Bixin Ventures: Where is the innovation in perpetual futures contracts Rage Trade?

Author: Bixin Ventures

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Abstract

1. Rage Trade is a cross-chain perpetual futures trading platform supported by LayerZero, aimed at enhancing capital efficiency through deep liquidity.
2. Compared to other perpetual trading platforms, its competitiveness and sustainability stem from innovations such as recycled liquidity and 80/20 Vaults.
3. The Delta Neutral Vaults strategy minimizes market risk for GLP stakers and provides returns for USDC stakers.

Background Introduction

Perpetual futures (perps) have become a cornerstone of cryptocurrency, enabling leveraged trading, hedging, and speculation. Since BitMex first launched perpetual futures in 2016, most trading volume has come from centralized platforms like Binance and OKX. With the continuous development of DeFi, decentralized perpetual futures have gradually gained attention. The main reasons for this are:

(1) Users want to self-custody their assets.

(2) Traders want to avoid restrictions such as KYC, regulations, and geographical boundaries for leveraged trading.

(3) Users want platforms to operate reliably and stably (more dependent on the underlying chain).

(4) Users want to profit from arbitrage and delta neutral strategies.

Depth of liquidity and gas fees are the two most important aspects for users when selecting a decentralized perpetual futures trading platform. Deep liquidity ensures minimal slippage during trading, allowing users to achieve the best positions. Low gas fees enable high-frequency trading, as the fees paid are negligible compared to the size of their positions.

Why do we need another perpetual futures trading platform?

Simply put, the liquidity issue has not been properly addressed. How does Rage Trade sustainably incentivize liquidity? As mentioned above, deep liquidity is essential for a smooth trading experience for users. Let’s examine the existing perpetual futures contract trading platforms in the market to see what problems exist.

Among various decentralized perpetual futures trading platforms, dYdX and GMX are undoubtedly the most popular, with annual trading volumes reaching $207.1 billion and $46.4 billion, respectively. However, there are still concerns about the long-term sustainability of these two protocols—dYdX uses token rewards to incentivize liquidity, while GMX's yield depends on traders' losses.

dYdX employs a Central Limit Order Book (CLOB), requiring market makers to provide liquidity through limit orders. To incentivize them, 40% of the total token supply is specifically allocated for rewarding traders and liquidity providers. After each epoch, traders earn dYdX tokens based on their trading fees and positions. Market makers can trade based on the liquidity they provide and hedge their positions on centralized exchanges to earn risk-free dYdX tokens. Ultimately, once prices drop, token buyers bear the brunt of the selling pressure, while market makers begin to profit.

On the other hand, GMX pays GLP rewards based on traders' fees and losses. GLP holders earn from the losses of traders, liquidated assets, and fees paid for each trade. Their entire revenue structure relies on traders' losses, as traders' profits are paid by GLP. Liquidity providers also bear risks, as they may lose liquidity if traders make significant profits. The provided yields are also based on trading volume, and unless traders use GMX daily, trading volume cannot be guaranteed.

Additionally, another popular platform, Perpetual Protocol, launched the v2 version of their protocol to mitigate various risks arising from the loss of insurance funds in v1. This is because they pay funding fees from the insurance fund, and significant deviations in token prices can lead to high funding costs.

With the launch of v2, true liquidity was introduced, allowing liquidity providers to become counterparties to trades rather than relying on the insurance fund. However, providing liquidity to the v2 protocol can lead to losses when the prices of underlying tokens fluctuate. Most liquidity is provided by the team itself, which must trade with its own liquidity to hedge losses. Ultimately, their PnL turns negative, forcing them to sell their $PERP rewards to cover losses. However, issuing tokens leads to similar issues as dYdX, where tokens primarily incentivize liquidity providers.

As mentioned above, existing platforms like GMX, dYdX, and Perpetual Protocol face long-term sustainability issues. Rage Trade aims to address this by providing a smooth and capital-efficient platform with deep liquidity for traders and liquidity providers. This article will discuss how Rage Trade innovates the deep liquidity supply mechanism by reclaiming underutilized LP tokens from various chains and how its capital efficiency and fee collection mechanisms stand out from existing platforms.

