Vega Protocol - Free the Stablecoins: Derivatives settled in anything with Vega Protocol

[Music] okay so today we're going to be talking about uh Vega protocol and more specifically we're going to be running through how the uh protocol which allows the creation of decentralized derivatives exchanges governed and run by the community how it allows you to create markets which both settle based on customizable Oracle inputs but also allow margining and settlement in any currency and relevant to here would be any given stable coin you want so how are we going to get there if I turn this on is we're first going to give a quick overview of what Vega protocol itself is uh Bonnie's going to give a bit of background about history and what it entails once we've got that I'm going to run through what we mean by Community governance what a vague protocol Market allows control of how the community manage it and benefit from it once we've got that Baseline we can go through what a market itself looks like on Vega and then sort of Step through the various steps of how to propose a new market uh creating a new asset creating the market itself and what it looks like once it's live once we've got that we may have a bit of time to discuss rewarding early adopters as well I'm Tom I work in the race research team building Vega protocol I've been here about a year or so and I have a background in sort of traditional Finance eight years or so doing that before joining here I drive by Barney who's one of our founders and I think the first thing we're going to do is give a quick run through of what Vega protocol is and for that I'm going to hand over to Dubai hey everyone I apologies for the slightly late start um and uh thank you for coming to listen um so yeah so vegan protocol is actually a protocol that was kind of conceptualized by me and my co-founder Ramsay back in 2017 um we were looking at the sort of state of crypto kind of looking at what was going on in um you know ethereum was kind of quite new and growing we were very interested in the kind of the idea of decentralized Finance so actually the idea of something that could start to replace the financial system and we were sort of looking at the strands of technology and progress that will be needed to get there and what we realized when when we did that was that um these kind of decentralized exchanges that existed things like ether at the time uh were really extremely basic they weren't going to scale to and allow the creation of kind of a really fundamentally challenging Financial system to the one we have today um and that this sort of underlying technology this blockchains that were running uh general purpose smart contracts were also not really going to be bringing real world business on board and so that was kind of our starting point for that and um you know one of the things that we had seen start developing and take take root and seem to be something that was going reasonably well was the issuing of assets on ethereum particularly as the rc20s um which was Paving the way for stable coins and I think you know as much as many people in this space would love to see Bitcoin be the global Reserve currency or Z cash or whichever their favorite uh crypto is I think that's a way further out than moving existing as currencies on chain and starting to do business with those so it was a huge Innovation and a huge step forward to be able to have these you know sort of early stable coins and and to have an ecosystem of assets and money that represent what we do in the real world and allow you to build Financial products on top of that on chain but what we noticed was missing was that you couldn't have price Discovery was anywhere near as efficient as the price discovery on say the London Stock Exchange or the New York Stock Exchange or other traditional markets you couldn't have high throughput you couldn't have Capital efficiency and so you ended up with what's basically a kind of beginnings of an alternative Financial system using these assets and Technologies but something that realistically you couldn't go and take to the city of London or to like you know Commercial Banking and start to say these are alternatives to the products and systems you use today and so we met with some researchers we knew at the UCL in London we started talking about proof of stake we're talking about different types of decentralized network and we came up with the idea for Vega protocol which was to be a side chain or an app chain that took assets that were already issued for instance on ethereum as the rc20s and allowed them to be used to create marketplaces that were what we considered like the beginnings of something that would be sort of real world useful and so we focus very heavily on meeting those criteria so the Vega Network focused heavily on having a very short block time sort of between 0.6 and just over one second and we're focused on not having fees for placing orders so we have different ways to prevent block congestion and spamming of the network but it means you can place orders completely for free you can amend orders for free and you only pay when you trade so much more like a traditional exchange we're focused on making it easy to create sort of robust and safe marketplaces and Order books order books for Price Discovery we will be building like sort of hybrid markets that allow amm style liquidity as well but focus on robust order books and things like Capital efficiency so allowing good good size margin rather than requiring sort of massive over class realization like some protocols and also just generally aligning the properties of the network we're building with what is needed to create sort of professional grade trading systems now obviously Vegas in Alpha right now you can trade real money on it as of a couple of months ago you can create markets there's reasonable leverage there's an experience that's pretty similar to a centralized exchange but completely decentralized end-to-end which is super cool we're not quite there yet for moving Goldman Sachs and their trading desks onto it but what we are doing is proving the concept out and iterating from there uh into sort of a world where you can start to do real real world trading on chain uh and a big component of that will be the