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Vertex Protocol vs. The Rest – A Comparative Analysis.

August 30, 2023

In conclusion

Over the past 6 months or so, we’ve analyzed every single aspect of the Vertex Protocol. We gave you the complete guide, then we gave you the relative valuation of the VRTX token compared to its peers, followed by a complete rundown of their launch, where they’re at, and what’s coming up next.

It’s safe to say we’re extremely bullish on Vertex.

Even though we’ve given you most of the blueprint, there’s still one piece left, and that's a technical comparison between Vertex and other players in the DEX perp space. 

Perp landscape 

Perps are an instrument primarily used only on CEXs, and for good reason. Cheap fees, a fast liquidation engine, orderbooks, and quick order matching are all imperative for a good perp trading experience, all of which are difficult to achieve on-chain. 

However, the cataclysmic collapse of FTX changed everything. The main change being the users' mindset. A first-hand experience of giving all your shekels to Mr.SBF taught people about the importance of self-custody. 

Thereafter, the race to become the best DEX perp platform began. 

It’s a sector ripe for takeoff if we do get another bull market. With newcomers being able to trade perps while self-custodying their assets and having 100% transparency of where funds are, user growth in this sector could be amongst the largest in all of DeFi. 

In turn, these protocols will make a lot of money off fees. 

Many players have assembled on the battlefield to capture the largest chunk of this potential upside, with Vertex being a relatively new addition. 

In this piece, we will compare Vertex to the likes of market leaders such as GMX, dYdX, Perpetual protocol, Gains network, and Kwenta to get an idea of where Vertex stands.

To effectively compare Vertex to its competitors, we will look at the following points:

  • Fees
  • Order Matching 
  • Liquidations 
  • Product offerings 

Fees

Fees play a major role in attracting users to the platform. Inevitably, users want the cheapest possible execution for their trades. 

Every exchange has different fee structures but Vertex has amongst the best in the entire industry, being more competitive than the likes of Binance. 

The first 3 rows from this image below will probably explain it better than I ever can.

Even when you compare Vertex to other competitors such as Kwenta, Gains Network, or Perp protocol, they still offer the cheapest fees in the sector. 

To pair with this, they have a Maker program offering very generous rebates. They offer VRTX incentives plus fee rebates for market makers to bring in more liquidity to the platform. 

 
Order Matching 

Order matching is the be-all and end-all of a perps exchange. How quickly and efficiently orders get matched is imperative to attracting users. Users will only trade on the platform that has the lowest slippage, cheapest fees, and quickest order matching. 

There are two broad avenues of exploration in this sector:

  • AMMs (Automated Market Makers) 
  • Orderbooks 

The most popular style for trading derivatives such as perpetuals is Orderbooks. Every single CEX uses an orderbook as it's the most efficient for order matching. 

However, implementing an orderbook on-chain is far from trivial. Gas fees & block times make the user experience far from optimal. Fees are exorbitantly high, order execution times are very slow, and slippage is often high. 

Despite this, benefits such as transparency and self-custody provided by blockchains were deemed sufficient enough for certain protocols to attempt to build orderbooks on-chain. 

Protocols such as dYdX use orderbooks but they aren’t fully on-chain. The orderbook itself runs off-chain. 

Traders can place their trades on-chain and these orders are then matched using their off-chain orderbooks with the help of zk-proofs. Liquidity is maintained by certain market makers which means dYdX has its own API for order pricing. 

This experience, although not fully on-chain, seems to be working well. dYdX has done $341B in volume in the last year and seems to be growing continuously. 

With Layer 2s and app-chains, a whole new suite of protocols has come out with fully on-chain orderbooks. The lower gas fees and faster transaction times on L2s may make on-chain orderbooks viable but it is still a fairly nascent endeavour so we are yet to see the efficacy of these solutions. 

Seeing that on-chain orderbooks still have many issues to overcome, some of the big-brain devs in the space decided to innovate upon something that we already know works well in the space, AMMs. 

AMMs are DeFi’s 0-to-1 innovation and are primarily used for spot trading. However, over the past year and a half, we have seen a boom in perp DEX protocols using AMMs as their order-matching method.

This new wave of protocols featuring the likes of GMX, Gains Network, Kwenta, and perpetual protocol all use AMMs as their order-matching method. Although each one of these has its own unique variation on the general AMM model, they still all use the underlying innovation of an AMM. 

For the sake of simplicity and not making this article 20 pages long, let’s take a look at one of the most popular AMM-based DEX perp protocols: GMX. 

At the forefront of this design is the GMX Liquidity Pool, GLP for short. This shared liquidity pool facilitates all trades on the exchange. Users can deposit whitelisted assets into the GLP pool as a way to provide liquidity to the exchange and earn rewards from the trading fees collected by the platform. Depositors receive a GLP token which represents their deposit in the pool which earns rewards and is also composable with the rest of DeFi. 

