Vertex: A rookie in derivatives DEX, with a market share of about 10% in daily trading volume

Author: duoduo, LD Capital

The competition in the field of derivatives DEX is fierce. There are GMX, DYDX, and SNX at the top, and Gains, MUX, Level, and ApolloX at the second line.

Vertex is a new derivatives DEX agreement with better performance. Since its launch at the end of April 2023, its recent daily trading volume has accounted for about 10% to 15% of the capital pool model derivatives DEX market, and won the Wintermute in June 2023 strategic investment.

Source: dune

*Remarks: This chart does not include the data of DYDX, and the comparison is the derivative DEX of the capital pool model. *

1. Business data

l Transaction volume: Mainly through transaction incentives, a relatively high transaction volume has been created. The average daily transaction volume in the last 7 days is about 40 million US dollars. The purple part is derivatives, and the yellow part is spot, mainly for derivatives transactions.

The daily trading volume was lower than that of the leading derivative DEX (DYDX/GMX/SNX), and the daily trading volume of the second-tier derivative DEX was comparable. Judging from the trading volume in the past 7 days, Vertex has already entered the top ten.

Source: dune

TVL: USD 6.22 million, the scale is relatively small, including four types of tokens, the specific composition is as follows:

Source: dune

DAU: The cumulative number of users is 1842, and the number of daily active users in the past 7 days is about 200. In comparison, GMX has more than 1,000 daily active users, DYDX is around 700, and SNX is around 500.

Source: dune

Open Interest: There are 7 trading pairs in total, BTC and ETH occupy the main shares, and the current open interest is about 5.37 million US dollars. The holding amount is also relatively low.

DYDX holds approximately 300 million, GMX holds approximately 150 to 200 million, Gain Network approximately 30 to 50 million, and Mux approximately 20 to 50 million.

Source: dune

Fee: The cumulative gross income is about 540,000 US dollars, and the net income is 460,000 US dollars after deducting the rebate to the maker of 86,000 US dollars.

Source: dune

2. Team and investors

Co-founder Darius is mainly responsible for external marketing activities.

Co-founder Alwin Peng, previously worked in Jump trading as a blockchain engineer.

Vertex received a strategic investment from Wintermute Ventures in June 2023. Wintermute Ventures is the venture capital arm of Wintermute, a cryptocurrency market maker. Wintermute provides market-making services for many well-known projects such as Arb, OP, and Blur.

"Vertex is led by a strong team of traders and engineers with a proven track record in the TradFi and DeFi markets and is at the forefront of smart contracts and market innovation," Wintermute said in announcing its investment in Vertex.

Previously, in April 2022, Vertex received a seed round investment of US$8.5 million, led by Hack VC and Dexterity Capital, Collab+Currency, GSR, Jane St., Hudson River Trading, Huobi, JST Capital, Big Brain, Lunatic Capital and others followed suit. **Early investors received 8.5% of the tokens, which means that the Vertex seed round valuation is 100 million US dollars. **

Vertex was originally a project built on Terra. After Terra crashed, the protocol migrated to Arbitrum.

3. Products

Provide one-stop DeFi business, including spot, contract, and lending markets. It mainly conducts business around the contract market. Most of the transactions are perpetual contract transactions. Spot and lending are more for contract services, so they are classified as derivatives Product DEX.

Liquidity supply mode: hybrid order book-AMM mode

The liquidity supply model is the main difference between Vertex and other derivative DEXs. Vertex believes that the off-chain order book is processed through FIFO (first in first out), which can reduce MEV attacks and improve transaction execution speed. The AMM on the chain provides liquidity support without permission, traders can force transactions, and when the liquidity of the order book is insufficient, the effective execution of transactions can be guaranteed.

Vertex implements the hybrid order book-AMM model through the following components:

• On-chain trading venue (AMM);
• On-chain risk engine for fast liquidation;
• Off-chain sorter for order matching.
• Figure: Vertex core component architecture

Source: Vertex

This means that **in the Vertex trading platform, there are two types of liquidity, one is the order book liquidity provided by the market maker through the API, and the other is the LP funds provided by the smart contract. **

These two kinds of liquidity are combined through the sorter, and what you see at the front end of the page is a unified liquidity, which is traded according to the best available price. The figure below shows how the order book liquidity and LP liquidity are used by the orderer to complete the transaction.

Source: Vertex

Source: Vertex

Process analysis:

The ETH-USDC pair is trading at $1,200.

Alice wants to buy 75 ETH in the market and set the maximum slippage to 1%.

There is a pending order for 25 ETH worth of $1200 on the order book, so a third of the trades are filled at $1200.

The next group of sell orders (a total of 60ETH) is $1210.

However, there are 25 LP positions with ETH in the price range between $1,200 and $1,210. Then, the next third of the trades were buys from LP positions at prices between $1200 and $1210.

The last third of the trade was executed at $1210.

Capital Efficiency: Universal Cross Margin Expands Margin Range

Vertex wanted to improve the efficiency of capital use, and proposed the concept of "Universal Cross Margin", mainly to expand the scope of margin.

