Vertex Protocol Litepaper 1.0
For the PDF version please click here.
As crypto continues to spread into every corner of global markets, certain participants have notably been left behind. Vertex believes that decentralized finance has the potential to democratize finance for all citizens of the globe but to do so, DeFi must ultimately replace the current tools available in TradFi.
Vertex sets out to create the infrastructure and mechanisms necessary to bring real-world money markets and genuine financial products on-chain. Specifically, Vertex will create a trusted marketplace for decentralized stablecoins and their perpetuals enabling:
- Expansion of utility for non-UST stablecoins.
- Facilitation of hedging and speculation in crypto FX markets.
- Inclusion of non-USD participants across a range of blockchains and protocols.
2. Vertex Protocol
Crypto markets have exploded with innovation since the development of Bitcoin, but even in the midst of incomparable progress, TradFi products and services can still offer inspiration for DeFi.
2.1 FX as a Model
Facilitating over $6 trillion in daily volume, the foreign exchange (FX) markets are the largest financial market in the world. They underpin global trade and commerce, helping capital flow efficiently across borders.
Currently, DeFi liquidity is concentrated in USD-denominated stablecoins. Supporting one major base currency helps avoid fragmentation of liquidity pools, but also precludes non-USD stablecoins from finding utility and limits their adoption.
Multi-currency users across both crypto and traditional finance have demand for:
- Trading instruments that are both transparent and capital efficient.
- Multi-currency solutions.
- Decentralized solutions that sideline centralized points of failure.
Derivatives markets in FX forwards enable a range of hedging and speculation that would otherwise be impossible due to lack of liquidity. Akin to this, perpetual swaps serve as a flexible backbone for derivatives in crypto markets and have proven robust in a number of use cases.
The problem of liquidity fragmentation must be addressed to create multi-currency utility: derivatives markets can be a solution.
Vertex will create decentralized perpetual markets to facilitate hedging and speculation in FX for a range of stakeholders and use cases. Vertex can capture first-mover advantage in this market and provide a valuable service to the crypto community by building out the first deep and liquid stablecoin FX market to trade on-chain.
The table below from the BIS shows outstanding notional derivatives positions in FX markets of $90–100 trillion.
0.1% Share of Current Market = $10 Billion of Stablecoin Demand.
The upside potential for Vertex and Terra is exponential.
Source: BIS — https://stats.bis.org/statx/srs/table/d5.1
2.2 Core Features & Use Cases
At the heart of Vertex is its Protocol Design; namely, perpetual swaps and a virtual AMM (vAMM) model.
Crafted for on-chain FX markets, the design is highly optimized and applicable for a number of DeFi primitives seeking capital-efficient and flexible markets.
Vertex will offer and support the Terra ecosystem with:
- Leveraged Trading across various stablecoin pairs with the ability to open long and short positions using UST and aUST as collateral.
- Utility for non-USD stablecoins across a range of protocols and blockchains, such as a multi-currency version of Anchor that supports JPT, EUT, INT, and more.
Vertex aims to tap into a diverse set of stakeholders and empower them with ownership over the protocol. Traders, liquidity providers, and partners will contribute to, and benefit from, the decentralization of Vertex through the protocol’s governance mechanism using the $VTX token.
2.3 Why Terra? Decentralized vs Centralized Stablecoins
The current stablecoin market is dominated by USDT and USDC. Both products have faced several controversies but continue to be the largest portion of the market share.
Centralized stablecoins suffer weaknesses in:
- Issuer Risk — Qualms remain on the asset-backing of their tokens, as well as the issuing entities themselves.
- Jurisdiction Risk — Centralized stablecoins are over-exposed to specific regulatory jurisdictions depending on their denomination or physical location, not suiting the decentralized nature of crypto markets at large.
- Liquidity Risk — It is incredibly challenging to generate liquidity in most local currency stablecoins.
Terra solves for the above as per below:
- Issuer Risk — Terra is completely decentralized, with no custodial risk.
