Fabric Ventures co-leads CVEX’ seed round

Exchanges have been among the most successful ventures in crypto, but it’s worth remembering this industry started from a key innovation enabling people to self custody so they could remove some counterparty risk from their life. Centralised exchanges have had the upper hand on user experience for a while, but you do have to trust their setup when your funds are in their hands, which over the years have shown to be imperfect and there’s clearly been a natural selection taking place.

With smart contracts, you can in theory achieve an equivalent user experience without having to trust a centralised exchange’s custody set up, which for the first couple of years was an objective, then it became real for “spot” trading (token <> token exchange), and recently it has become real for derivatives as well, and slowly options too.

Decentralised derivative exchanges are more challenging to build because they introduce the concept of realised/unrealised profit and therefore margin management and potentially liquidations, and also the need for trust-minimising oracles so that the decentralised exchange can autonomously manage all of this. To solve for this, the first version of these decentralised derivative exchanges had to be conservative in their risk parameters: practically that meant requiring more margin from users (i.e. less max leverage) and significantly more liquidation penalty than centralised derivative exchanges, as high as several % penalties which for some markets is very generous for liquidators. That’s acceptable most of the time, and potentially quite painful some of the time…

This chapter in DeFi was a necessary one, to prove that decentralised derivative exchange can, and do work at scale, with now over $10 billion traded daily. There is now an opportunity to improve on these risk management choices, to offer an even better user experience without compromising on the overall protocol safety, especially now that we have more users, more liquidity, and more chains with cheap execution which enables to do more on-chain.

CVEX brings a mix of crypto and traditional finance, and in particular, they see here an opportunity to bring value-at-risk (VaR) margin management to improve decentralised derivative trading experience. VaR is a concept that is widely used in traditional finance, which we believe has the potential to be a real differentiator and a winning feature in this growing market. Practically speaking, where some decentralised and even centralised exchanges require their traders to collateralise every position, value-at-risk margin management tries to be smarter by taking into account the correlation between when a trader has multiple positions open. For example: a bitcoin call and a bitcoin put option’s profit and loss will not both move in profit or in loss at the same time, or a bitcoin long and an ethereum short are unlikely to move 100% in opposite directions, so you can tweak the model to allow traders to have less collateral (i.e. be more capital efficient), or simply liquidate their positions later, compared to some of the strict design choices that can be seen elsewhere.

The name of the game is obviously to be careful in these risk parameter choices, a decentralised exchange has much less room for error when it comes to liquidation in violent market moves, and the CVEX team knows that and their intention is to start somewhat conservative and evolve from there.

We recognise that this is a segment of the crypto industry that has been relentlessly growing, and if far from reaching its top. The CVEX’ team energy, expertise on margin management, and solid roadmap all contributed to getting us on board with their vision and we look forward to what comes next!

The CVEX mainnet is expected to launch this summer, and will bring even more functionality and features to the platform. To stay on top of all CVEX-related news, please join our community via:

Twitter (X): https://twitter.com/cvex_xyz

Telegram: https://t.me/cvex_xyz

Discord: https://discord.com/invite/DRma7Z9BTz

To learn more about the Crypto Valley Exchange, please also visit the following:

Website: https://cvex.xyz

Medium: https://cvex.medium.com/

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To learn more about Fabric Ventures, you can visit our website, follow us on Twitter and read our investment thesis.