DerivaDEX is a next-generation decentralized derivatives exchange that unites the performance of a centralized exchange with the security of a decentralized exchange. This product sets a new standard in user-governed exchanges, where traders are stakeholders. Governance is the foundation of decentralization in the DerivaDEX protocol.
There are 4 core elements, all controlled by governance, that make up this system:
- decentralized matching,
- non-custodial trading,
- the DerivaDEX checkpoint contracts, and
- the real-time price feed.
This post dives into governance and the DerivaDAO, future posts will explore the other mechanisms listed.
From Day 1, any updates, modifications, and additions to the DerivaDEX protocol must be done so via governance.
For example, a mainnet release of the DerivaDEX Exchange will require a successful governance proposal by the DerivaDAO (all DDX token holders). Once the proposal is put forth, DerivaDAO members will be able to provide feedback, suggest modifications, and ultimately vote on whether or not to accept the proposed changes to the protocol. This same process can be applied to any future governance proposals submitted by members of the DerivaDAO.
Unlike most DAOs, there never have been and never will be admin keys of any kind. For this reason, as the DerivaDAO nears a mainnet proposal, it is increasingly important that the community understands the governance process that is used to upgrade or modify the DerivaDEX protocol. Decentralized governance has a key role to play in product strategy, security, and the evolution of the DerivaDEX exchange in a way that truly empowers you, the user.
Modifying the DerivaDEX Protocol
As mentioned, all modifications to the DerivaDEX protocol must take place via governance. This article discusses how governance is implemented in DerivaDEX.
For a detailed description of the mechanics of a proposal process, check out this article.
If you visit governance.derivadex.com, you can see all past and current proposals.
Governance is also part of the product model of DerivaDEX: to facilitate rapid development, a swift response to new situations, and ensure that the exchange can remain competitive with centralized alternatives, governance has wide latitude to modify the protocol. This is accounted for in the DerivaDEX security model via token economics. In a nutshell, the platform expects token holders to make beneficial decisions for the protocol. No single entity is solely responsible for management of the exchange. As the community grows larger (and liquidity mining progresses), the governance of the exchange becomes increasingly distributed as well.
Generally, there is a tradeoff between flexibility and security in governance: DerivaDEX is currently a very flexible protocol. In fact, the architecture of DerivaDEX even allows for governance actions that alter the scope of governance itself (pretty meta, huh?). In other words, decisions around the role of governance will be up to the DerivaDAO. For example, as the system matures, the DerivaDAO could even propose to limit the scope of its own powers.
Mainnet Proposals
When the DerivaDEX Exchange is ready for a mainnet release, the relevant code will be submitted to governance as a proposal.
A successful proposal can fall into two categories:
- a logic upgrade, or
- a state change.
The proposal process is the same, but the way the protocol is modified is different. A state change is generally more limited in scope. For example, a state change might be including a new trading product like DOGE-PERP or altering the fee schedules for users.
A logic upgrade covers more substantial changes. For example, adding the exchange contracts to the DerivaDEX protocol is a logic upgrade, because the logic of how the contracts interact and function is modified.
These distinctions are not critical for a user who simply wants to vote or delegate on a given proposal, but they are important for those who wish to more fully understand the process by which the DerivaDEX protocol can be upgraded and modified.
Upon proposal, certain parameters will be specified that can be updated easily in the future via state change. First, it’s important to understand a little of how on-chain governance works with the off-chain operators responsible for matching and execution.
Specifications
Any parameters that the operators need to know about must be set in the “exchange specifications” or “market specifications”, and is passed automatically into the operators directly from the contracts. Parameters that *only* affect on-chain components are still subject to governance, and are set inside on-chain contract specifications.
“Contract specifications” covers three categories. On-chain specifications only affect the parameters of the smart contracts. “Exchange” specifications apply to the entire exchange. “Market” specifications apply to a single trading pair. This is a good place to start to begin looking at some of the ways in which governance can influence the design of the exchange product. Some of these parameters include:
Exchange specifications
- Fees for maker and taker trades
Market specifications
- Trading pairs listed on the exchange
- Leverage allowable per trading pair
- Origin of price feed(s) per trading pair
On-Chain Specifications
- The required operator bond
- Accepted collateral types
- A registry of approved (or blacklisted) operators
Other
These elements may not yet be included in contract specifications, but are also set by governance:
- Target size for insurance fund, and how to deploy surplus
The DerivaDEX mainnet proposal will include contracts for deposit and withdrawal onto the exchange, a registry of TEE-equipped operators who are approved and have gone through a trustless verification process, and a smart-contract based “checkpoint” system that enables communication between DerivaDEX operators and the Ethereum network. Stay tuned for future articles about these individual components!
Coming next:
- Security model of the DerivaDEX operator
- The role and functioning of DerivaDEX Checkpoints
- More! Hop in the Discord to request deep-dives into any DerivaDEX component.
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