ecosystem around stable coins we'll be having stable coins that are trustworthy and we'll be having Marcus that actually settle in real world currencies right now most of the stable coins are US Dollar on Vega and indeed in the rest of the market but I think you know one of the things we'd like to see is is that increased so actually you start to have more currencies that relate to different types of Market that people can create and so all of those things are possible on bigger over the next you know six months a year plus and we'd love to see that uh grow and move forward so after that sort of intro to what Vega is um I'll hand over to Tom to talk about some of the mechanics of how you actually create these um sort of high quality centralized exchange like marketplaces on a decentralized network like Vega and what it all actually means cool thank you so now we've got a bit of background what do we mean when we say you can run a decentralized community market on Vega so there's there's various aspects of a market which are completely customizable by the community so running through a couple examples we've got Network parameters the the network itself and markets within that governed by sort of a wide range of parameters from everything everything from spam protection to Market parameters that govern risk that kind of thing there's also what tokens themselves are available on the network it's also totally Community governed and driven uh we'll go through a bit in a minute about how one adds a new token to the network we also through this have to ensure that token holders themselves who are voting on these things have good Clarity in what exactly they're proposing what they're voting on and what the changes might be in the future if they make approve these things so what is a market on Vega it's a lot like a limit order book that you might expect in any given sort of centralized Exchange with a few additional things that are worth taking into account one of these is we have a concept of liquidity providers these are slightly different to a liquidity provider on uniswap or something like that where although they still stake some funds instead of that stake being used to automatically trade it's used as a guarantee that they will always provide prices on the market obviously that's quite a commitment for them to make and in exchange for that they receive fees from all trades on the market whether they're hit in that given trade or not furthermore we've got a couple of auction Concepts which are aimed to protect Traders and customers in a couple of different cases we've got liquidity auctions which relate back to these liquidity providers if open interest on a market grows too much then we drop into one of these liquidity auctions to ensure that the position outstanding position is never larger than sort of can be closed out reasonably by liquidity providers and that encourages more people to come along State their liquidity and bring the market back to life we also have price monitoring auctions which are another customizable feature of the market which aim to prevent large price spikes by allowing price trading within some range of probabilities and if a price would happen outside of that then instead we drop into another auction for a few seconds or a few minutes customizably which allows the market to hopefully come to a realistic view of what the price should be and trade again at that and then the leverage itself is to also totally defined by a community and a risk model so rather than being a sort of fixed leverage number you have a normal risk model which allows customization of this depending on the markets and one further aside before we jump into how you create a market you really need a way of simulating these markets and having idea of what what trading Behavior might be what they might look like in the real world before you actually make that change in production so we built out something we call vegan market Sim which allows you to run locally an entire Vega chain with the data node in the front end and see what it would look like with given changes so we've used this internally for a just testing the network itself but also uh being able to see and explore these sort of what-if cases of if we change a parameter to this what might how might that affect the network do market makers and liquidity providers still receive the rewards they should and that kind of thing and it's something a really powerful tool for the community to make these similar Explorations when they're evaluating a given proposal so now that we've got that background we can jump into setting up a market itself there are a few steps that are involved first off you obviously need an idea for your Market this has to come from the community ultimately but there's a few components that we'll run through of what that idea should include once you've got that idea you need to propose your asset if you're lucky and that asset already exists on the Chain then you're done with this step if not we'll run through what you've got to do it's fairly simple once you've got the asset on train you're going to propose your Market that's a similar kind of flow you're going to discuss it you're going to propose it and then it's voted on and goes live but the discussion is probably a little more involved because you're worrying about risk parameters and price monitoring and this kind of thing once you've got all that there's a couple of last requisites for the market to enter live trading but they're fairly light and we'll cover those two so first up the idea for a market the idea itself obviously is up to the community but you want something that people will want to trade on and ideally you also have someone who wants to do this initial liquidity provision because although it's not necessary for the market to be approved someone's going to have to do it for it to go live and trading so it's easier to find up front and know someone's going to do that you then need to know what asset you're going to settle in probably a stable coin but there's many cases where it might not be might have a BTC East future you might if you're wanting to trade nft floor prices or something then maybe you want an eve and then finally you need the settlement Oracle that's going to actually