How does Rage Trade work?

You can refer to Rage Trade's official documentation and the Twitter threads from BizYugo, 0xjager, and 0x_d24.eth for detailed insights into the operational mechanisms. The diagram below illustrates the workflow of the protocol:

In short, Rage Trade has two main components to optimize the liquidity of spot LPs and enhance the capital efficiency of its $ETH futures contracts with 10x leverage:

(1) Omni-chain recycled liquidity

(2) 80-20 Vaults

Omni-chain Recycled Liquidity

Rage Trade has the potential to connect all ETH/USD yield-generating pools, such as GMX and Sushiswap, and provide recycled liquidity for Rage Trade through LayerZero. How can LP tokens from another protocol (hosted on other chains like Polygon, Avalanche, Solana, etc.) serve as liquidity on Rage Trade's Arbitrum? The answer lies in using LayerZero. LayerZero is essentially a messaging protocol that allows messages to be sent from Chain A to Chain B. For example, when 3CRV LP tokens are used as collateral on Chain A, we can mint virtual liquidity into Rage Trade on Chain B.

80-20 Vaults

This is a system pioneered by the Rage Trade team. Essentially, at least 80% of the LP tokens will continue to generate yield on the original protocol. The remaining 20% will be used as virtual liquidity for Rage Trade. This mechanism allows users to enjoy the benefits of UNI V2 yields while still benefiting from the concentrated liquidity on UNI V3. The 80-20 Vaults are in a state of dynamic equilibrium and do not remain fixed at an 80-20 ratio. You can learn more about how it works here.

Other Products: Delta Neutral Vault

GMX has been a popular perpetual trading platform, with liquidity in its GLP pool exceeding $384 million as of January 2023. GLP is a liquidity pool similar to Uniswap, containing a basket of tokens. The diagram below shows the composition of tokens in the pool.

Source: GMX

GLP consists of 39% USDC and 61% other cryptocurrencies. Due to the volatility of assets like BTC and ETH, GLP is susceptible to value fluctuations. Users are incentivized to stake GLP to profit from traders' losses and earn rewards in the form of esGMX and 70% of platform fees. However, due to market risks, GLP stakers may still incur losses despite earning returns. The diagram below compares GLP returns with rewards. Since its inception, GLP has experienced a return rate of -13% due to market risks.

Source: Ape/rture

Rage Trade aims to address this issue by ensuring that GLP stakers receive returns through reduced market risks. This is achieved through the Delta Neutral Vaults product, specifically by shorting BTC and ETH on Aave and Uniswap to minimize risk exposure. They have two complementary independent vaults: Risk-Off Vault and Risk-On Vault.

The Risk-On Vault acquires BTC and ETH through Flash Loans on Balancer and then sells them on Uniswap for USDC. These USDC, along with some USDC from the Risk-Off Vault, are used to borrow BTC and ETH, which are then repaid to Balancer. This effectively creates a short position on AAVE, as the Risk-On Vault borrows BTC and ETH. Every 12 hours, this position is reopened to collect fees, rebalance PnL between the short positions on AAVE and GLP collateral, and hedge based on the composition of GLP deposits.

Source: Rage Trade

The Risk-Off Vault is crucial for providing collateral to the Risk-On Vault, maintaining a healthy borrowing ratio on AAVE (1.5).

Source: Rage Trade

Here’s a comparison between the Risk-On Vault and Risk-Off Vault:

How does the market reflect the Delta Neutral Vaults? Upon release, both Vaults were sold out within minutes, demonstrating strong user demand for the Vault products. In terms of performance compared to GLP, the Risk-On Vault achieved a profit return rate of about 25%, while GLP was at -13%, indicating better performance for the Vault.

Source: Ape/rture

Currently, Rage Trade dominates the GLP value compared to other protocols built on GLP, holding approximately $6.5 million in GLP.