Traders can then leverage trade against the assets in this GLP pool making GLP the counterparty to all trades on the platform. 

The success of this model is apparent seeing that GMX has facilitated over $86B in volume this year. 

Other AMM-based protocols have their own variations. For example, Gains network has its gTrade engine to facilitate trades and Perpetual protocol uses its vAMM to facilitate trades. Both platforms have facilitated around $40B in trading volume this past year and they continue to grow. 

AMMs however are still far from optimal. The main issue is fees. Traders often get charged fees proportional to their size which isn’t the best, especially for whales. 

This is where Vertex comes in with their hybrid DEX perp protocol. 

Vertex combines the best of both worlds by creating a hybrid orderbook/AMM-based protocol. 

The hybrid model has three tiers to it:

  • A fully on-chain trading venue - Constant product AMM 
  • A fully on-chain risk engine 
  • Off-chain sequencer for order matching 

Vertex’s AMM utilizes the classic xy=k model where users can provide liquidity and trade against the liquidity in the pools. Vertex will also have leveraged LPs soon to further enhance liquidity. 

This AMM will stand alongside the off-chain sequencer creating a unified liquidity hub for all trades on the platform. 

Essentially when perp traders execute trades on the platform, the off-chain sequencer is used to match orders, but in the event that the off-chain sequencer is under maintenance or has any other issues, the protocol will seamlessly shift to using liquidity from the AMM. 

But outside of being there during problematic situations, this unified liquidity model also ensures that traders get the best possible execution on their trade, whether that be from the AMM or the off-chain sequencer. 

At the end of the day all that matters is cheap fees and low slippage. 

Now let’s come to the off-chain sequencer. This sequencer is an independent orderbook located off-chain as a node. It has a HFT-friendly API allowing traders to plug into the orderbook if they wish to do so. 

The advantage this orderbook has over CEX orderbooks is being combined with the on-chain AMM for augmented liquidity. This orderbook can also match orders at the best price within 10-30 milliseconds. Lightning fast. 

A hybrid orderbook/AMM is something that hasn’t been done before and is frankly very innovative. When implemented on layer 2’s this could be the way forward for perp DEX protocols as it combines the best of both worlds. 

Now let's move on to another instrumental aspect of perp DEX’s, liquidations. 

Liquidations 

Liquidation is something we’re all too familiar with (I say we, but it’s probably just me). When playing with leverage, you have a liquidation price. This liquidation price is closer to your entry the higher the leverage you use. If the price hits your liquidation price then your position gets closed automatically and all your collateral posted for the trade is taken. 

A good liquidation engine is a pivotal aspect of a successful perp exchange. This is something that even most CEX’s struggle with. 

Most on-chain perp exchanges have their own unique mechanism to ensure that they have the most fair and efficient liquidation engine. So let's quickly take a look at how some of them work. 

GMX has a system of partial liquidations. The price at which the loss amount is very close to the collateral amount is the liquidation price. It is calculated as the price at which the (collateral-loss-borrow fee(s)) is 1% of the position size. When the price goes through this price, a position is liquidated. 

With Gains network, the rollover fee plays a bigger role in liquidations. It’s a fee charged in each block and is only applied to collateral. Using this a liquidation price distance is counted which is Open Price * (Collateral * 0.9 - Rollover Fees - Borrowing Fees) / Collateral / Leverage. Using this a liquidation price is calculated. 

If long, liquidation price = open price - liquidation price distance. If short, liquidation price = open price + liquidation price distance. Once the price goes through the liquidation price, the position is automatically closed. 

Perpetual protocol uses a margin ratio to establish a liquidation price. If a position's margin ratio goes below 6.25% then it is liquidated. This margin ratio is calculated using the 7-minute TWAP of the index price. 

Vertex’s liquidation mechanism is slightly different. 

Vertex has a maintenance health ratio which looks at the health of your margin positions. If this falls below 0 then a position is liquidated. 

Liquidation happens in the following order: 

  • Orders are cancelled 
  • LPs are decomposed 
  • Assets are liquidated 
  • Liabilities are liquidated 

When the assets are liquidated, any other user of the platform can choose to buy the liquidation. They specify the product and the amount they want to liquidate. The liquidation price is set halfway between the oracle price and the price determined by the maintenance weight. 

Liquidators are incentivised to take part because it is quick profit for them and the protocol is not stuck with any bad debt. 

Vertex also has an insurance fund which is a segregated pool where USDC is frequently added and is used in the event of fund shortfalls. If there aren’t liquidators bidding on assets, then this insurance fund will step in to ensure that the protocol has no bad debt.

