The endgame of our trading model.
Hi everyone! Really excited to finally share the details on this v6.1 update, which is key to laying the foundations of our next adoption wave.
It gives us the right set of parameters to tune for managing the DAI vault drawdown risk, makes the platform fully robust against spot oracle manipulation, allows us to expand our offering of both leverages and pairs (there are very interesting ones like (ETH/USD)² + other custom ones), and makes the fee system more balanced by reducing the closing fee and spreads!
It is the most important update since a while (and possibly since the beginning), as it isn’t only about optimizations, but truly about reaching our potential over the long term.
We’re getting out of the very strict risk management mode that we have been in for the past weeks (min leverage at 10x, 20 pairs delisted, max collateral at 35k, higher spreads, higher closing fee on collateral) and now have way better tools to manage the risk, stay competitive, and maintain a great UX.
Have a good read! — Séb
Capital efficiency is the key to success for any protocol. If a protocol with $10m TVL offers the same UX as another protocol with $100m TVL and therefore generates the same fees (= 10x better capital efficiency), it will probably also reach $100m TVL due to the APR being 10x higher, and then it will offer a 10x better UX than the other protocol. 10x higher liquidity efficiency means one protocol can reach the same UX with 10x less liquidity, but it as well means it can offer a 10x better UX with the same amount of liquidity.
In our case, the liquidity efficiency is a lot higher compared to other platforms due to the following unique advantages of our architecture:
- The leverage isn’t borrowed, it is synthetic.
→ We can offer higher leverage than any platform at a fraction of the TVL.
- We use true median spot prices instead of our own derivatives price.
→ Gives a much better UX to traders by eliminating scam-wicks.
- All pairs listed share the same liquidity pool and don’t need to be held by liquidity providers (only DAI).
→ We can offer the widest possible range of pairs, with great UX.
These unique properties (which stay the same after this update) have led us not to charge any funding fee or rollover fee because it hasn’t been a technical necessity until now. However, the recent market conditions have proved this to be too fragile, due to the significant risk it represents for our DAI vault, which is the counter liquidity to trades on the platform and which effectively powers the whole trading platform.
This means that either we need to stay extremely strict and rigid with all pairs we list and the maximum open interests we allow and keep monitoring each pair very aggressively, or we can make the architecture fully flexible and truly reach the potential of what we can offer both in terms of pairs and leverage.
Now is the best time to take the opportunity to make our trading model fully robust and capable of handling the next wave of adoption!
It is the best possible evolution of our trading model, keeping our biggest strengths and further expanding our offering of both leverages and trading pairs while finalizing the risk management for our DAI vault stakers.
v6.1 major changes
We achieve this by introducing the following:
- Funding fee
→ Charged on net exposure (long/short open interest, collateral x leverage).
→ Doesn’t make revenue to the protocol, only incentivizes the opposite side of our total net exposure.
→ If more long exposure, longs pay shorts proportionally, and inversely.
→ Eg. if $1m OI long and $200k OI short and funding fee APR at 30%, 0.3 * (1,000,000-200,000) = $240k / year going from longs to shorts. Longs would pay 24% / year and shorts would earn 120% / year, on this pair.
- Rollover fee
→ Charged on collateral and how much time the trade is open
→ Eg. 5x $20k trade generates $100k of volume and pays fees on that, however, it is much riskier to the protocol than a $1k trade at 100x, as the first trade could win $180k from the vault, while the latter could win $9k.
- Dynamic price impact
→ Based on the 1% depth above and below the current price for each pair
→ Prevents exploiting pairs by opening a trade on our platform and later manipulating the spot price, even if liquidity is low.
→ Could replace spreads long-term (we will probably keep a smaller spread at the beginning, which means it’s probable small position sizes will pay less spread than they do now)
Important: The fee percentages will be set independently for each trading pair, depending on their volatility (lower volatility = lower rollover and funding fees, and inversely).
The funding fee is the most capital-efficient way of managing the DAI vault risk, it is about renting capital to take the opposite side of our exposure so we can limit the drawdown risk in case of violent market movement in the direction of most trades opened.
The rollover fee based on the collateral is almost irrelevant for medium-high leverage trades and considerably limits the DAI vault drawdown risk from low leverage trades, and should even allow us to offer as low as 2x.
Finally, the dynamic price impact is needed to completely remove the risk of spot price manipulation, which becomes too high to be acceptable when liquidity dries up, which we noticed can happen fairly often. It also allows us to list even lower liquidity assets while still making sure they can’t be manipulated, by keeping their spot 1% depths up to date.
Once v6.1 is live, no trade opened before the update will pay funding or rollover fees, it will only start with trades opened after the update.
Also, we will remain fully competitive in terms of fees compared to other platforms after the update.
Finally, we will be able to offer lower leverages like 2x (compared to 10x now), and relist most pairs that were delisted (probably even more).
- The fee to update a guaranteed stop loss (eg. on cryptos) has been divided by 2 (from 0.03% to 0.015%).
- Liquidation prices are now dynamic, as there are fees to keep trades open.
→ eg. if you’re getting paid funding fees, your liquidation price will go further away from your open price, and it inversely gets closer if you pay rollover/funding fees.
- New contracts allow us to update the funding fee, rollover fee, and 1% liquidity depth parameters automatically using a bot, which is very convenient to keep them up to date.
- Spreads will be divided by 2 on all pairs and probably even further reduced depending on the statistics we get after v6.1.
- The closing fee on collateral + PnL will go from 1% to 0.5%.
- Max collateral per trade will go from 35k to 50k, and later closer to 100k.
- The maximum open interests per pair will reach reasonable levels again (they’re clearly below what they should be at the moment).
The v6.1 update is already live on the testnet (contracts are ready and fully unit tested), and the website backend/frontend has been adapted (the frontend testnet release will be done the day after this article is out).
We only need to do a minor update to NFT bots, check CertiK’s feedback, and then adapt the contracts / repass the unit tests if needed.
This means the update will probably be live on the mainnet within 7 days.
The goal is to be fully flexible and to be able to offer trading on the most pairs possible (historical data shows only 35% of our volume came from BTC/USD and ETH/USD before delisting the 20 pairs recently) with the widest range of leverages (there’s no reason to miss out on 2x-4x volume).
It will also allow us to better balance the fee system by dividing the spreads by 2 and dividing the closing fee on collateral by 2 as well.
This will allow gTrade to reach its full-fledged potential, by not restricting pairs and leverages in a binary manner, but by listing the most possible and charging the appropriate fees.
It will also probably bring funding fee farming volume as if there is a big net exposure on one side, the incentive to open a trade on the opposite side and then hedge the position on another platform will be significant.
Another article will be released very soon on how we will set and update the rollover/funding fees dynamically for each pair.
Finally, the short/medium-term roadmap will be released in the following weeks as well.