We are making Vega to be elegant and straightforward to use. But underneath the hood is a complex system that is designed to offer flexibility, security, and stability. It’s the ideal combination of brains and beauty.
In this post, we go into a high-level overview of how we’re making an elegant protocol that can also change how derivatives trading works in fundamental ways.
If you want an in-depth look into the architecture of Vega, read the protocol whitepaper.
What is Vega?
Vega is a protocol for trading margined financial products on a decentralised network. The network, secured with proof-of-stake, will facilitate fully automated, end-to-end margin trading and execution of complex financial products. Anyone will be able to build decentralised markets using the protocol.
What sets Vega apart?
Innovative liquidity incentives: Built-in liquidity incentives match traders and market makers across any financial product.
Range of collateral options: Vega will connect to major blockchains for collateral, which can be in any digital asset including Bitcoin, ERC20 tokens, and stable coins.
Straightforward market creation: Pseudonymous market creation means any participant can easily create and launch markets.
How will people interact with the protocol?
The Vega protocol is designed to run on an open, blockchain-backed public network comprised of geographically distributed nodes.
This isn’t exactly an FAQ, but we’ve put together some of the common topics people want to understand about Vega.
How to create products and markets
Participants will be able to create financial products using Vega’s bespoke smart product language. It will provide a toolkit of product features and economic primitives from which all cash flows and settlement instructions can be easily specified. Vega is designed to support many types of financial products, including derivatives such as options and futures.
Each product will utilise one of Vega’s risk models for margin calculations, allowing leveraged trading on certain markets. Parameters for the risk models and other relevant product parameters will be maintained with on-chain governance.
To launch a new market for a product, the participant must specify the underlying assets, dates, and other necessary parameters of a smart product, and then submit this to the network for review. Network participants will use their stake to vote on accepting a new market. A proposed market will automatically be launched and opened for trading after it passes the review period, and has the financial backing of one or more market makers.
Market making on the network
Market makers provide liquidity for markets and are rewarded for all trading that occurs on that market. Any participant can become a market maker by submitting a financial stake. This acts as a bond against their market participation. Market makers are obligated to provide order book volume proportional to the size of their stake at all times while the market is open. Rewards for market making are derived from the clearly marked trading fee that a trader pays when they take a price.
Trading fees are distributed between the price maker of the trade, the node operators, and all the market makers of that market. This means market makers are rewarded much like centralised owners of exchanges and are incentivised by the overall trading volume in that market. The proportion of total liquidity fees that a market maker receives is relative to their market making stake, price making activity, and the historical longevity of their market making commitment. Trading fees are dynamically adjusted by the network so as to attract market makers to where they are most needed.
Collateral and settlement on Vega
Collateral is managed by the Vega network via links to other blockchains. Funds are deposited by paying into a smart contract on a host chain. The first available chain will be Ethereum — any ERC20 token can be used as the collateral currency for creating a market, and also as margin for orders and positions.
The network calculates the minimum collateral required to maintain open positions and orders as near-to-live as possible, minimising the cost of margins and maximising leverage opportunities. The required funds will be allocated to a market until they are no longer needed and are released. The Vega network maintains a ‘view’ of a trader’s collateral balance.
Positions are settled continuously as the market’s mark price changes, as they are closed, when interim cashflows are due, and finally at expiry of the instrument, when all collateral held in margins is also released.
Withdrawals are requested on Vega, resulting in a transaction for the host chain that must be signed by a quorum of Vega nodes. This will trigger a release of funds to the requested destination address.
How trading works
Trading on Vega is designed to operate within a transparent and fair framework. Orders on a market are received by the network, which uses a consensus mechanism to determine their relative time priority. The matching engine and trading core logic is then executed deterministically on all nodes, resulting in precisely the same results for matching, risk management, and settlement of all orders and positions.
Vega will eventually support multiple trading modes, including limit order books, auctions and requests for quote. The protocol will also support a range of order types. Those include limit, market, and stop, as well as various time in force instructions, such as good-til-time and fill-or-kill. Certain order types, such as iceberg orders, are not compatible with a fully transparent order book.
The price taker will pay trading fees in the settlement asset of the product. All of these fees are redistributed to network participants, including market makers, as rewards for liquidity provision.
In the next few weeks, we’ll be looking under the hood at the key aspects of trust and safety in decentralised trading, and how we’re handling the network architecture.
Do you have questions about any elements of Vega that you want to see covered? Leave us a comment, or get in touch on Twitter.