Quick bites

Introduction

Perpetual futures (perps) have become a cornerstone of crypto, allowing for leveraged trading, hedging and speculation. Ever since BitMex innovated perp trading in 2016, the majority of trading volume has traditionally been on centralized platforms such as Binance, OKX. As the DeFi space continues to mature, DeFi perps are gradually gaining traction as well. The main reasons for this are:

Deep liquidity and low gas fees are two paramount features that users look out for when considering DeFi perp platforms. Deep liquidity ensures that slippage is minimized when trading so users get optimal fills on their positions, while low gas fees allow for high frequency trading, as the fees paid will be negligible to their position size.

Why do we need another Perp trading platform?

To put it simply, the issue of liquidity has not been properly addressed — how can we incentivize liquidity in a sustainable manner? As mentioned earlier, deep liquidity is sorely needed for users to have a smooth trading experience. Let’s examine the perp trading landscape to appreciate some of the current pain points.

Amongst the various DeFi perp protocols, dYdX and GMX are undoubtedly the most popular, with annualized trading volumes hitting $207.1B and $46.4B respectively. However, questions remain over the long term sustainability of both protocols — dYdX incentivizes liquidity using token emissions and GMX’s yields rely on trader losses.

dYdX runs on a Central Limit Order Book (CLOB), which requires Market Makers to provide liquidity via limit orders. In order to incentivize them, 40% of the token supply is dedicated to rewards for traders and liquidity providers who earn dYdX tokens based on their trading fees and open interest after every epoch. However, these Market Makers are also free to trade against the liquidity they provide and hedge their positions on Centralized Exchanges, thereby earning “free” tokens. Therefore, token buyers are the ones who bear the brunt of the token emissions as the price goes down, while Market Makers get to earn money.

GMX on the other hand pays GLP yields based on traders’ fees and losses. GLP holders earn a portion of negative PnL of traders and their liquidations, as well as the fees paid for every trade. Their entire revenue structure is banking on traders being unprofitable, since trader wins are paid from GLP. This is the risk that liquidity providers take, where a professional trader could make a large win and potentially drain the LP. The yield provided is also based on trading volume, which is not guaranteed unless traders use GMX daily.

Perpetual Protocol recently launched v2 of their protocol, in order to mitigate issues with v1’s risk of insurance fund drainage. Previously in v1, they were paying funding fees from the insurance fund where a large deviation of token prices would cause them to pay high funding. With the launch of v2, they added real liquidity, allowing liquidity providers to be the counterparty for trades rather than the insurance fund. However, liquidity provision on v2 can lead to losses when the price of the underlying token changes. Since most of the liquidity is provided by the team itself and has to trade against their own liquidity to hedge against their losses, they end up with a negative PnL and have to sell their PERP rewards to recoup losses. Therefore the token incentivisation model for liquidity provision runs into a similar problems as dYdX.

Given the uncertainty over the long term sustainability of existing platforms such as GMX, dYdX and Perpetual Protocol, Rage Trade seeks to bridge the gap by offering traders and liquidity providers a smooth yet capital efficient platform with deep liquidity.

This article seeks to discuss how Rage Trade innovates deep liquidity provision by recycling under-utilized LP tokens from various chains and how its capital efficiency and fee collection stands out from the existing platforms.

How does Rage Trade work?

You can refer to Rage Trade’s official documentation for a more detailed explanation of the mechanics as well as well written threads by BizYugo, 0xjager and 0x_d24.eth. The diagram below shows an overview of how the protocol works.

In a nutshell, Rage Trade has two main components to optimise the liquidity of spot LPs, as well as improve capital efficiency on its $ETH perp with 10x leverage :

Omni-chain recycled liquidity

Rage Trade is potentially able to bridge all ETH/USD yield generating pools like GMX, Sushiswap etc. to provide recycled liquidity on Rage Trade via LayerZero. In other words, Rage Trade is able to use LP tokens from other chains like Polygon, Avalanche, Solana etc. to serve as liquidity on Rage Trade’s Arbitrum chain. Using 3CRV vault as an example, when 3CRV LP token is used as collateral on Chain A, we are able to mint virtual liquidity into Rage Trade on Chain B.

80–20 vaults

This is a protocol design that is 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 on Rage Trade. This mechanism mirrors a UNI V2 payoff with the added benefits of concentrated liquidity on UNI V3. This 80–20 vault is constantly rebalanced and does not stay as a fixed 80–20 proportion. You can read about the detailed workings here.

Other product offerings: Delta Neutral Vault

GMX has been a popular perpetual trading platform, with over $384M in liquidity in its GLP pool as of Jan 2023. GLP, is a liquidity pool similar to Uniswap’s LPs, where it comprises a basket of coins. The image below shows the various compositions of individual tokens.

Source: GMX

With GLP being 48% stablecoins and 52% other coins, it is prone to fluctuations in value due to directional exposure of the volatility of coins such as BTC, ETH. Users are incentivized to stake GLP to earn from trader losses as well as yield in the form of esGMX and 70% of platform fees. However, GLP stakers may still lose money despite the yield they receive, due to market exposure. The chart below shows the returns of GLP compared to the rewards. Since inception, GLP has had a -13% return due to market exposure.

Source: Ape/rture

Rage Trade aims to solve this issue to ensure that GLP stakers capture just the rewards, by reducing market exposure. This is done through Delta Neutral Vaults where they aim to minimize BTC and ETH exposure by shorting them on Aave and Uniswap. To achieve these, they have two separate vaults that complement each other: Risk-Off Vault and Risk-On Vault.