Source: Dune

Why do we believe Rage Trade will perform excellently?

Potential of the Arbitrum Ecosystem

With Arbitrum successfully launching its Nitro upgrade and the ongoing Arbitrum Odyssey, projects within the Arbitrum ecosystem have garnered significant attention. The Arbitrum ecosystem is thriving, with daily trading volumes reaching historic highs. Moreover, Arbitrum has one of the lowest fees in L2 and inherits the security of Ethereum, making it an ideal choice for developing protocols.

Source: The Block

Source: L2fees

Unified Liquidity Across Chains

We firmly believe that the future will be characterized by a multi-chain landscape, which is why we invested in LayerZero and now in Rage Trade.

Most liquidity is distributed across various chains, isolated and fragmented. This is precisely where LayerZero can assist protocols like Rage Trade in gathering liquidity. Rage Trade can leverage liquidity not only from the Arbitrum protocol but also from Ethereum (Compound, Sushi, etc.), Avalanche (Trader Joe, Benqui, etc.), BNB Chain (Pancake Swap, etc.), Polygon (Quickswap, Aave, etc.) and other chains.

Innovative Recycled Liquidity

Rage Trade innovatively incentivizes liquidity in a sustainable manner. Drawing from the successful experiences of protocols like GMX and Tri-crypto, users can deposit their LP tokens to provide liquidity for Rage Trade. Notably, this incentivizes users to deposit their yield LPs for additional returns without excessively releasing tokens. Furthermore, this establishes the composability of DeFi over traditional finance—where all these LP tokens are reused, and providing liquidity is just one example.

The Best Arbitrage Platform

Most GMX traders are arbitrageurs looking to profit from price discrepancies between GMX and CEX. Similarly, when prices deviate from oracle prices, Rage will also attract arbitrageurs. However, compared to GMX, which uses the GLP pool and oracles, Rage, with its vAMM pricing, may attract more arbitrageurs, as the vAMM model does not tie prices to asset prices through oracles. The vAMM operates as an independent market, allowing arbitrageurs to hedge their positions on CEX and profit from price differences.

Significant Growth Opportunities

The decentralized perpetual futures space is still in its early stages compared to traditional centralized exchanges. Data from The Block, Tokenterminal, and Dune Analytics indicate that as of December 2022, the market size for perpetual futures was $389 billion. Decentralized perpetual futures account for only about $2.5 billion, representing just 0.8%. Compared to centralized spot exchanges, decentralized perpetual futures contracts have substantial growth potential.

Source: The Block, Tokenterminal, Dune Analytics

Envisioning the Future

The rapid action on the initial CRV vaults demonstrates a strong demand for LP token reclamation. We look forward to utilizing Vaults on protocols across chains like Polygon, Avalanche, Solana, Aptos, and Sui in the future. Currently, Rage Trade only offers ETH-USDC trading pairs; we believe more trading pairs will be launched soon, providing users with more options.

Rage's protocol code is open-source, allowing partners to integrate, combine, and develop financial products on the most liquid ETH Perp using their SDK. Other potential products that can be built on Rage Trade include Delta Neutral stablecoins and various structured products, delta-hedging your options positions, or using their bots to earn fees and become system administrators. Collaborators, including Abracadabra, UXD Protocol, and Sentiment, provide leveraged returns for stakeholders in the Delta Neutral Vault, while Sushiswap allows users to deposit idle LPs into Rage for yield, and Resonate offers fixed returns for Delta Neutral Vaults, and Sperax allocates 10% of its USDC collateral to the Risk-Off Vault.

The trust these partners place in using and building products with Rage Trade demonstrates its safety. Since its launch, Rage Trade has purchased insurance against smart contract vulnerabilities and ensured the protocol operates normally through some deposits.

Rage Trade features many key innovations, such as recycled liquidity and 80-20 Vaults that provide users with a high-quality trading experience, as well as Delta Neutral Vaults that offer returns for stakers. Based on the team's emphasis on sustainability and security, we are confident in Rage Trade's success.