Vertex: Built for Cross-Margin, Low-latency Trading | Darius & Alwin

Transcript

it sounds really boring but the strategy is to have a really [ __ ] good product that works really well and will give you tokens and build community while we do it you know a lot of crypto is just have a ton of [ __ ] marketing and then put a product out and the product just underwhelms we decided to focus on having a really good product first and then just let Word of Mouth do the wrap all right everyone welcome back to another episode of zero X research before we dive into today's episode I want to give a quick shout out to our new sponsor hexins the most hardcore security team in web 3 pioneering in ZK and novel cryptography hexins is trusted

by tier one projects like polygon including their new ZK evm mantle risk zero Lido one inch and more you'll hear more about them later in the episode but they will be at Booth 832 at permissionless so and if you go up to them be sure to say hi and don't forget to mention Xerox research when requesting a quote and they will give you a free web to pen test with the purchase of an audit uh you know speaking of that I want to give another opportunity for the listeners uh 30 discount code using 0x30 if you are looking to go to permissionless it is in a little under a month now September 11th through 13th in Austin Texas it's gonna be a ton of fun the whole research team will be there and we are pumped for the great speaker lineup as well we just

got word that vitalik will be doing a virtual panel there so again going to be one hell of a conference really looking forward to that jumping into today's episode we have a good interview with Darius and Alwyn from vertex protocol a nice perp decks being built on top of arbitrum and before we jump into that interview as always we are joined by some of the blockworks research analysts to jam on the latest Market happenings with a game of Hot Seat cool Throne today we got Ren pibbles and effort Capital maybe rent I'll throw things over to you first to kick us off I have researchers in general uh on the hot seat this week um there was an lvr space or loss versus rebalancing space that was basically trying to hash out how to

figure out um to solve loss versus revenanting which is one of the largest issues liquidity providers in unison V3 over the course of the space basically researchers took like one and a half hours to barely come to the definition of lvr itself and there's just a lot of back and forth and not not specific for this space I want to say researchers in general just like to do the sync where they make up words and then make everything a lot more complicated um so whether that's talking about Roll-Ups fraud through CK whatever finality like most often ethereum related um it seems like researchers have a

really really fun time just evading endlessly about semantics on Twitter or through blog posts and I'm not sure how much value that provides you know sure I do agree like we have to come to a conclusion on what the problem at hand that people are trying to solve is but it feels like everyone's just more interested in being correct or sort of like a circle jerking each other going back to the lvr space specifically right um not exactly targeted at the speakers for that space But with unisoft X Universe for you know UNICEF X I think some can see that as

unisop itself giving up on solving the amm lvr farm and just going straight to an RFQ model and similar to unisoft before right rather than Unison themselves trying to solve that problem is asking the community to help solve that problem for them and I think that's another Trend that we've seen recently actually like like a lot of Protocols are banking on like researchers or external research teams to sort of help them figure out their problems rather than trying very hard at doing that doing it themselves it's not that I don't think they're interested it's just that the problems that they're trying to solve are so complicated you really need the brain power of the entire Community to come together right um but I don't know at least for us researchers it can be kind of confusing sometimes because

you read about something and I think this happens the most often with Roll-Ups and you thought you knew like how a lot of work what people are actually talking about and then you read one Twitter thread and one blog post and you uh back at square one you have no clue what is happening again and yeah it's just that's why I'm putting them on a hot seat this weekend nothing against them they're solving important problems yeah that was funny right when you mentioned uh the mental massaging that goes on to change definitions of What Not l2s came straight to my mind I feel like that's always going on over there in that space but what was your takeaway from the lvr space what's the what's the tldr on lvr and I mean what's the leading idea on how to fix it yeah

um without going too much into the definition of Elvia because I walked away with a slightly confused definition too I've had a bit of discussion with other people I'm following but the the easy super simple way to think about it is it's the cost to liquidity providers when external actors are able to rebalance liquidity add a better execution advice most often on a sex versus the Texas liquidity itself there's like some model like definitions that kind of get squeezed and there are some theoretical or some practical for example there's this concept of like relay spread which introduces like markouts from chat 5 Market making and looking at where your price is executed versus where the price is for uh for

example like five minutes later but lvr there's two main solutions to try to solve that right the first is an auction mechanism the second is dynamic fees both of them have their like unique trade-offs and I think there are teams working on both of them simultaneously and I don't think they are mutually exclusive Solutions like it's very possible that you can have options plus Dynamic fees um but I don't think anyone is close I'm very excited to see Dynamic fees sort of come into play with unison V4 and hooks and perhaps auctions potentially come to play with folks but also I feel like that will probably take a bit longer and come a few years down the road like

there's a lot more infrastructure that needs to be figured out with auctions and designing like a fair and open auction mechanism especially when you consider that running an option sort of like affects everyone Downstream of the Mev supply chain including searches Builders proposals and whatnot what's the value add of measuring versus rebalancing though like okay if I'm just thinking you know let's say I'm just uh you know a passive D5 user and I have 500 of Ethan 500 of usdc and I want to throw that into a uni V3 pool at a certain rate let's let's not make it complicated let's actually use a uuv2 pool at a certain range like I I was never going to rebalance that position in the first place so is lvr even a fair metric to be determining what my like

loss in this sense is I think it's still fair in the sense that there is value being captured out of the liquidity pool that you are not getting any share to like sure Before You could argue that like before Mev was a thing like in a uni V2 for like no one was really doing cause like sex the decks Arbitrage and so like there isn't that much value being lost in that sense but now that value is being captured by someone else I think the argument has sort of become some of that value should be returned to the liquidity providers because without

them that value wouldn't sort of exist yeah no I think that makes sense yeah and then what's the like I get how Dynamic fees make more sense right if you're trading at a super volatile time then chances are you'll get a larger Arbitrage so you should be getting charged more um and also trading against size seems to be a fairly common way to deter against this so if you have like a massive trade coming through after a series of small trades like that's likely the Arbitrage trade so making that user pay more uh kind of hits there as well so the dynamic fee thing especially based around volatility makes a lot of sense to me uh but what about the oxygen mechanism can you like

explain potentially what that would look like yeah sure so I think the simplest implementation of an auction is that on ethereum there are 12 second block times so basically whoever is able to capture the price change on a sex within that 12 second block time probably makes the most money within the block right um most often you want to be the first to submit that transaction so that's known of top of block um and basically you can run a simple auction whether through like Unison V4 Hulk or like do some like protocol enforcing that's a completely different discussion but you can auction off the right to be the first trade in a liquidity pool and basically whoever is bidding on that would bid for the right

to sort of are about the price difference that's occurred in the previous 12 seconds and that's like the simplest possible implementation of an auction mechanism yeah that's pretty interesting all right we got to have somebody on the Pod they can walk us through it like that would look like at a super complex level but uh effort Capital he got in the hot Cedar cool thrown this week yeah I have I have the cosmos Hub surprisingly uh and the community on the hot seat uh instead of typically the cool Throne where when I'm usually on here uh bullposting or bull talking about the cosmos ecosystem so uh this past week uh the community is currently like actively voting on Prop 818 uh the exact title of this problem is punish equivocation of neutron by pupmos and citizen Cosmos so just give a

