Interview with GAEA Engineers: Using Mature Design to Futures Market Vulnerabilities
Cryptocurrency is affected by its policy as its market is volatile, and the risks and profits are difficult to lock. The lack of risk aversion and hedging tools has become a huge flaw in the current market.
Since 2017, cryptocurrency trading has been reaping gold, and its 7x24-hour trades has not stopped. After a large number of investors entered the market, they bear the alternating pressure by opportunity risk. Also, the current financial market for cryptocurrency trading has not yet reached its maturity, especially in trading cryptocurrency derivatives (futures, indices, etc.).
Recently, Golden Financial reporters conducted an exclusive interview with the Financial Engineering Department of GAEA Global Blockchain Asset Derivatives Trading Platform to explore the development and opportunities in cryptocurrency derivatives trading.
The GAEA Engineering team consists mainly of professionals, particularly on traditional futures trading design, and they have high theoretical knowledge and practical experience in cryptocurrency hedging and quantitative model development.
China Needs a More Mature Derivatives Trading Market
The purpose of hedging comes from the emergence of derivatives. In the process of spot trading, the risk of the original spot transaction can be hedged by issuing the corresponding derivatives through the forecast of future earnings.
For example, if the miner is hedging according to the token value and the token price that they are expecting to dig in the future, the relationship between the opening amount in the futures on the contract and the number of future mining will be equal. Hence, the miners can transfer the risk of token fluctuations, even though when the price of the currency falls or when the value of the futures end has been locked.
However, due to low maturity in the market, arbitrage and speculative traders have continuously entered the market, which sometimes dominated speculative forces in the market and increasing the market’s volatility.
The GAEA Engineering team mentioned to the Golden Finance reporters that: “Cryptocurrency is affected by its policy, the market is violently fluctuating, and the risks and profits are difficult to lock. The lack of risk aversion and hedging tools has become a huge flaw in the current market.”
Firstly, most platforms only support a single currency transaction mode, with a single business model, and there are still gaps in the reasonable disclosure of prices and the provision of information in the trend. Although some exchanges have launched cryptocurrency futures products, they have not fully covered the current cryptocurrency varieties or providing reasonable leverage for the market, which has caused the market prices of some currencies to deviate from its reasonable range.
Secondly, the current futures exchanges such as Bitmex, Bitfinex and OKCoin are aimed at the currencies with large trading volume on the market. Most of these currencies have no futures hedging instruments, which unable many investors to implement effective hedging strategies when configuring other cryptocurrency assets. When effective hedging strategies cannot be implemented, most of the funds are concentrated in the mainstream currency, which is unfavourable to the development of the cryptocurrency market. Due to the imperfect design of trading mechanism in the exchange, the risk of spreading out is high.
GAEA’s Platform GMEX
The GAEA Engineering team believes that the existing cryptocurrency derivatives that is currently on the market, such as fixed-term contracts, perpetual contracts, and others, are not much different in its product structure compared to traditional finance. However, cryptocurrency trading has great complexity and volatility compared with traditional finance, so it has to be continuously improved. In response to the current problems in cryptocurrency trading, GAEA has the following directions for cryptocurrency derivatives:
(1) To reduce the volatility of the cryptocurrency market. When there is a large fluctuation in the price of the currency, investors can avoid the panic of buying in the spot market (the chasing up and falling down, etc.) by hedging and reducing its volatility.
(2) Derivatives can increase the liquidity of some markets, by bringing more cryptocurrency trading volume when applying cryptocurrency options to the corresponding underlying currency portfolios.
(3) To provide risk management and transfer tools for investors. In order to avoid the decline of cryptocurrency prices, futures trading can be used for hedging.
(4) A better investment strategy will be added, and any variety of cryptocurrency can be broken down into several futures and options combinations.
In order to avoid the risks in the characteristics of the cryptocurrency market, the GAEA Engineering team mentioned these key thoughts:
- To emphasize good marketability through emphasizing the market, an exchange can achieve a good match between the buyer and the opponent’s hand. It is important to have a core market-making team, even in the case of a downturn, to optimize the trading market.
- It is forbidden to gamble with customers, to prevent the risk of a one-time crash.
- Strict control of income, do not quantify the team, eliminate the banker’s control, and ensure fairness. GAEA only provides research strategies for customers, such as some quantitative strategies, some hedge plans, hedging structures, and arbitrage-moving methods. The team will never be quantified to ensure market fairness. GAEA’s brick arbitrage program can also achieve annual revenues of around 30%.
- The contract design must be free of loopholes. It is strictly forbidden to share it. If it does not move, it will roll back to avoid losses.
- The fluency of IT transactions. The original GAEA team has been working on financial technology development for some software in the industry, developing arbitrage software for the quantitative team, and more. The core team comes from China Financial Futures Exchange (CFFEX), the Shangjin Institute, National Security Bureau, etc. This team is made up of professionals in product experience. Some exchanges on the webpage might face problems from time to time, hence, it is developed for the PC that requires data connection with the API interface for each exchange. Previously, GAEA has CTB level trading ability, combined with a simple UI design, which is compatible for the Asian market.
GAEA’s Rhythm
On September 16, the GAEA’s global blockchain asset derivatives trading platform was officially launched. Up to now, GAEA has launched its regular contract products in 2 currencies, BTC and ETH. They are carefully designed to prevent the two key vulnerabilities, which are explosion and risk control.
First of all, by using the mark price and the full warehouse margin system, users can minimize the probability of triggering a flat as much as possible. The GAEA Engineer team believes that many platforms use the latest transaction price to calculate the position, but in relation to its volatility, once a trader maliciously pulls the disk, a chain burst can easily occur, and this will destroy the balance and stability of the market. The mark price used by GAEA is a reasonable price based on the index price and the depth of the market, which can help reduce the possibility of a burst.
At the same time, in comparison with the marginal system, only the initial margin can be used. GAEA uses the full marginal system so that the realized profits of the position can help increase the margin on the loss position, which can effectively avoid the leveling.
In order to minimize the occurrence of marginal loss, GAEA also set up an insurance account for risk reserve. The insurance account is used to take over the forced closing order that cannot be immediately sold in the market in time, to avoid investors risks. At the same time, the risk reserve is used to reduce the probability of investor’s margin loss, and minimize the user’s loss.
After the platform is officially launched on September 16, GAEA continued to introduce various tools and value-added services, such as the automatic brick-and-mortar transactions, arbitrage, and inter-temporal arbitrage. It is expected that in the fourth quarter, GAEA will launch the online sustainability contracts to meet the growing demand for derivatives trading.
Final Notes
There are many standards and inherent models in the world of the financial economy. The rise of cryptocurrency will complete the improvement of financial economic capabilities. Many technical challenges of cryptocurrency in the future can be overcome, and blockchain asset derivatives are bound to be the future trend.
GAEA believes that even if the current cryptocurrency market is in a relatively sluggish state, the future direction will not be stagnant, as investors can focus on the quantitative strategy of derivatives. “Some traditional investment strategies, such as arbitrage, CTA, etc., can still be found in the cryptocurrency market with better application.”
The blockchain asset derivatives market will simultaneously promote the maturity of the blockchain financial ecosystem, in the process of its own development and maturity.