determine what price this Market either settles to if it's an expiring future or the sort of ongoing settlement prices of a perp right now there's a couple available within protocol itself one is this open Oracle format that a couple of people including coinbase publish Oracle prices in and another is a trusted signer which is broadly some trusted counterparty who promises are going to publish the right price coming imminently is a much more powerful tool which is flexible ethereum oracles which broadly allow you to settle a market based on any given solidity output So that obviously massively opens up the whole world of of what you can trade a market in and hopefully it can bring about some interesting ideas for new things to trade so now you've got your idea you need to move on to your first discussion so as I say check it already if it already exists if it does and you're lucky enough then you can skip this step to do that you go up here to explorer.vega.z you can check this other Tab and assets and you'll see a nice list of what assets already exist on Vega if it's there you're golden if not you're going to have to go on to a proposal so the proposal here you're going to want to go to the forums at this link open up your asset proposals and broadly make a proposal as you can see the discussion here is fairly light and easy adding an asset is fairly pro forma you want to discuss why why people want to add it to the network obviously and specify a few details like the erc20 contract address of it people might want to discuss if there's any weird edge cases with this asset if it doesn't properly act as an erc20 usdt or something but by and large there's probably not going to be too much dislike of adding something new they might just question why you want to add it and it gives you a chance to make people aware of of this new asset you want once you've got that you'll build out this Json as you can see it's pretty much the details that were here as in Json form nothing too complex some details about the votes that you're going to create and you'll have your vote assuming this is approved which hopefully it is because you've discussed it all in the forums already you now have your asset and you can run on to proposing a market so for this the flow is pretty much the same you're gonna create this Market proposal and Market proposals in the community and headline you're going to describe what the market is and what it's going to trade and why you think it's good to add to Vega but there's a little more complexity in this setup in that there's more parameters and they have less obvious values than you may otherwise expect so there's a few different ones I'm not going to run too much through what all these are because it's good to dig into the the docs a little about what the different values are but there's a few different areas that we're going to set firstly we've got parameters defining the liquidity monitoring this is the relationship between how many people we need staking liquidity versus when we drop into one of these auctions that we discussed earlier so that's what you set here we've got risk parameters which these are obviously somewhat important because they Define your margin that people can take and also some of these price monitoring parameters that I'll discuss in a second so you need these to be reasonable such that people can take enough leverage and margin that they're interested in trading on the market but also aren't always getting closed out and owing more money than they have in their account which is not a great place to be once you have that we've got these price monitoring parameters we are going to dig a little more into these in a second there's a small case study but broadly these determine the price auctions we discussed earlier there's a couple of different fields on these there's Horizon which broadly defines this time window as a number of seconds and a probability so at a high level we're looking at over this number of seconds is a trade executing at a price less likely than this probability if it would we drop into an auction of this many seconds so we want everything within that price bound and then finally we've got our Oracle specification this is where this is a market settling on a coinbase open Oracle format so they've specified their etherdress which is the publisher of this open Oracle format and then some filters which pulls out the right price says what specification of decimal places it's in and some sanity checking ensuring that it's above zero digging a little bit more into the price monitoring parameters and how that can have an effect on the market and why you want to think about these things the values as proposed for this Market when it was sent for a vote were these when it started out it was more like this so you can see here there's these two extra rows of short price monitoring auction windows and it's not entirely obvious whether this one or this one makes for a better or more tradable Market so one thing you can do is run them through a simulation and see how the market behaves and make a decision based on that instead as a more scientific approach to getting this done so that's what you can do with Market Sim and what the community can then look at and decide how to trade so this was a period last November when the price was pretty volatile we could run it historically through the of Market Sim based on the two price monitoring setups we had earlier this was the price monitoring with the extra two short windows you can see slightly faint here a lot of vertical red lines each of these is entering a price monitoring auction now entering an auction for a minute two minutes is a little disruptive to trading flow so you quite possibly don't want all these auctions when it's volatile and people want to be able to keep up with the market and keep their positions hedged so what about if we strip out those two extra windows we get something more like this as you can see there's still a couple of times when we're hitting an auction but the flow itself is a lot smoother we're in continuous trading a lot more of the time so quite possibly we want something more like this than like this this case is where these tighter bounds might be useful so that's why it's good for the community