little context and backstory um right now uh earlier this year the cosmos Hub went live with interchange security V1 is called replicated security what that allows the cosmos Hub to do is provide security as a service essentially it's like eigenlayer does E3 staking where it extends ethereum security to other middleware protocols um Cosmos Hub is able to pretty much leverage its active validator set and the atoms stake to the hub to secure other chains called consumer chains around the Hub the first consumer chain for the Hub is Neutron which is like a cosmosum generalized smart Contracting platform uh what ended up happening was about a week and a half ago there was a rolling upgrade uh of neutron um where all these validators were

pretty much obviously expect to upgrade Neutron to the latest version uh two validators during this rolling upgrade that was unplanned actually uh ended up double signing a block so typically improve of stake networks this is a no no it's a penalty if you double sign a block I think ethereum has some type of slashing mechanism uh with Cosmos chains if you double sign not only do you get slash there's also potential possibility of tombstoning that validator but tombstonians means permanently Banning them from the active set which is a really big deal replicated secure so typically if you do double sign you're tombstoned and you're slashed uh with replicated security when it went live it didn't allow for uh automated

slashing uh by of validators if they double signed or do something nefarious to a consumer chain the reason being is because it's very new tech and the concern was what if a consumer chain accidentally uh slashed the validators when they didn't do anything wrong so it was kind of supposed to be like a false positive signal the idea of being the consumer chain would uh accidentally slash and put In Harm's Way the entire Cosmos Hub security proposition uh due to again like a false slashing event the way that replicate's security launched was allowing governance aside whether or not a validator or validators should be slashed how this would work is um a validate or do something bad on

Neutron a message over IBC would be sent to the cosmos Hub saying hey cosmosup Community validator a did XYZ bad and then there would be a governance proposal brought to the community to vote on whether or not to slash or on slash so that's exactly the situation we're in right now so two validators during this rolling upgrade double signed a block they're currently being asked or the cosmos Hub communities currently being asked whether or not to slash these uh to validators or not um our current understanding of the situation and the community's understanding is that these two validators did not maliciously intense with intent to like double sign these blocks he just accidentally happened mostly due to poor operator uh I guess best practices so there's

certain things that they could have done uh during this rolling upgrade so that they didn't accidentally double sign this block there's over 180 validators there are 180 validators in the active set for the cosmos sub today and 178 of them did not double sign but these two did um and there's like a really contentious debate right now as to whether or not to slash entomb some of these validators certain validators I think code is law thinks that they should be slashed because if this exact event happened on the cosmos Hub if like a validator double signed on the cosmos side they would have been automated slashed and tombstoned like why aren't we taking this exact same approach um and setting the exact same precedent for Cosmo for Consumer chains even though it can replicate security is sort

of on training wheels right now but there's a lot of validators right now that are looking at this and going well the risk returned from a cut for validating consumer change is not worth it they're not really generating a lot of revenue for the cosmos Hub today um and I don't want and the validators don't want to be penalized for you know not intentionally double signing or doing something else uh you know negative to these consumer chains so you see like a lot of back and forth like what the right thing is to do um I'm of the opinion that you know just because you didn't intend to do something like in law intent doesn't necessarily mean that you go off scot-free God forbid like if you accidentally you know kill someone while driving uh just because you intend to do

it doesn't mean like there's a difference between murder and manslaughter which is specifically around the intent of accidentally killing someone um I think you got to set a precedent here that these validators should be slashed and maybe Neutron or like the consumer chain should reimburse the validator I mean we should vote after slashing in Tombstone in these validators to untombstone them and bring them back into the validator set like I think it's very important to set a social precedent uh but this ultimately in my opinion like can put the value prop of of replicated security and interchange security uh In Harm's Way like if the entire value prop of security from The Hub is all based on a social Vote or our governance vote like I think that you know uh Decay loses the

credible neutrality of like the security service that the Hub offers um I guess the light side of this conversation is that there is going to be a planned upgrade for replicate Security in the coming months to have automated slashing uh but it's just like unfortunate that this event is happening while replicated Securities on on training wheels uh the cosmos Hub and the cosmos Community I think really needs a big win and like this is of course just like a really bad thing to happen at like the wrong time but as always The Hub is kind of testing in prod and showing I guess the rest of the crypto ecosystem like what it looks like to have like a really tough um a really tough debate uh because typically like this on-chain governance is not a thing in in Solana and ethereum

and other ecosystems but I think there's a lot of lessons learned that like eigenlayer and other shared security models are going to take from this uh event in the cosmos Hub what are the implications of like what happened on Neutron when there was this double-signed transaction like is that akin to uh like a double spend or what's the tldr on a double sign no so I think a double spend would actually have to happen if over 33 of the vote power actually like all double-signed and uh you know actually cause like a double spend attack for the Hub I'm sorry for Neutron or a consumer chain um to be honest I don't know the exact like thing that went wrong like if these two values did double sign I don't think any of the state was actually messed up for Neutron

um I don't think there's anything that actually like negative happened uh to Neutron itself but I think it's the unfortunate event that they did double sign you know they could have been they could have been malicious in doing so we know for a fact that they weren't in this case uh but it's just like the act of potentially trying to double sign a block is usually what's frowned upon prawn and proof stake Networks I think my teacher is that obviously like there's different security mechanisms or different layers of security for like different things in crypto whether it's like a blockchain or like a middleware or like a dab or like a Roll-Up but for something that sits like kinda like the highest level of like in the

providing interchange security or even like if maintenance security right and being a validator for that I would always Ur to decide of slashing first and then having someone like a veto committee combinator and potentially undo that stash just because for these systems that purely depend or largely depend on like crypto Economic Security like you need to have that guarantee that the session is going to happen instantaneously um or like it's within the code right and then maybe sure like you don't have to slash and then like immediately burn it you can like move stuff to a community owned like wallet and then there's like a committee of some sort

that sort of votes on whether this stashing is vettled or like it goes through it and I think I just kind of described eigenlayer's battle committee and it's ironic that initially yeah when I saw that company I was like wait I don't really like the idea that this committee to do that so I'm kind of torn into VT now it's funny because like to your point I can let your taste takes a pessimistic approach slash first ask questions later The Hub took up optimistic approach which was the validators are optimistically like they're probably not doing anything Affairs they're probably not being malicious so let's give them the benefit of the doubt and like governance ultimately decide and put social consensus to the test probably was probably not the right thing to do in hindsight you probably should have slashed first ask questions later because again if these validators

did this on the cosmos Hub or if an osmosis validated or double signed they would have been slashed immediately so I don't know why we're not extending those exact same rules that we already have in place and what the president is for other Cosmo chains to to this exact case but um I think the problem is that there was communication between neutron and some of the cosmos sub validators that this would not this upgrade would not be a slashable offense and that they would kind of have a get agile free card in the event of anything happening unfortunately that wasn't the case uh and now these questions these two validators are potentially being um slashed so I I know where I firmly stand on this but it's definitely like a hotly debated Topic in the ecosystem right now um obviously a lot of validators are

concerned about whether or not they should even be validating Neutron moving forward or another consumer chain uh because the risk is is potentially not worth it so um really interesting time and I guess in the cosmos ecosystems uh Journey when's this go up for vote so it's currently being voted on it went up uh I think Zaki actually put it up for vote but it went up the vote on the ninth and the it ends on the 23rd those 14-day voting windows are crazy yeah pit bulls who you got in the hot Cedar cooled down this week yes I got a cool thrown and this one's on a seven day voting period not a 14-day voting period so we like to get things done on the ethereum ecosystem uh I've got fracks

coming in with finres PBC we picked this up in gov Hub early last week essentially frax has incorporated a not-for-profit C Corp and they're going to be able to custody treasuries mint and redeem usdp which is paxos stablecoin and mint to redeem usdc this is a pretty big step for fracks towards their V3 because the Frac stable coin really died down over the past year or two like I think all-time high market cap was like 2.6 Bill and now it's sitting at 800 million and you know most of that is just protocol on for sure um so this is a big step in actually

trying to get some usage for the track stablecoin we don't know what else is coming out for V3 but it's rumored that the full release will be this month um so just a really uh bullish Catalyst for fxs and it's it's awesome that we flagged this beforehand and there will probably be a lot more governance stuff popping up in the near future yeah Sam Martin couldn't uh join us for this this recording today but I'll in his honor I'll give a good strong agree there uh pipples this is uh this is really big for fracks they needed to figure out an rwa strategy Sam K their protocol founder made that very clear that there has to be some sort of rwa

thing they just hadn't really figured out what it seemed like the approach was going to be um and they're kind of siloing everything within this one entity so this finrest PBC whereas this is kind of in contrast to Makers approach where you know you have like five or six entities that you're working with to create these rwa deals and ultimately back die with uh these t-bills um so there's like two ways to look at that one is you know siloing everything within this one entity should really make for ease of reporting and management and maintenance of these positions but on the other side of the aisle you'd say okay well siloing within one entity while it creates efficiencies it also condenses your risk and if finra's PBC fails to do anything important then everything comes down

crashing so I'm really not entirely sure where I sit on on that debate specifically because you know there really isn't any creation history to finra spbc it's a newly Incorporated newly created entity we don't really know who exactly is managing it just seems to be some extension of the frax team which Sam K kind of kept his uh his uh you know his statement can uh congruent with like everything else he says it's like look when you use frax you're already exposed to the core team when you you're already like why they have their frax Ferry because you're they're just adding another protocol within the ecosystem there's no like external Reliance and this is like kind of that same thing if you're using fracks you're already relying on the core team to kind of create this product um so Fender sppc is simply just the the

next extension of that into the real world asset side so I know personally I'm curious about like who the people that are actually sitting on this board for this entity are like actually managing these positions and making these deals and converting crypto into assets I know they mentioned their partner on this was paxos which is a very solid partner in my opinion I think that's exactly the type of person you want to in our group that you want to see helping create this thing and they have like a really clever mechanism on how they can pass assets or back and forth between finres and the frax protocol Dao itself that's like using usdp right because finres itself has the ability to Mint and burn both usdc and usdp I believe it was so because of that

then they can if they want to pass Revenue back to the Dow they just simply convert yield from t-bills into one of those two stable coins mint them through the circle or paxos themselves and then one one transfer to the to the protocol Treasury and there you go so I really like their system honestly I'm excited to see this thing come to life I know frax V3 is going to have a lot of a lot of cool tricks to it so I'm excited to see they're kind of beasts in the uh the tokenomics game so I'm excited personally yeah and then you have this comboed with the actual frax gov module which has been in audit for a few months and that's lining up is another Catalyst for fxs and um it's finally going to be a

fully on chain governance system and I think it's truly something that's going to be competitive with compounds governance module so a lot of fun stuff on the horizon I think there are a few things that excite me about this track spin recipe PC the first is that if I'm not wrong the treasury bond naturally converts to fracs upon expiry of the bond and I think that should be a natural driver of growth over the long term I'm not sure what like the duration of the bonds that they're going to invest in are but I think that probably provide some sustainable demand for facts itself and the second thing is someone correct me right wrong here is that they're going to run the same two token model with facts Eve with the facts bonds product

and I do think they'll open up some interesting opportunities both in terms of like higher yield from the two token model but also from sort of like a similar Loop trade where you men's like this facts Bond it has an internally higher yield than whatever the cost of borrowing is then you borrow more and then you sort of mint more and like that whole thing that was pure speculation by me I I don't know if that's the case but I I mean it makes sense right like with their fraxied steak fract teeth model they're able to separate the spot demand for the asset to like actually hold frax ether um versus the yield bearing side I haven't checked on the distribution between the amount of fraxied staked as steak vac teeth but

um that's something to monitor but I mean it wouldn't wouldn't surprise me right like in this scenario you do have the same like spot asset with frax itself and the ability to accrue yield through these rwa deals so it would be kind of interesting nonetheless and that kind of gives you the ability to like juice the yields right if you only have three percent but then only half the supplies opted into it well you can take that three percent and make it six percent for the for those that are interested in it so um it is a smart mechanism I I don't know if that's what they're going to do here though you know paxos is probably a big winner here I mean between what they're doing with frax what they're doing with Pyongyang USD or PayPal's USD token uh they're like in a crazy world you might actually I know

you guys spoke about uh pyusd last week well PayPal USD try to incentivize frax in order to drive more liquidity to pyusd and make that a dominant stable coin to compete compete against like usdc and tether very possible um it'd be really interesting to see like what those Dynamics look like in in the next Bull cycle uh but as a notable like frax bear typically amongst like the Blobfish research group I'm actually really excited about this I think real world assets like are the future of Finance um I think the frax team is like extremely capable but I think what I've had in trouble with historically is them uh doing too much at once and not having like a core product as like their killer feature I think they have all really

good products they're building a really good Suite but none of their products I think is like a number one or number two uh it's usually like number three or number four in like any one category but I think this partnership with paxos uh and their overall setup looks really promising and could really compete with maker dough um so this is awesome and I'm I'm honestly turning bullish fracks you heard it here first effort Capital has flipped with news of the rwa injection into frax uh but I'll close this out here with a final cool Throne uh this one uh is close to my heart Thor chain is the first protocol I really like that's what roped me into crypto the beautiful tokenomic design they have was what woke

my eyes up and was like damn okay like tokens are very interesting tools that you can use to bootstrap use of your protocol uh and I'm putting them in the cool Throne this week with the release of their new lending market so real quickly Thor chain is across cross chain Decks that basically uses a validator set to manage vaults on a series of connected Networks by doing this they're the only bridge that I'm aware of that can uh include native Bitcoin within this architecturement system uh and so that kind of gives them this Edge that nobody has really been able to figure out yet and with that they kind of said okay we've got the Dex thing under control like let's keep the building onto this thing similar like

you know you've seen curve do this uh and now we're also seeing it in other decks and this kind of enables the idea that the they wanted to effectively like inject leverage into the system and by doing so you can borrow any L1 gas token so think Bitcoin ethereum and the Blue Chip gas tokens um at no interest no liquidation and against any supported asset on the network so for example you could post Bitcoin collateral in Native BTC and borrow let's say usdc on ethereum and so the loan to LTV ratio that you get uh depends on the pool depths so you get a lower collateral collateralization rate with less utilization so it kind of creates this incentive to be first like

I'm the first one in I can get a very generous loan whereas if you're like the you know one of the people at the end of the line you're going to get a worse LTV ratio and so roon is burned when loans are opened in this in in these this mechanism and admittedly I still have some reading to do on exactly how this whole design works but essentially the protocol takes on the liability of repaying collateral when the loans are closed so it's like a net benefit is realized when roon appreciates faster than collateral assets and that's because again when I go and open the loan a portion of that loan gets burned and ruined and then when I close the loan some of that roon or a dynamic amount of Rune is minted again so there is the potential where

let's say I opened the loan which burns 100 Rune and then based on price changes uh actually when I go to close this loan it'll actually mint 110 Rune and now I've created like this net inflationary period so that does definitely set off some alarm bells to a lot of people of like this whole desk spiral risk I think a lot of us are still scarred from the Luna days when the huge unwind kind of just created this mass mass Supply increase where Luna basically are inflated towards Infinity honestly but there are circuit breakers and to limit the exposure to this risk and um that's admittedly where my reading needs to occur is like exactly how the these mechanisms can kind of control that and we had a great episode with Chad Barrett Ford one of the lead devs

over there gosh it was probably eight months ago now and we need to get him back on for a follow-up just because of how cool and novel this mechanism is and ultimately to discuss the risks because I think there is this really interesting situation that's unfolding but again roon has these extremely exciting tokenomics that ties the determined value of roon to the value of the non-rune liquidity in the pools on the network and so obviously again when you open up these loans you deposit Bitcoin into the network you increase the amount of non-room liquidity in the network you so you improve the amount of trading that can be done and you also improve the um this is this is some number go up technology guys we got it back so uh again if it's I need to do more research

on the actual risks that are at play here but I am extremely excited about the new lending Market on Thor chain yeah just to jump in I'm not an expert on the lending markets themselves I was kind of reading the docs this morning it sounds like the only way it's betting the Thor chain is betting on roon outperforming any of the borrowed assets uh that that a user deposits or are I guess is it thinks that runes gonna outpace Bitcoin eth any of the collateral assets are deposited into the protocol it's pretty much taking the collateral that a user deposits and selling it and Market buying roon with it and if as long as roon outpaces the collateral asset that

was deposited root the Thor chain protocol will remain solvent in the event that the collateral asset that was deposited outperforms roon and then a user goes to withdraw their collateral what it's going to do at a system-wide level let's say a system-wide rune is insolvent what it's going to do is it's going to Mint roon up until the max cap which I believe is programmed the 500 million Rune and in the event that minting up to the max cap does not make the system still solvent what ends up happening is the borrowers of the pro from the protocol pretty much take a haircut it's like they got liquidated

effectively but but you know there's not like a hard liquidation to like regular lending protocols point but this kind of sounds like make it's like maker now taking the collateral asset and just Market buying maker with it and then being long maker uh it's pretty interesting from a game theory perspective because I guess you can argue like if the pro if the token doesn't go up well the pro is the protocol even going to be around for like long term uh it's like taking a really long directional bet on its own asset uh it's it's definitely number go up technology I think because it needs to go up in order for this to work um I guess the only difference between that and like Luna is that Luna can mint to an infinite amounts so I think it's gonna be really interesting to see like

how this plays out what the uh I guess like the solvency mechanism looks like for for roon I don't really understand like the lending lever that they talked about uh so I'm kind of the same boat as you Dan like I don't understand it fully but like high level it some good Ponzi Tech I guess yeah I think they need to court igorov and Justin sun to get over there and start putting it to the test and then we can be there to short it whenever that time comes whether it's six months or a year from now but lots of ways to make money on this so that's fun first of all nothing that anyone said is financial advice if he's on Gold by and buy market and Market by ruin

um second of all I think that's a new face that I'm going to use when something seems shady as hell and have no under no clue how to risk management works I'm just gonna say this is interesting game theory mechanics I think I'm curious I have a question for you Dan if if you know the answer like is this lending Market effectively like double dipping into the liquidity for like the costume solves or is it still in some sense titled I I don't guess I don't totally know what you mean by double dipping but effectively like the way it happens is like okay let's say I take Bitcoin to the network to open alone uh when I deposit the Bitcoin it will be swapped into roon and then like let's say I had like a 200 CR 50 LTV

um then 5K Rune would be burned let's just say my my Bitcoin was worth 10 grand the amount of Bitcoin I deposited and then five thousand dollars worth of of that Rune will be burned and the other 5000 will be used to be like swapped into usdc um and then that is the piece that like I will take as the borrower so the idea is that like the protocol has shifted off the risk onto effectively the Rune holders that's who is taking the BET here in my in my view so it is possible that if there's some like really lopsided demand for like borrowing or lending something then like the underlying liquidity proves that Power Authority and also become imbalanced uh well there's always an Arbitrage

opportunity between the liquidity pools across the network and there they do a quite a good job of actually staying balanced so like when a large borrower does come in yes there's a rebalance that needs to take place but uh there's like really good R Bots that seem to be hooked up to Thor chain and kind of maintain that ratio um but yeah no it's it's going to be interesting to watch this play out again like I it's like one of those novels honestly honestly for me it was like when I was reading curve's new lending model I was like all right like there's a lot to unpack here and I'm just scratching the surface honestly today um so I'm excited to dive deeper on this and really figure out is this thing sustainable but there are like interesting throttle mechanisms to the to the death spiral Point like

you can always open new loans but when you go to closed loans basically during times of volatility or like a lot of closing of loans you're gonna it's like a throttle mechanism so you'll get a smaller amount of your collateral back if you try to unwind your position at a inopportune time for the protocol so like yes there's no liquidations and there's no interest payments but you might get stuck in it depending on when you're trying like I don't know there's there's like the bank the bank run scenario here you would definitely want to be first and not last and if you are towards the end of the line I think the incentive theory is like you just won't close your loan uh which does benefit the protocol right because at the end of the day it

is a decks and liquidity is King so that's kind of the idea it seems to be scaling the liquidity pools to drive more than to drive the swapping operation um because there is no like the revenue generation from The Lending Market itself but that's probably a good stopping point for here we've been we've been talking for quite some time now so you know I want to give another shout out to our new sponsor hexins definitely be sure to check them out at permissionless or include a link in the show notes of how to get in contact and now on to the interview with vertex protocol all right everyone we are joined by Darius and Alwyn yeah so I was hoping you've already explained this a little bit on other uh podcasts but I do like to hear your guyses take uh firsthand I want to give that to our

listeners so can you explain kind of uh what you were building on Tara um in the first iteration of vertex and why you opted to build on arbitrum instead of a Cosmos app specific chain like I feel like that probably would have been the easier move from a development standpoint on Tara like the initial motivation was to make the currency version of anchor um and then in order to do that you want to like hedge out the currency risk um so like you could earn like I don't know 16 apy on Euros or some [ __ ] um and in order to hedge out the currency risk you want to have like liquid um perpetuous markets so that was sort of the initial thought which just have liquid perpetuals on Terra um in terms of like

why we picked arbitrum um like yeah it would be a lot easier to just go to like another Cosmos chain but like from the perspective of a team trying to like build a product that actually has users um Cosmos didn't seem like it was going to make it most yeah like the biggest Channel Cosmos or I just went to zero in like a week um so probably not a good idea to stick there and I think that looking at like the terror projects that like try to stay in the cosmos ecosystem um yeah leaving it was probably like a good decision um in terms of like why arbitrum specifically uh evm is like sort of the uh sort of the runtime that just has the most TBL

um and like all the top blockchains all run evm so it seemed like a good way to be like fairly agnostic to what blockchain we were on and have like just a really good chance of whatever of being able to build on something and having that work matter um without like sort of getting rugged from underneath us by like the underlying chain being messed up and arbitrum happens to be like the most performant evm chain at that time that also had like tibial awesome yeah and then I was hoping just to get like more of a high level overview of like what is vertex and uh I guess a lot of people probably don't know about vertex

so what is it and what makes it different from other margin dexes in the space yeah so like vertex is sort of just like a Futures exchange it's like pretty Capital efficient and fast and easy to use and then like it's sort of also decentralized but that's kind of like a side thing um so really it's like you can go trade on vertex as if you would trade on a centralized exchange it takes like one click to do [ __ ] um you know if you're a market maker you can get your orders placed on vertex like in like 10 milliseconds or whatever um so like you know I think we're actually like we're like much faster than FTX was um so like that's really all we're doing

like essential like something that looks like a centralized exchange feels like a centralized exchange but um just so happens to like be decentralized and so if we like take a layer of and peel back peel back a layer here uh and look what's under the hood you know what is it about your design that makes you be able to be faster than FTX or be able to have these high performance speeds is it the hybrid order book amm that you're using uh or or what exactly gives you that speed oh so look in terms of being faster than um FTX I don't think that's a function of like us being really good that's more of a function of FTX not being like designed super well um but uh um the uh the sort of just this is a the sort of gist of it is that like

um having like a centralized server um just makes things really performant because you don't have to wait for consensus and stuff um so the idea is like let's just make a compromise right like users self-custody their [ __ ] um but we can process all trades and Order placements like optimistically on our own server um and that way it's not like you're not waiting for a light to travel from like different nodes to each other and all of them to reach consensus um yeah it's just like centralized servers are fast and we like that yeah absolutely and I think a big value add to a vertex in particular is the cross margin account architecture just kind of like offered by default can

you guys kind of go into that and you know maybe talk about what cross margin accounts are and and maybe why you think other margin taxes in the space haven't attempted to implement it like you know the the gmx's the uh dydx's of the world um so I think DOI DX like I think they are cross margin but they don't have like um different like they don't allow you to use like btcs collateral or whatever but um like it's just easier to implement isolated margin than um across margin and something kind of tricky about cross cross margin is that we like we just have to care about all of our all of the products on vertex for like every transaction so it does get a bit tricky and like computationally

expensive um but the idea behind cross margin is that every single one of your assets is sort of pulled together and they all like um count for each other so you could have like eth spots in an LP and have that collateralize your positions so um it just widens the design space of the degeneration that you can do I think as well like a lot of users get in their head that cross margins more risky than isolated margin where I would argue kind of the opposite is true you know if you have a portfolio of random isolate margin

trades which would be the case say on the number of taxes you might use you end up with this like exposure to path dependency in a way that you don't really get with portfolio margin so on vertex you know if you've got a portfolio of Longs and shorts you can do that in a way that's far less likely to get stopped out and with less Capital than you would be able to do on say uh even a GMX V2 or whatever right because those isolated margin trades you're liable to get stopped down when it goes up and stop that when it goes down and you end up with no position you might be right in the end but it doesn't balance you out the way that we will on our risk engine it's a fairly common design structure in

like traditional markets it's just not that common in crypto I want to give a quick shout out to hexins as we explore today's blockchain landscape let's take a moment to recognize them as a premier cyber security provider in web 3. hexins is trusted by Tier 1 projects like polygon including a Security review on their new polygon ZK evm mantle risk zero Lido one-inch new bank and more get a deep dive into your technology stack with the most comprehensive analysis in cyber security Consulting hexins not only uses widely known methodologies and flows but discovers and introduces new ones on a day-to-day basis with over 55 billion dollars secured they cover everything from Smart contracts to blockchain to web 2 pen tests yeah there's been nearly seven billion

dollars of total value hacked in crypto's nascent history so it's safe to say your team has a lot on the line don't skimp out take your security seriously and reach out to hexins don't forget to mention Xerox research for a free web 2 pen test with your partnership and reach out to hexins at hexins.io find them in the links in the show notes or reach out to them at permissionless they'll be at Booth 832 but without further Ado let's get back to today's episode okay interesting and so you also you know you mentioned the use of like LP tokens uh as collateral there how are how is spot volume how has spot volume been trading on vertex so far in any plans to kind of drive more volume there as it's kind of essential for LPS or uh you know how do you think

about there's a huge discussion around lvr and how LPS helping is really not that profitable uh are you thinking about making this like a more profitable design space or is that just kind of something that's maybe way down the road map um I think the short answer is it's way down the road map um you know at the moment we have four spot markets um they do decent-ish volume but I think you'll see when you look at any exchange perks do way more volume than start and part of it's to do with capsule efficiency is just more expensive from a capital perspective to do sport although we have leveraged spots so it's easier it's still more expensive than doing perks

um the other thing is just like managing inventory and you have to be on a certain ecosystem so for us like we're on arbitrary at the moment we're not cross-chained so getting inventories just a pain in the ass like it's way easier to do perks so at the moment we don't um but like Alvin and I have discussed a few times like would there be a way we could design a more Capital efficient amm you know a similar kind of a product to a glp that would apply into vertex it's just down our list of priorities because at the moment we sort of get that synthetically right by incentivizing market maker liquidity we've got like the best firms in the

world make markets on vertex we incentivize them with our token and they just make really good topic liquidity for people to trade against them that's better than anything we could do with any sort of semi algorithmic amm type design like glp so would you say the primary use case for the amm is just as a fallback mechanism in case the off chain sequencer that facilitates the order book goes down um yeah I would say so and it's also sort of just like um a decent place to like Park your funds um if you just want to like Market make just like a one-click way to like grid trade yeah yeah that makes a lot of

sense can you guys kind of explain what a user could expect in slow-mo mode as you guys call it when you you know the sequencer were to ever go down you'd kind of fall back on just the the contracts that reside on chain um yeah so we don't really expect that to to happen like ever um so like if we were to go down long enough for like slow mode mode to matter um it probably like that means that we've just [ __ ] up really bad as a company um and that like it sort of just makes like like at that point it's like yeah withdraw your funds these guys are idiots but slow-mo mode will let you like withdraw your funds and like get out of the system so basically gives away for things to end

orderly if we were to not do our job properly and can you expand on like what do you mean by not do your job properly is that the sequencer going offline or like which piece of the the operation would fail in this case um yeah so the the waste limit mode works is that like you can like so normally all transactions get pipelined through the sequencer and the sequencer submits them to the chain um you can also take your own transaction and write it to the chains directly in which case the sequencer can choose to process it immediately um or after a certain delay you could also just forcibly push that transaction through um so what it would involve would be users like forcibly processing their

withdrawals um if the sequencer hasn't processed it in like I don't know like three hours or something okay and you guys charge like a flat 10 fee I believe um on trades as a sequencer fee because obviously you're batching all those up and you need to settle them on arbitrum um is this like a revenue source for you guys like do you ultimately you know make money off of the sequencer fees or yeah I guess is there a Delta there in fact we run a small loss on the sequencer and just to clarify that we don't there's 10 cents not 10 as well just to be 100 clear yeah um I think you made a slight slipper but yeah

