(2) Exo-Derivatives (tFUTURES)
Phase 2 launch of tASSET development
After the launch of tASSETs that allows ExoniumDEX users to trade synthetic assets, tASSET futures (tFUTURES) market will be initiated to introduce
- futures contract of arbitrary assets and expiration dates to be created by tASSET LP,
- onchain Liquidator, which reduces the entry barrier of liquidators and helps automate the liquidation process.
In TradFI, the market size of derivatives has long been the leader when accounting for international settlements. Futures and Option trading outweights the size of spot trading by ~200%.
This applies to centralised exchange (CEX) as well, with derivatives trading volume enjoying exponential growth since 2017. However, CEX derivative products generally face the criticism and skepticism of users, especially when it comes to liquidation operations. Users are often left in the dark regarding the backend operations behind centralised exchanges as stats and figures are not open-source.
With the openness and transparency of decentralised finance protocols, we see huge market potential ahead for DeFi derivatives and ExoniumDEX is very excited to bring this technology to the cryptocurrency community soon.
All of the tASSET futures contracts are defined as linear non-deliverable contracts with 10% initial margin and 5% maintenance margin. The definition of a unique market consists of a Spot Index Oracle for a trading pair and Maturity of this contract.
For the trading pair of the Spot Index Oracle can be further split into BASE and QUOTE assets, where the QUOTE asset should be an tASSET used as the margin for this Futures Contract and the BASE asset has no restriction as long as the oracle is available.
*A tASSET pair is the quotation of two different assets, with the value of one asset being quoted against the other. The first listed asset of a tASSET pair is called the base asset, and the second asset is called the quote asset.
As compared to the usual AMM mechanism used for spot trading (no leverage), our tASSET Futures (tFUTURES) AMM is designed to provide similar trading experience for margin trading. Essentially, it is a market participant with its own margin account similar to other users, but always ready to make prices based on the constant product formula and its current position. The tFUTURES AMM contract provides users with interfaces to add and remove liquidity to the futures liquidity pool and the tFUTURES AMM contract also allow users to deposit margin to and withdraw margin from their account.
tFUTURES AMM Liquidity Pool:
To add liquidity to the tFUTURES AMM, a user interacts with the smart contract and transfers the margin token, or the QUOTE asset to the tFUTURES AMM. Internally the tFUTURES AMM creates a long position in the Futures Contract using half of the added margin token, effectively synthesizing the BASE asset of a trading pair, and keeps the remaining half as available margin. At the same time, the tFUTURES AMM would allocate a short position of the same size as the newly created long position to the same user.
As a liquidity provider, the user owns a share of the total long position and the available margin of the liquidity pool in the tFUTURES AMM. The total risk position of a liquidity provider equals the share of the long position of the tFUTURES AMM plus the position in their own account. Thus the action of adding liquidity to the tFUTURES AMM does not change the total risk of the liquidity provider as the newly created long and short positions offset each other. However, the liquidity provider does need to ensure suﬀicient margin in their margin account to meet the margin requirement after adding liquidity to the tFUTURES AMM.
Removing liquidity from the tFUTURES AMM follows a similar but reverse process where the tFUTURES AMM would reduce its long position and allocate the reduced long position to the user requesting to remove liquidity and return the margin token to the user. Similarly, the action of removing liquidity from the tFUTURES AMM does not change the total risk of the liquidity provider.
When the margin balance of an account is lower than its maintenance margin requirement, the account needs to be liquidated. Two approaches for liquidation are provided.
Conventional: Liquidator takes over the position of the liquidated account and pro- vides the required initial margin at current Mark Price. After successful liquidation, the liquidator will receive the balance of the maintenance margin of the liquidated account as reward. This approach has no market impact as the only change to the system as a whole is the extra margin provided by the liquidator.
However, a liquidator willing to provide such margin and take over a risky position might not always be available. Thus full liquidation is desired when such a liquidator appears.
Onchain Liquidator: In the existing financial market, liquidations are normally handled by executing trades in the market to partially reverse the position of an account falling below its maintenance margin requirement. The challenge of this partial liquidation approach in DeFi is the availability of a counterparty, before the invention of AMM.
With AMM, accounts that need to be liquidated can be forced to trade with the Onchain liquidator, or in this version at the same time the respective AMM to partially reduce their positions to meet margin requirements. In this approach, liquidation would have some market impact just like existing infrastructures. Compared to the conventional approach, this approach hugely reduces the entry barrier for liquidation as it only requires an initiator to send a transaction to the smart contract, without providing any margin or taking any risky positions.
Similar to the traditional financial markets, convergence of futures price to spot index is only guaranteed at the maturity for settlement. Prior to that, futures price follows its own price discovery of the market, although a high correlation is expected with spot price. Thus, the difference or basis between Futures price and Spot Index is an important factor in determining the fair price or Mark Price of Futures.
For risk management purposes, a near real time mark price with a stable basis is desirable. The Mark Price for a tFutures Contract is defined as Spot Index + Mark Basis, where the Spot Index indicates real-time pricing while the Mark Basis keeps the relationship between futures price and spot index stable by applying exponential moving average on past basis.
In the last hour of a tFutures Contract, basis is assumed to be 0 and the Mark Price will be the TWAP (time-weighted average price) of Spot Index to facilitate the price convergence to the spot and the eventual settlement.
Whenever the state of the system changes, the Mark Price is updated. The system also allows voluntary mark price updates without trading or liquidity changes and the initiator of such updates will be updated by the ecosystem.
In the last hour before maturity, the tFUTURES AMM enters the settling mode. In this mode, users are only allowed to reduce position and not allowed to open or increase position. This is to ensure a smooth settlement of the futures contract. The final settlement price will be the TWAP of the Spot Index during the settling period. In addition, Mark Price used for liquidation in the settling period will also be the TWAP of the Spot Index to be consistent and avoid the situation where some accounts need to be liquidated after settlement. After the maturity, users will be able to settle their position into margin and withdraw their margin balance from the tFUTURES AMM.
Trading futures involves the risk of loss. Please consider carefully whether futures are appropriate to your financial situation. Only risk capital should be used when trading futures. Investors could lose 100% of their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.