At present, there are two common margin models in derivatives trading. One is the isolated margin mode (Isolated Margin), a trading pair is an independent isolated margin account. In a specific isolated margin account, only the currency of the trading pair can be transferred, held, and borrowed. Each isolated account has an independent risk rate, which is independently calculated based on the assets and liabilities held under the trading pair. The risk isolation of each isolated margin account, once the risk of liquidation occurs, it will not have any impact on other isolated margin accounts.

The other is the cross margin mode (Cross Margin). Generally, a user has only one cross margin account, and can trade all supported currencies. The assets in the account are cross-guaranteed and shared with each other; the risk rate is based on all assets under the cross margin account. Assets and liabilities are calculated. Once a liquidation occurs, all assets under the account will be liquidated.

It can be seen that the capital utilization efficiency of the cross-margin mode is higher than that of the isolated-margin mode. On this basis, Vertex proposed Universal Cross Margin.

**All funds (deposits, positions, and investment gains and losses) of users on the platform can be used for margin, including open positions in spot, perpetual contracts, and currency markets. **For example, users provide liquidity for the spot fund pool. On the one hand, they can earn fees. On the other hand, this LP fund can also be used as margin for contract transactions. This improves the efficiency of the use of funds.

**Universal Cross Margin also allows Portfolio Margin where unrealized profits can be used to offset unrealized losses or used as margin for existing positions or opening new ones. **

In order to facilitate users to better manage the risk of their own accounts, Vertex also provides account risk level reminders, which can directly see the health of the account on the page.

Accounts can be divided into two states: Initial and Maintenance. In the Initial state, it can also be divided into three types: medium, low, and high risk according to the ratio of margin to debt. The Maintenance status means that the initial margin usage has exceeded 100%, and no more positions can be opened. The margin needs to be replenished as soon as possible, otherwise it may face liquidation.

Because of the Universal Cross Margin, the liquidation is also a cross-margin mode, the positions will be closed in the following order:

The order is canceled and the order funds are released;

LP assets are released and sold;

Assets are liquidated (spot balance/contract position);

Liabilities are liquidated (borrowed).

If during the liquidation process, the initial health of the account returns to above 0, the liquidation will stop.

Source: Vertex

Low Transaction Fees

Vertex’s transaction fees are at a low level. Regardless of spot or contract, the maker fee is currently 0, and the taker fee is 0.01%-0.04%.

Source: Vertex

In order to encourage maker transactions, makers whose transaction volume exceeds 0.25% of the total transaction volume within a specific period (28 days, one epoch) can also get rebates. The rebate ratio is as follows:

Source: Vertex

Compared with several major derivatives DEX markets, the transaction fee of GMX is relatively high, and the opening and closing fees are both 0.1%; the transaction fee of DYDX is 0.02% to 0.05%, and decreases with the increase of transaction volume; Kwenta’s transaction fees range from 0.02% to 0.06%.

4. Token Economic Model

**VRTX is the governance token of Vertex Protocol, with a total supply of 1 billion pieces, of which 90.08% of the tokens will be distributed within 5 years. **

The distribution of tokens is shown in the figure below. A total of 46% are used for community incentives, of which 9% are used for token incentives in the initial stage, 37% are used for continuous incentives; a total of 41% are used for teams, treasury, ecological funds, and future contributors ; 8.5% allocated to early investors; another 4.5% for liquidity. It should be noted that this distribution map was disclosed in early June 2022, and does not involve the investment in Wintermute. Under normal circumstances, it may be distributed to new investors from the treasury.

Source: Vertex

**Vertex tokens will be distributed six months after mainnet launch, which is expected to be issued in October 2023. **The token release schedule is as follows:

Source: Vertex

**Part of the tokens in the Initial token phase are used for transaction incentives before the tokens are issued. **Users can track them on the reward page of the Vertex app. The official website clearly states that relevant incentives can be claimed in October 2023.

Source: Vertex

The Initial token phase has a total of 6 epochs, each epoch is 28 days, and each epoch rewards 15 million tokens, which is currently the third epoch. The proportion of transaction incentive tokens mainly considers the weight of transaction fees. In addition, different trading pairs have different rewards, as shown in the figure below:

Source: Vertex

**Vertex protocol tokens have not yet been issued. Due to the existence of transaction incentives, it is impossible to avoid the existence of brush transactions. **At present, the launch of the derivatives DEX protocol needs to rely on transaction incentives. For example, Vela implemented transaction incentives in its beta version to stimulate the growth of transaction volume. After most of the agreements go online, they still maintain transaction incentives, such as DYDX, Kwenta, etc. Vertex is able to gain more adoption at this stage, indicating that funds have a positive view on the protocol token.

5. Summary

The competition of derivatives DEX is already a red ocean. The model of a large number of projects Fork GMX is deployed on the new public chain or the second layer, giving a higher APR, trying to attract funds and earn profits. In comparison, Vertex provides some mechanism innovations, which are worthy of attention if they want to create better liquidity and higher capital utilization efficiency.

The risk that needs to be paid attention to is that while its Universal Cross Margin improves the efficiency of capital use, it also increases the risk exposure of user assets, and traders need to do a good job in corresponding risk control.