um but basically it's to kind of cover most of the costs and it stops people sending like spam transactions to the sequencer um but it's literally just there for that we end up covering I think roughly 30 to 50 percent of the gas costs typically out of trading food okay yeah it's a bit of a weird structure um for trade answers that like every match that we process we have to pay a flat fee in gas so we sort of have to propagate like a flat fee over to the user and um it's been adjusted a few times based on like the gas costs on arbitrimp um but like I'm like pretty confident in that number like trending downwards over

time um as like the you know like arbitrum gets better or like other performer evm chains come up that makes a lot of sense and definitely 10 cents and not 10 I don't think many people would use vertex if that was the case like seven million dollars this morning from 10 food I'm also curious so you guys want to decentralize that sequencer over time I assume um that's a problem that not even some of the the best L2 teams have actually been able to solve so what are you guys thinking there is that just like a ways down on the road map as well or is that a priority and if so like what do you think the design will actually look like so depending on the regulatory situation um like everything sort of in flux but

like I I can speak to like initial plans of um how we would do something like that so the first is that like we're not trying to solve the same problem um as like an L2 team because they're trying to solve for like um like the general case and for that it's like order matters a lot what we sort of care about is like it's reasonably decentralized and if it's like someone can move your transaction around in a space of like 10 milliseconds probably doesn't matter um so we're just solving like a really different problem um than they are and we would probably

do something or like we have like a leading sequencer and um that sequencer just outputs like a tape of like what it thinks the incoming orders are and other sequencers can sort of just check that order right so like what we can do is make sure that the leading sequencer isn't like cheating by um not adhering to price time priority um within that tape of orderings what we can't do is ensure that the leading sequencer doesn't lie about that tape but realistically if your latency is like on the order of 10 milliseconds which it is for us then

like you know the leading sequencer can only move things around um kind of like front run [ __ ] um inside of that 10 millisecond window so that should be like sufficiently small such that it doesn't really matter okay yeah and you guys are able to achieve this low latency I think it has a lot to do with uh stork your Oracle Oracle provider I'm just curious why why stork is it just these exact needs that you guys need and I'm also curious like using a less battle tested Oracle provider any worries there um so it's actually like a bit like it's like a bit counter-intuitive but um It's actually kind of nice to work

with like a new Oracle provider because like they just give like really good customer support when they're like a startup and like we can pester them about like really dumb [ __ ] and they get back to us like instantly um so that's like really nice I have like serious doubts that like chain link would have like similar responsiveness um in terms of like stork's actual design um the way it works is that like they just generate a bunch of like prices off chain and then like they sign those prices and then like that can be validated on chain um so that actually works really well with our architecture because um we sort of know deterministically what price is going to be reported right so that allows us to sort of that allows

the state of our off-chain matching engine to stay in sync with our on-chain contracts at all times um and then the other thing is like it lets us pay gas to like check what the prices are and like push the prices like when we feel like it so it just saves a lot of gas um whereas like for example if we were to use something like pith on Solano um every single time like you know we'd have to like bridge that [ __ ] over Wormhole and stuff that gets sort of kind of a mess and Stork just does everything like really low latency um really low latency of chain which is just really suitable to our use case super interesting and just you mentioning uh you mentioning other

chains got me thinking like do you guys have any interest in adding additional support for other chains or you guys want to stay on Arboretum for the time being Terrors do you want to answer that I think ultimately we'd like to be able to provide assets across multiple chains so it's kind of a again it's like something we've discussed the exact way we'll do it we haven't decided on but you can think of it like logically you want all your liquidity and trading to be happening in one place and you want all your capital on each account to be accounted for in one place as well to keep your Capital efficiency so that means if we were going to do a cross chain app

we wouldn't look like something like a uni swap where you just Fork the code and put a different version of the code on like 20 different chains you're going to have to use a cross-chain messaging service like a wormhole to bring Assets in take deposits on different chains bring them to Arbitron and then have a user account interacting with the arbitrim instance of the protocol trade and then anytime they want to withdraw their withdraw to their home change so uh it's quite a big piece of work but I was probably the guy to do it given that he worked on Wormhole previously and has exposures to this from previous roles so um we haven't got the exact plan mapped

out but we're pretty confident we can do something decent in that space that's super interesting I kind of like your approach there yeah just because you mentioned Solana that's like that was the one on my mind given the loafy environment could be like attractive for building a defa application like this but that does definitely add some additional complexities around the cross chain messaging um yeah I'm just curious like how would that ux look for the user like given that there would be some latency if you have to use that cross-chain messaging platform from so like I guess like the way I would probably design it would be like so the way we validate signature is right now

uh the way everything's set up is that like most of the things that people sign don't end up like on chain it sort of just goes to our matching engines directly um so like they don't actually have to sign a transaction for like um arbitrum in theory right so the ideal ux would be they sign in on let's say optimism they have to send the transaction on optimism to deposit and then on the back end we bridge that [ __ ] to arbitrum they are not exposed to the bridge in ux at all um and then it might take like a bit longer for the bridged funds to arrive so let's say on the order of like two minutes to go from optimism to arbitrum

and then after that they can just like trade normally as if it was like a centralized Exchange um yeah and then in like a super Ideal World um it would be like almost a cross chain wallet so they could like log in on the same wallet on like arbitramp withdraw their funds or something like that okay interesting yeah I'm definitely excited to see how you guys uh progress on the cross chain strategy I feel like there's a lot of opportunity across various chains so I feel like that's an important piece but I did want to ask too about the the liquidation engine and just kind of the risk engine and risk engine in general how does that work under the hood because ultimately that's going to be pretty important considering you know the The Leverage involved and you know some of the synthetic leverage that's enabled on vertex every single

asset sort of like has like like a weight I guess and then um the way is sort of just like a penalty on its value so like we have like a concept of like how much health your account has um and then we just add up the value of all of your assets and then depending on the risk of that asset the values like decremented a bit to account for your health then if your health drops below zero you get liquidated and then we try our best to do like a good job when it comes to like not listing assets that are um yeah particularly risky for the exchange and so what would those Health uh Health

factors kind of look like you know maybe something comparing like uh Eve to to something like mkr which you've recently added usdc would be one right because you know usdc is just one usdc that's the base asset that we use um and then on BTC is like 0.95 and then you can save what mkr is that's 0.9 so converting it back into leverage like you can get up to 20 to one leverage on BTC purpose and you can get a ten to one leverage on uh maker perms so if you look across the space like we're on the conservative end I would

say as far as leverage goes um and then we have slightly more conservative leverage ratios with the collateral assets so if you're doing spot you get less leverage because obviously that becomes the underlying thing that's like underpinning the portfolio the perk we can just kind of liquidate one user into another but with the spot assets you want to be a bit more conservative in terms of what people are holding and what actually sits in the system because that's what kind of underpins the whole chronic structure of the exchange and if I wanted to take part in liquidations like how exactly would I do that uh you would have to spin up like your own liquidation bot so it's not like