Source: Rage Trade

Users deposit sGLP or USDC into the Risk-On Vault which takes a flash loan of BTC and ETH on Balancer to sell for USDC on Uniswap. This USDC from the Uniswap transaction, together with some USDC from the Risk-Off Vault, is then deposited into AAVE to borrow BTC and ETH which will repay the flash loan from Balancer. This effectively creates a short position on AAVE as the Risk-On Vault has now borrowed BTC and ETH. Another important feature of the Risk-Off Vault is to provide collateral to the Risk-On Vault, in order to maintain a 1.5 health factor on the AAVE borrows. Every 12 hours, this position is reopened to harvest fees, rebalance PnL between shorts on AAVE and GLP collateral as well as rebalance the hedge based on GLP deposits’ compositions.

Source: Rage Trade

Overview of the vaults:

Current Traction

At launch, both vaults were filled instantly within minutes, showcasing the market demand for the vault offerings. In terms of the Risk-On Vault’s performance in comparison to GLP, it returns a profit of about 25% compared to GLP’s -13%, showing the utility of the vault.

Source: Ape/rture

Currently, compared to other protocols building on top of GLP, Rage Trade is dominant in GLP value, holding about $6.5M in GLP.

Source: Dune

Here’s why we think Rage Trade can succeed

Strength of Arbitrum’s ecosystem

With Arbitrum’s successful launch of its Nitro upgrade and Arbitrum Odyssey gearing up, Arbitrum projects have been on the forefront of attention. The Arbitrum ecosystem is booming, hitting an all time high in daily transaction counts. With one of the lowest fees as well amongst L2s and inheriting Ethereum’s security, Arbitrum is the optimal contender for building protocols on.

Source: The Block

Source: L2fees

Omni-chain Unified Liquidity

We have a strong conviction in a chain-agnostic future which led us to an investment into LayerZero and now, Rage Trade. Most liquidity today is silo-ed on and fragmented across various chains, which we think Rage Trade, with the help of Layer Zero, can solve. Rage Trade will be able to utilize liquidity not only on Arbitrum protocols, but also on Ethereum (Compound, Sushi etc.), Avalanche (Trader Joe, Benqui etc.), BNB Chain (Pancake Swap etc.), Polygon (Quickswap, Aave etc.).

Recycled Liquidity Innovation

Rage Trade is able to incentivize liquidity in an innovative yet sustainable manner. Building on the success of protocols such as GMX and Tri-crypto, users are able to deposit their LP tokens to provide liquidity on Rage Trade. This is unprecedented for many reasons — notably, this incentivizes users to deposit their yield-bearing LP to earn extra yield, without the need for excessive token emissions. Secondly, this builds towards the kind of composability that DeFi has an edge over traditional finance — there is secondary usage for all these LP tokens, liquidity provision is just one example.

Demand for ‘Real Yield’

DeFi summer introduced liquidity mining as a form of yield for incentivizing liquidity. However, these proved to be unsustainable as token prices could not be sustained in the long run. Thus, a demand for ‘Real Yield’ was born where projects incentivize liquidity through profits from protocol fees. Rage is building its own ‘Real Yield’ trading platform and also building on top of other platforms to capture the success of the ‘Real Yield’ ecosystem as a whole. Its Delta Neutral Vaults on GMX are the first of its kind to minimize Impermanent Loss through flashloans. Compared to incumbent GMD Protocol which requires users to deposit BTC, ETH or USDC, Rage Trade users can hedge their sGLP without additional capital, ensuring capital efficiency.

Large Growth Opportunity

Compared to traditional Centralized Exchanges, the DeFi perpetual sector is still early. Data from The Block, Tokenterminal and Dune Analytics shows that the total addressable market for perpetual trading is $389B in December 2022. DeFi perpetuals only occupied approximately $2.5B, or 0.8% of the TAM. This shows the huge room for growth for DeFi perpetuals compared to their CEX counterparts.

Sources: Tokenterminal, The Block, Dune Analytics

Promising Outlook

The rapid response to the initial CRV vault highlights the strong demand for recycled liquidity with LP tokens. We look forward to future vaults with protocols from chains like Polygon, Avalanche, Solana, Aptos, Sui. Currently, Rage Trade only offers ETH-USDC trading pairs; we believe that more trading pairs will be launched in the near future in order to offer more choices to users.

Rage’s protocol code is open sourced, allowing collaborators to integrate/compose and build financial products on the most liquid ETH Perp using their SDK. Other possible products that can be built on top of Rage Trade include delta neutral stablecoins & various structured products, delta hedge your option positions, or using their bots to earn fees and be a keeper in the system. Some collaborations include Abracadabra, UXD Protocol and Sentiment providing leveraged yield for stakers of the Delta Neutral Vault, Sushiswap allowing users to put idle LPs into Rage to earn yield, Resonate allowing for fixed yield for Delta Neutral Vaults, Sperax allocating 10% of its USD collateral into the Risk-Off Vault.

The partnerships demonstrate the security of Rage Trade as a protocol through the trust placed by various protocols in using their products and building with them. Rage Trade has also purchased insurance against smart contract exploits since day 1, as well as limited deposits in order to ensure that everything goes smoothly.

Rage Trade’s key innovations such as Recycled Liquidity and 80–20 Vaults allow for a liquid trading experience for users, together with its Delta Neutral Vaults that provide yield for stakers. Backed by a strong team focusing on sustainability and security, we are confident in Rage Trade’s success.

Written By Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong