depth of their trades.Platforms with poor trading depth will prevent traders from successfully opening positions at their desired points, which can make the execution of trading strategies far more difficult. Trading depth is a huge chasm for any relatively early trading platform since fewer participants will naturally lead to poor trading depth.We did a lot of research to solve this problem, and finally, inspired by Synthetix's model, we designed the Peer to Pool (or Peer to Contract) mechanism, through which we could make use of liquidity pools to provide traders with almost unlimited trading depth. To ensure that each trader can successfully hold a position at his or her desired point. We named this model LP-Auto Market Maker, or LAMM, where liquidity providers act as market makers by providing liquidity, while smart contracts will automatically perform liquidity operations for them. They also take risks and participate in the profit sharing of market making.Through this strategy, we can get those investors who are willing to take risks join our Protocol governance, participate in the Scale Protocol by providing liquidity, and grow together with the Protocol to share the benefits. Liquid Bonds Liquidity pools are at the core of our focus, and if the protocol lacks illiquidity, then it may be difficult for us to serve more traders.But equally, we hope that liquidity providers will be rewarded so that more partners will have the desire to join the ranks of liquidity providers. We know that current DeFi protocols are willing to provide users with liquidity mining means to boost their liquidity offering intentions.But undoubtedly, once the value of the LP Token starts to fall, liquidity miners will not hesitate to withdraw the liquidity and sell off Token, triggering further price declines. We've already seen many such examples in 2022. Therefore, the Scale Protocol will not offer LP tokens to users as a liquidity providing incentive. Instead, we are instead taking a simpler approach where the liquidity pool will be funded from the issuance of liquid bond offerings.The liquidity bonds will be in the form of NFTs, and users will receive a percentage of expected return after selecting the duration of the bonds. During the duration of the bonds, the protoccol will periodically take profits from the profit and loss pool and distribute them to all liquidity providers before the maturity of the bond. All funds from the scale of liquid bonds will go into the underlying liquidity pool, which will act as a control for risk exposure. And when traders incur losses, the incurred losses will go into the profit and loss liquidity pool. For those incurred profits, they will be paid out by the profit and loss liquidity pool as a priority. Liquidation Robot The issue of liquidation has been at the heart of our concerns.Due to the mechanism limitations of smart contracts, we cannot allow contracts do the clearing work by themselves, so we need to introduce external clearing mechanisms. Through the efforts of our engineers, Margin Bot was created. Margin Bot is a server-deployable liquidation robot that monitors the security of each position in real time by recording the burst price of each position and retrieving information from the chain. The robot automatically executes the liquidation process when a position hits the burst price, thus helping the trading contract to record the user's burst position. In order to decentralize this work, we will open source the Margin Bot deployment method in subsequent development and encourage more users to participate in the clearing work.At the same time, to avoid malicious liquidation, we will require liquidators to pledge a certain Scale token as a credit certificate, and the pledger can get Scale token as a reward for participating in the liquidation work. However, if the liquidator is found to have malicious liquidation behavior, all the pledged tokens of the clearing node will be forfeited as punishment, and the Token will be compensated to the trader to compensate for the loss. Insurance fund Although we have carefully designed Scale's trading model to ensure that, in most cases, the interests of both liquidity providers and the traders are guaranteed.However, history has taught us that there can still be payout issues when extreme market conditions occur. For this reason, we will charge a commission of 0.05% of each trade that occurs, which will be accumulated in a pool of insurance funds to cover the possibility of extreme payouts. The management of the insurance fund pool is the responsibility of the Community Governance Committee and in theory, the insurance fund pool should only be applied in two scenarios, namely:
Our team members have diverse backgrounds, some have trading and risk control experience from the traditional Fortune 500 Financial Institution, some are experienced in Internet platform product operation and well-versed in user operation and product marketing, some are mature product designers with centralized exchanges, and some are proficient in Rust and Move languages. The team has worked together in the past and has mature team management and collaboration experience. We hope to provide users with a truly fair, transparent, safe and fast trading environment through Scale, lower the threshold for on-chain derivatives trading, and allow more traders to participate, so as to promote the healthy development of the crypto industry.