I think like we have like our own Liquidator I'm not we've definitely shared it with people but I'm not sure if it's like a public repository just yet um like to be honest like you would have to be like someone technical to do it right now yeah I feel like that's pretty standard across the space honestly you need a little bit of technical expertise to do that how is the the risk engine fared so far I know you put out a good thread Alwyn on uh The Day xrp news got released and it went up like 70 or so so it'd be great to hear a little bit more on that end oh thanks I didn't know you followed me on Twitter yeah yeah of course but uh um I mean it's been it's been going pretty good like I don't think we've had

like a single day where the Insurance Fund has gotten drawn down so um we have like this summary bot which just tells me um the status of everything um so the Insurance Fund is up like fifteen thousand dollars in Inception and then the Liquidator that we run is up like sixteen thousand dollars since Inception um so really like over the course of all of these like various ups and downs um you know Liquidators made money the Insurance Fund um made money yeah like the way our system is set up is like um we just run our own instance of the uh

the matching engine like a separate standoff instance that like it's like maybe like 50 milliseconds behind the matching engine and then that's just constantly looking for like accounts that can be liquidated um so like when like the price moves um it might be like like we should liquidate most accounts within like a few seconds tops um so it's like pretty robust and you mentioned the insurance fund there how is the is that is like a portion of trading fees used to fund that account um so whenever like so the way we do liquidations is um say you're underwater and you have some Bitcoin

um you're along the bunch of Bitcoin so when I try to liquidate that Bitcoin it just means that I buy that Bitcoin from you and I give you some usdc and um the price that I buy the Bitcoin from you at is computed using the Oracle price of Bitcoin and I get like a slight discount and that's what incentivizes me to liquidate you and a part of that gap between the Oracle price and the price that's computed like the liquidation price is sent to the insurance fund and at what point would this Insurance Fund be tapped into like what is its use for um so sometimes like like when an account goes underwater or something um

yeah like some of the funds from insurance will be used to top up that account I think that there have been cases where accounts did go underwater during like um the xrp stuff so like some money went from the insurance fund and so those accounts so like Why Not So like um I guess it's like once I've completely finished liquidating you um so like I've bought all of your assets and I've paid off all your liabilities and then it turns out that you still have one liability like negative 500 usdc and like nothing else in that case 500 usdc will come out of the Insurance Fund um to reset your account okay and if the insurance fund can't

make up that difference is it amortized across the holders of the same asset within that account that has a negative balance yes so if your liability is like um let's say negative five BTC spot then it's amortized across all holders or all depositors of that spot token if it's like a perp position and you're like down bad um then it's amortized across like participants in that per Market okay gotcha there and earlier you mentioned uh some similarities with the mango markets uh that was built on Solana so I'm curious you know that obviously suffered a pretty bad uh exploiter attack whatever you want to call it how

is that avoidable on vertex I don't think that hack was a function of like a like a shitty model um I think that hack was like a function of like shitty parameters within that model um so like yeah we're not gonna like list vrtx and have like an unreasonable amount of Leverage that you can take on it if you look at all the assets we've listed so far we're kind of focused on doing things that have pretty decent depth and liquidity to them while established products um at the same time like we obviously look at that and we have like a whole list of things that we implement or we discuss risk or you know

how one of my might gain like various scenarios and say okay how can we guard against this in the future it's just a constantly evolving thing I don't think our risk framework will ever be finished but as Alan said in the first instance not listing your own illiquid exchange token on a fairly High collateral value probably a good risk measure and then you know there's a lot of Wrong Way risk there with that token being on the exchange and leveraged and using collateral um but you know there's a ton of other things we can do yeah we'll Implement over time

um separately like uh hacks are actually one of the places where like this off chain sequencer actually like benefits us a lot right um so what happens is like you know in our sequence here if someone if we see like massive withdrawals and stuff like we know of that [ __ ] beforehand and we have like the time out like the slow-mo time out to like actually respond so like if someone if we see like a withdrawal come through for like a hundred million dollars like that is gonna get flagged because that's like pretty strange um and it's sort of like the guy can try and push through that withdrawal but like we kind of have like three hours to figure out like what exactly is going on

um so we just have like an additional delay where we can be like um pretty responsive it's not like oh and one blockchain transaction you just get [ __ ] yeah that makes a lot of sense um I think probably not listing your a liquid native token with high leverages is probably a good move um but I did want to ask too so I feel like dydx like kind of got big and a lot of traction because they they were kind of like the first purp Stacks that did like a really big airdrop that like ended up well for its users and then if you look at GMX like the fees are super high but people love that you know token because the yield is so good paid out in escrow GMX so because of the high fees I mean you're paying I was looking at it

the other day it's like on every ten thousand dollars a volume on GMX you're paying like 20 of fees and on vertex you're paying like two so it's ten times cheaper to trade on vertex um but I guess I'm just wondering for you guys like you're not the first um and you're also not going to be generating the most Revenue until you reach scale so I guess like what is the strategy for um I guess bootstrapping staying power in a moat I think the road map is like we're still in like version 0.50.6 if you like that product offering you know we launched three months ago we don't have a liquid token we have an incentive program we've been very clear about our airdrop strategy so our

airdrop will be incredibly generous but it's based on the trading activity so if you're a user you come to vertex you try you're helping us build a product and we will reward you with our exchange token we have trouble now I don't think the whole Community picked up on quite how generous our token program is so we're dropping like nine percent of tokens in October um there's some bells and whistles around how that airdrop will occur which will become public in due course but the truth is by the end of that airdrop we'll have a liquid token so people will now be able to put price on what the incentives are worth

we'll have I think one of the best products out there if you look at goes through from speed convenience which obviously like Alvin and the back team have built out so it's really fast it's super Capital efficient you can do sport you can do perps all in one place and then on the front end we've really worked hard to make the UI ux super accessible easy to understand and we just can you continue to smash away at that so it sounds really boring but the strategy is to have a really [ __ ] good product that works really well and will give you tokens and build community while we do it and I believe

people will respect that it's not you know a lot of crypto is just have a ton of [ __ ] marketing and then put a product out and the product just underwhelms we decided to focus on having a really good product first and then just let Word of Mouth do the rest so we're still in that process it's starting to build you know like you found us I think through Word of Mouth other people have come to us through Word of Mouth there's way more value in that I think you get recommended by people you believe in who like our product than there is in just paying for a ton of people to show your [ __ ] on Twitter yeah that's a

sobering take I like it build the product get iteration then give people a token it's uh refreshing to hear that um you did uh talk about the vrtx like token airdrop and token incentive program can you guys shed any light on um I guess the tokenomic design like what will the token be used for exactly I also like I'm curious how you guys arrived at like the 28 allocation for the team and and early investors that just seems pretty generous in terms of like I guess industry standards normally it's closer to 50 or so yeah um so I mean addressing that part like I think ultimately it kind of depends on the size of the team um the resources have been put into it

we raised a decent amount of capital last year from investors and you know as you alluded to early in the podcast you know we started off in Terror we went through all of the Tara d-peg we went through all of the events around FTX last year other centralized exchanges blockchain's having problems protocols going to [ __ ] getting hacked through all of that our investors have been very supportive calm um helped us move forward helped connect us to people and the team has done the same

and frankly in the midst of all that to build a great product and you know I think today we're like top three for volume on purpose access um I I think is a highly justifiable amount you look at what's going to the community and how we're looking to spread it I think I think it makes sense so I I feel no need to justify that really I think it's kind of fully warranted in terms of the um tokenomics um it's a governance token so it will have some voting power um given the technical sort of basis of the exchange obviously

a lot of that will probably be on a um recommended basis only it's not going to be like totally enforceable because it's just inappropriate for um like a community to decide on say risk metrics for an exchange or anything else or we have to think carefully about how that gets handled but then on the um economic side So the plan is to put elements of token of their exchange Revenue back into the token so haven't quite fixed the percentage yet but um basically there'll be like a usdc payment weekly into token staking and that would be users being incentivized