Okay, let's take a breath 

Hopefully, you caught all that. 

But that’s not all. Order Matching and liquidations are the most important elements of perp DEX protocols, but it's also the little details that matter. The little details are the additional product offerings made by the platform. 

Product offerings 

Most DEX perp protocols don’t offer anything other than leverage trading but dYdX being a longstanding protocol in the space does have additional offerings. They offer spot trading as well as lending and borrowing on the platform. 

Vertex is one of the newer protocols which launched with additional product offerings. Vertex offers spot trading through the AMM as well as borrowing and lending services on the platform. 

As the name suggests, Vertex is a VERTically integrated EXchange. All these products are offered because they can be used in combination with one another for a unique and enhanced user experience. 

The money market is the best example of this. Users can use the money market to borrow for either yield or additional leverage on the same platform as they trade. This makes cross-margining on-chain significantly easier. 

This money market is supported by a robust risk engine to ensure liquidations are processed in an orderly fashion so bad debt is not an issue in any area of the protocol. 

Another thing to keep note of is the new markets on Vertex. 

They initially started with only a few markets, around 4 to be precise. However, seeing the success of these initial markets and the platform starting to grow rapidly, the team quickly started adding new markets with coins from multiple different chains. They currently have around 21 different perp markets. 

There are also other small cool features that don’t really change much technically about the protocol but are nice touches. For example, when people share their PnL on Twitter with screenshots, Vertex allows you to put custom images of Wassies or whatever else on your screenshot to make it a bit more unique. Small fun things like this although not necessary are good to get people to notice the protocol. 

Also, be on the lookout because Vertex are shipooors through and through. They frequently launch new products and often without much announcement prior. The ship first and talk later. 

Universal Cross Margin 

Something that is truly unique to Vertex is its system of cross-margining all positions on the platform by default to unlock superior capital efficiency. 

Cross-margin is when multiple positions liabilities are shared across an account to offset the margin between positions thereby reducing the overall margin requirement. 

Cross-margin is mainly popular on CEX’s, it’s rare we see cross-margining in DeFi. DeFi typically features isolated margin wherein the liability is limited to the initial margin posted to a single position. 

Cross-margin is typically something used by more sophisticated players with larger sums of capital. Vertex aims to spread this to more retail participants due to the benefits it provides. Namely:

  • Lower Margin Requirements 
  • Automatic Risk Management 
  • Risk/Reward Optimization 
  • Use of unrealized profits from one trade to offset the unrealized loss of another trade 
  • Simplified account management 

To track the health of your account, Vertex has a health bar that will show you 4 different levels of health ranging from low risk to extreme risk. This health bar will dynamically change based on your positioning and market conditions and should help reduce the risk in your trading journey.

As mentioned earlier, this cross-margin system offers unparalleled capital efficiency. Just as an example for you to better understand this capital efficiency, let me show you one possibility on Vertex

Say you’re an LP and have deposited assets with Vertex. You receive an LP token representative of your stake. You can use these LP tokens as margin for your perp positions. So you are earning yield on your assets while using them as collateral. Pretty neat if you ask me. 

But that’s not all, just before we end this article, there is one more thing we need to talk about. That’s the tokenomics. 

Tokenomics 

It’s been a while since we initially introduced you to Vertex here (LINK). Since then, they’ve made some changes to make the tokenomics even better than it previously was. 

The main change is moving from voVRTX to esVRTX. Rather than having voVRTX which was more like users’ score, esVRTX follows a vote-escrow model and vests. An additional benefit is that it can instantly be claimed for a 50% haircut.  

But something that a lot of you degens will care more about is the Rev sharing model of vertex. 

When a user stakes VRTX for xVRTX, they’re not only getting governance power over the protocol, which by the way in Vertex’s scenario, actually means something, but they also get revenue share. 

This is done through having exposure to a pooled group of assets. This pool will continuously grow as it is supplemented by token emissions as well as the trading fees collected by the platform. From this pool, xVRTX holders can get a share of the protocol's revenue proportional to their stake. 

The earring potential is unlimited here. 

Concluding Thoughts 

The DEX perp space is still in its infancy, there’s a lot of innovation that has already happened and I'm sure that there is a lot more to come. 

Vertex is a new challenger in the sector and is looking poised to be amongst the best in the space. Their hybrid AMM/orderbook model combined with their diverse product offering make them amongst the best in the space. 

In the 3 months they’ve been live, they have a TVL of $9.2M with 4.7k unique traders doing a total of $5.6B in trading volume. 

As crypto gets more adoption, so will the DEX perp space and Vertex is poised to be amongst the best in the game. Their journey is just getting started with a lot more to come, this is one you will want to keep your eyes on for sure. 

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