- Jurisdiction Risk — Terra stablecoins are governed by an on-chain swap mechanism and impervious to external influence or censorship.
- Liquidity Risk — Terra supports the creation of virtually any stablecoin via its minting mechanism and oracle network, with stablecoins linked to the price of USD, CNY, JPY, GBP, EUR, KRW, etc. already in circulation.
Terra’s high throughput and low-fee architecture, enable seamless cross-border value exchange for anyone, anywhere making Terra an ideal candidate for the emergence of a multi-currency stablecoin architecture in crypto.
2.4 Problems Solved
Ultimately Vertex is focused on solving real-world problems for real-world users. Some of the immediate problems in the ecosystem include:
- Non-US Anchor depositors face FX risk — Vertex will create native stablecoin deposits powered by FX perpetuals, which will eradicate this risk and broaden the ability for integrations into multiple jurisdictions.
- Broad international adoption of decentralized currency is necessary — Vertex will enable deep, liquid, instantaneous cross-border transfers via a range of stablecoins freeing trade, and transfer of value.
- Leveraged FX trading is price-inefficient and capital-inefficient — Vertex will fix retail FX trading in spread betting and OTC forward transactions as they are overpriced and over-margined, precluding individuals and small businesses from efficient hedging solutions.
2.5 Example: Anchor as a Model
A lynchpin to the growth of the Terra ecosystem and UST adoption has been the market-leading rates offered by Anchor Protocol. Nearly 20% returns with minimal variance have enamoured a host of builders to seek ways to leverage the power of such high yield for real-world users. However, for those operating outside USD-denominated jurisdictions, the opportunity is constrained by currency movements that can negatively affect these returns.
Drawing Inspirations from Traditional FX Money Markets
In traditional markets, scale in short-term money markets is often achieved through FX swap markets where mismatched demand for liquidity is facilitated via combinations of FX spot and derivative transactions. In the example below, Counterparty A is selling spot EURUSD vs buying forward EURUSD but is also effectively depositing EUR and borrowing USD via FX transactions.
Source: BIS — https://www.bis.org/publ/qtrpdf/r_qt0803z.htm
Vertex Protocol’s Proposed Crypto Mechanism
In the absence of an active stablecoin forward market, Vertex’s FX perpetual market will facilitate leveraged FX trading for both hedging and speculative purposes.
As a secondary effect, it will allow users to create synthetic deposits for non-UST stablecoins.
Ultimately, this mechanism will be abstracted away from end-users who will solely be exposed to:
EUT- > Deposit →Earn Yield →Redeem- > EUT + YIELD
This elegant solution brings users:
- Decentralized currencies for their respective regions.
- Opportunities to earn attractive DeFi yields in their native currencies.
3. Tokenomics & Protocol Governance
The priority is to get Vertex’s ownership into the hands of the community as quickly as possible. As such, Vertex plans to issue the Vertex DAO token ($VTX) which can be staked in the xVTX pool to get xVTX tokens.
xVTX tokens serve two main purposes: governance and insurance backstop
xVTX holders can propose and vote on new ideas, collectively contributing to protocol development. Holders will also share in a percentage of protocol trading fees in return for acting as a general backstop for the protocol’s insurance funds. In the event that a liquidation event is triggered, up to 30% of the value in the xVTX pool will be sold to the market to mitigate losses for traders.
In order to disincentivize manipulation of this mechanism, there will be a 3-week lockup on tokens which will also help to stabilize the circulation of the tokens and incentivize community participants towards long-term thinking and participation in the protocol.
The Vertex team believes the next big opportunities in crypto will come from innovating on problems users face in the real world. Vertex will leverage leaps made in technology made by others to become a connecting utility for crypto, using efficient design to bring the benefits of crypto and decentralized finance to users everywhere.
This drives a simple philosophy: empower users and protocols to fulfill their potential by removing barriers to adoption.
We are excited to start the journey.
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