to stake and partaking evidence and receive some dollars I also noticed in the docs it said that it could potentially be used to pay for uh you know baskets of uh assets that are acquired via liquidation and then the subsequent vrtx payment would be burned potentially I also saw another burn mechanism that is like if incentives go above 10 million dollars in a given month then the excess is burned as well and I also saw potentially paying for trading fees and vrtx with vrtx getting burned as well is that like still where your head is at in terms of token design or is what you guys laid out more so just general ideas for now because the tokens on not live I think they were it

was more like a general idea space I think as things have evolved I think my head's come to a place where you know working back paying for fees so it's a little bit circular because we get paid in usdc the usdc goes to stakers people buy the token to them earn the staking yield there's a similar way around to like paying in the fee inverter you know what I mean it just complicates the mechanism while achieving the same thing so I'm not sure um asking our one of the back end team to make that work has that much value um similar thing with the baskets uh

what was the second thing uh in terms of tracking the amount of the amount of tokens issued um that is something yeah I think we'll seriously look at it might not be in place in the first instance but if we see that like we're doing volumes such that you know that becomes a huge excessive amount of token we're issuing every month we'll probably put a mechanism in place to control for it I think the lesson learned from dydx was those incentives were really insane at one point um and so there are probably ways we can make that better and benefit token holders other than just issuing like 50

million dollars of incentives in a month how do you think about the Dynamics uh of incentivizing both you know both Traders and market makers in this model right because you kind of need both to make this this ecosystem run so how do you think about the balance that you need to have at play here yeah it's um I mean obviously you need to have a you know it's like any Market you need to have a supply and you need to have demand if you don't have market makers you don't have a market and if you don't have price takers you don't have someone to like help Arbitrage push the price around do various things right just take risks and add value by Crossing that offer

um I think more simply like you can think of the token as like a way of it's a way of like demo denoting membership of the exchange so if you look at like an old exchange like a CME or the sibo or c bar right back in the day not as they are now but back in the day they would have uh seats on the board so if you were a training firm at the CME you'd have an exchange membership and that exchange membership would give you certain benefits yes you'd get some proportion of the exchange's revenues but you'd also get the ability to participate in um exchange decision making what

products we're going to get listed how risk was managed whether other firms were let in what would happen all these sorts of things right with our token we can create a similar thing and like all exchanges members will conduct different activities so yes market makers are huge and they get like a special designation because they Supply the liquidity but then you've got all these participants who come in and are trading professionally or they you know in the case of crypto a lot of these are going to be retail right but they come in and trade and do things um to you know maybe they're doing a cash and carry trade they're trying to capture spot pert basis or they're just doing a Paris trade or whatever it is

they might just be taking Direction because they think doge is going to the moon and they're going to go 10x live version see it go up whatever it is doesn't matter all those guys add value and in return they get the token so it's just a way of increasing the expected value of trading on vertex right now it's extremely positive EV to come and trade with us every trade you do even if you marginally lose money from a fee basis you should be making cash trading with vertex we want you to make money super interesting and if you think about like a an original spot decks like you know say on ethereum for example like trading was never what was what was incentivized

it was always the lp side so getting that liquidity in because there was like sort of a necessity you know for Traders to have to come to a protocol and trade anyways if you think about the perp landscape that we've seen that be much different you know we've seen a lot of perp Texas use incentive programs to get traders in the door and then like the idea is Kill Bill just building a badass product that they stay for uh but on the other like does that logic still translate here like will market makers kind of always need to be incentivized or can you build a system to which that they're going to be making money as well um and such that like that's what keeps them coming forever not necessarily the fact that they're getting additional incentives um yeah like the uh I feel like the main

distinction between spot and purpose that like on purp mostly happens on order books and spots still like happens mostly on amms on channel um so on order books it just doesn't really make sense to like for people to throw money into like a giant pile and to incentivize that in terms of vertex or whatever it's like zero [ __ ] effort for them to just like keep it on and to keep providing liquidity and if they're like you know good at Market making they should just continue making money so like why turn off something that's like making money um so that's like just the general idea hopefully the market makers stay after incentives um because they've already paid like the fixed cost to get connected yeah that

makes a lot of sense actually plus the the maker rebates and zero maker fees definitely doesn't hurt um who are some of your Market maker Partners I mean I think it's well known that when to mute or participating in our ecosystem they make a we have a strategy strategic around with them they put a small investment in um and uh Market making with us but then you know if you look around last year um it's hard for me to give all the names that market make with us so I'll tell you who invested with us um our investors included like dexterity jst Hudson River Jones Street GSR um so not all of those are Market making

with us but some of them are and we have a bunch of other firms on Market making as well I think what's interesting is um depending on the market uh we have more market makers that participate in BTC and East and slightly fewer that do the old markets which sort of mirrors most exchangers we're starting to see market makers come now they've seen our volumes um on various stats and stuff and people are seeing us competing we're now seeing other market makers join in so we started with about five market makers that's growing I think there are 10 that are active

across different products at the moment okay and now the the end goal for vertex it feels like to me at least and correct me if I'm wrong but is ultimately to complete with like centralized exchanges like you guys aren't necessarily decentralization Maxis but you're more so product Maxis like you just want to enable a really good trading experience you get on a centralized exchange with the added benefit of you know self-custody and a little bit more decentralization than you'd get uh on a sex and and maybe avoiding implosions of FTX so I guess what features do you want to launch over the next 12 months that help you achieve that goal yeah I think the in terms of like pure product um

huge one is cross chain which we already sort of spoke about um I think figuring out wallet ux would be really important um I think just the pure nature of having a non-custodial wallet puts a lot of users off so probably need to engage with using account abstraction on some level to create say like a Vertex smart account where people can just log in with their email have an account and just feels like logging into any web to company but in the background you own your wallet and you you know that those assets are segregated away from the rest of the exchange um

I think probably we need to look at a few little feature things like um isolated margin even though I kind of personally think it's dumb some users want to use it so you've got to give the people what they want um can you think of anything else what am I missing oh yeah I would say those are the main things oh I think it would be interesting to think about how does one like really how do you really neatly integrate like a Fiat online from that's probably like one of the big things that people use centralized exchanges for

um and I think until you have that on vertex you're always going to have some element of friction you've got to go somewhere else to get your crypto before you can then trade on vertex that's very sub-optimal we really want to own the user from start to end so how do you put that into our package so these are the sort of things we think about yeah that's awesome guys I really love that analysis there is as interest generally your approach of kind of figuring out what are the trade-offs that we need today to to make a product great in in crypto so you know thanks a lot for joining us today this was an exciting conversation uh can you just give us some thoughts on where to where to find you or where to find more about the protocol vertex best place to find me is

on Twitter um at various to buy uh t-a-p-a-i I recommend following Allen he is excellent when he chooses to put something out my first name and my last name this is pure hour and pain and then um vertex underscore protocol um so yeah you can follow us there or join the Discord and um yeah if you've got any questions we pride ourselves on having pretty decent user support so there's a good team working on Discord to help with any problems uh and just come and use the product awesome sounds great man we'll be sure to link to the vertex as well in in the show notes and in the project docs as well so thanks again for coming on guys appreciate it thanks for having

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