to be able to see the two options and decide on a market by market basis what you want so once you've made all that discussion you've hopefully now put it for a vote and it's going to get approved and everyone's going to love it and it's going to move on to entering into an opening auction now here you're basically there a couple more things you need you need liquidity stake to this Market these are your market makers that we discussed earlier hopefully someone's ready to do that and it's going to commit and then all you really need are limit orders which cross to set an initial mock price and limit orders which don't cross to so that you actually have an order book at the stage of time when you're you're entering into it so now you've got your live market running on Vega there's a couple more things that are worth considering your market May well have not have all that many traders to begin with so one thing that is built into the protocol that allows you to incentivize trading on your Market a little bit are Rewards now what these are are automatically calculated metrics in the protocol which totally permissionlessly allow anyone on the network without sort of governance voting or anything to fund reward accounts and based on the outputs of these metrics reward positive activity on the market so they can do a couple of things they can either fund Market creation if you have a given stable coin you want to create markets in you can fund a pool that if someone creates a market with sufficient trading volume on it they will get a reward you can also provide reward providing liquidity if there's not enough liquidity providers on markets that you want to add an extra pool and an extra benefit for that or you can just reward straight paying and receiving trading fees uh making it more profitable for people to come and sort of trade on your Market versus elsewhere and all of these can be specified to a market specifically set my creation obviously or anything trading on your given token so for more information on that you can jump over to this docs page and have a look there uh so with that that's broadly the talk as it is hopefully you're inspired to go create some markets on Vega uh yeah any um yeah so the the bridge is um is sort of Vega specific but I think it uses a semi-well-known pattern um effectively what happens on the bridge is you send your assets to a Smart contract on the ethereum network so it's an ethereum Bridge initially all the assets are erc20s you send your assets to a Smart contract on the ethereum network that smart contract is effectively controlled by the Vega validators so um effectively when you send them the assets there they then get recognized in your Vega wallet and appear on the Vega Network and then when you want to withdraw them effectively you just say to the Vega Network I'd like to withdraw these assets on the Vega protocol will then effectively check that you have a balance to withdraw and it'll then the validators will sign the message which you effectively send back to the ethereum smart contract the interesting thing about this is that um we can do some things because Vega is a app specific chain that uh can't easily be generalized for sort of general purpose change so one of the things you find a lot of the time at Bridge is as you sort of have a separate bridging step and a separate bridging technology perhaps with its own security assumptions his own validators you know his own sort of nodes keeping that secure with Vega it's the same validates as the network so effectively you're trusting a single security assumption around the validates on the Vega Network which is that um you know the validators are honest validators for the Vega Network for the Vega protocol for the trades happening on there and also for the bridge so there's kind of a single set of validators who maintain the security of the funds on the network and also the bridge because they manage that bridge technology so you do have you know the same issue you have with all bridges which obviously you have that those assumptions but in the Vegas situation you're at least making those assumptions about everything else on that Network as well so um reasonably reasonably tolerable from a security point of view um I think um you know certainly we've looked at future work as to how to kind of import additional security from ethereum or other chains where you kind of have steps to to add security with additional signing but as it is the bridge is just is a Contracting ethereum that's controlled by the Vega validators so when someone joins or leaves that Vega validator set effectively they their rewards as validators are withheld until the um that contract's updated so the valve data set contract has to stay in line with the correct set so when someone leaves the set or joins the set the the new set of validators sign a message uh containing that update and then they deposit that on ethereum to update the set so it maintains kind of synchronization between the two um we I don't know if optimism style would work on Vega I'd have to think about it to be honest um we've been the thing we've been investigating probably slightly more is um what's it called ICP is it right um interchange protocol yes ICP the uh this is a cosmos interchain protocol and looking at how to enable kind of bridging of assets between multiple chains using kind of a network of bridging but also bridging of transactions and other data so I think you know in the long term we would like to be sort of plugged into a network of chains and bridges that are sort of all compatible on a message level and also we would like to be able to pass things other than just assets so you can pass asset sender and a limit order that you want to make with those assets or something like that across the bridge so you can effectively you know have an order router that sits on one network that actually sends funds and directs trading on the Vega Network so that's probably the direction of travel um the optimistic roll-up type stuff probably I'd have to think about whether or not there was a way to do that but we haven't looked into that one yeah exactly yeah yeah so this is why we haven't actually well why at the moment is still in a research stage because effectively the the pro