DerivaDex Crypto | Deep Dive
Review Date: July 14, 2021 |
Project Overview:
With DerivaDex, traders no longer have to choose between the performance of centralized exchanges and the autonomy and security of decentralized ones.
DerivaDEX is a decentralized exchange with the performance and security traders need.
Project Description
Built on top of Ethereum, DerivaDex is the first community-led decentralized autonomous organization to create a powerful trading experience that combines the best of both traditional and decentralized exchanges. Managed as a DAO from day one, DerivaDex offers traders an open order-book exchange, with on-chain settlement and no AMM’s. Although AMM protocols have been successful in DeFi so far, DerivaDex adopted the open-order book exchange model to ensure that liquidity is met by both providers and market takers to maximize capital efficiency for both institutional and retail investors. DerivaDex took a new approach to provide traders with a seamless UX with lots of liquidity and cryptographic security by realizing the trade-offs between decentralized and centralized exchanges when it comes to security and anonymity.
Combining trading and blockchain engineering, Derivadex hopes to capture market share from both centralized and decentralized markets by offering unparalleled user experience as a community-governed organization. To understand DerivaDex’s trajectory, we must first look back at how cryptocurrency trading has evolved over the past decade. Beginning with centralized spot exchanges like Mt.Gox and Coinbase in the early days of blockchain that played a custodial role in transferring assets to derivative-based perpetual swaps on venues like BiTMex and FTX.
This shift marks an important change in the user’s demand for more derivative-based options like dated futures and options to lever up their capital and devise more targeted trading strategies. With their pragmatic approach to decentralization, DerivaDex has created a one-of-a-kind exchange that prioritizes performance, liquidity, and user experience without having to trade off against decentralization.
In essence, the insurance fund gains capital on liquidated longs when the closing price of a trader’s position is greater than their bankruptcy price. For short positions on leverage, this would be the opposite.
On the flip side, during times of extreme volatility, John’s position could be sold below his bankruptcy price, and similar to our prior example, John could owe an additional $200 on top of his initial $10,000 collateral. In this case, the insurance fund steps in and pays the difference to pay the trader who went short when John went long.
In conclusion, DerivaDex’s insurance fund is put in place to protect investors on both sides of a trade. Capitalizing on the insurance fund is a shared cost for all traders in leveraged positions.
The Diamond Standard
To make sure the trading experience is uniform for all, DerivaDex implemented what is considered “the diamond standard” of smart contract upgradeability into their exchange to overcome any potential limitation on storage and contract size and provide exceptional modularity. Authored and envisioned by Nick Mudge, The Diamond Standard smart contract gets its external functions and duties from other contracts called “facets”. With the ability to add on as many facets as one likes, “facets” built upon the diamond standard enable developers to write smart contracts with virtually no size limit in a modular and gas-efficient way 4. In addition to allowing developers to build upon smart contracts, Diamond Standard contracts are easily upgradeable without having to change the existing smart contract functionality/architecture.
By providing developers new avenues of storage and transparency, the Diamond Standard is becoming an industry- standard in smart contract upgradeability to maximize contract size and modularity. Working in unison behind the scenes of the Diamond Standard is a new storage technique also pioneered by Nick Mudge, this mechanism allows developers to specify where data gets stored within a smart contract’s storage.
In conclusion, the “Diamond Standard” feature enables the community-governed DAO to have direct ownership of the protocol. Thus, any additional facets added to the Diamond Standard smart contract can be added, removed, and modified at the discretion of DDX holders.
DerivaDex finds this exciting for several reasons:
- Safety and Agility – Auditors can easily read and track various smart contracts if there are any concerns of separation between different facets.
- All facets are reusable contracts that DerivaDex and other protocols can access and use to build new applications, decreasing the overhead and complexity of creating new contracts.
- According to the product lead at Dex Labs, Ainsley Sutherland, “ The Diamond Standard brings excellent transparency to code used in diamonds and facets, providing a permission-less history of all upgrades and modifications to the attached logic contracts. This is critical for upgradeable contracts, and diamond contracts contain a history of all modifications made over time, as well as clearly describe all functions currently accessible to the diamond” 5.
How DerivaDEX is implementing the Diamond Standard:
- The initial DerivaDex Diamond Smart contract owns the DDX token contract
- The diamond contract also owns itself
- Governance proposals and contracts related to the exchange are added to the diamond as facets
- The diamond smart contract can add, remove, and modify any of its facets have via community governance
Token Utility
DDX, the native token of DerivaDex exchange, serves two primary functions:
- DDX is used to govern the project via the DerivaDAO.
- DDX is also used for fee reductions and for staking opportunities.
Tokenomics
Nature of Token Supply
The creation and allocation of DDX have been engineered to provide a sustainable and sane ecosystem for stakeholders of the DDX native token. The initial distribution of DDX was leveraged to create an insurance fund which was initially funded and capitalized on via a staking program.
DerivaDex is a DAO so all stakeholders who own DDX have a vote on all updates and modifications to the system. To incentivize early adoption of the native token, the founders implemented the insurance mining program where asset holders stake a variety of assets to earn DDX tokens as a reward. By implementing a “governance cliff”, DDX funded their traders’ insurance fund and funneled liquidity into the protocol.
The following emissions of DDX tokens are subject to this schedule :
- 100,000,000 DDX are emitted over 10 years. There is no additional supply or inflation planned for DDX
- 50 million DDX are emitted initially as part of the genesis supply. This is referred to as “genesis token emission” throughout.
- 50 million DDX are emitted over 10 years as part of the liquidity mining supply.
Genesis Supply
From the initial 50 million tokens that were created as part of the genesis supply, approximately 34 million DDX tokens will be allocated towards the DerivaDao foundation and the developing team, but only 21,263,737 million are unlocked upon network launch. This issuance is to be used for community initiatives, developments, and partnerships, marketing, future fundraising, and the continued engineering of the protocol. According to the founders, “unlocked tokens can be utilized for these purposes at any time, and will be done so transparently to the community” 6.
In addition to this, 15,994,596 DDX from the genesis supply are allocated to current investors and advisors, based on a 1-year linear schedule. With the majority of the tokens (15,554,596) on a 1-year linear vesting schedule, and the rest (440,000) on a 2-year linear schedule.
Liquidity
DDX tokens currently have a daily trading volume of $33,198.10 and a market cap of about $66,330,339. This gives DDX tokens a liquidity ratio of 0.0005%, meaning that the tokens are very illiquid and owning the token is a financial risk.
Audits
Extensively audited by QuantStamp, an excerpt from the audit: “Overall, the code and documentation in the DerivaDEX smart contracts are of very high quality. Nonetheless, during the audit, we uncovered several issues, both relating to the use of the diamond standard, as well as code in the facets themselves. Importantly, since certain contracts rely upon the security of external token contracts, caution should be used when adding new tokens to the system. We suggest addressing all issues found before using the code in production”. (Quantstamp) 7
Exchanges
DDX is currently available for purchase on the following decentralized and centralized exchanges: Uniswap, Sushiswap, 1inch, Bilaxy, Hoo, and CoinBene.
Company History
DerivaDex was founded in 2019 by two ex-software engineers from Enigma Blockchain, with a mission to democratize DeFi by building cutting-edge software solutions.
Team- Currently 8 employees are working on the protocol, with the majority of them being software engineers.
Leadership
Aditya Panelpu
CEO & Co-Founder of DerivaDex: Before founding the protocol, Aditya started his career as a J.P. Morgan trading summer analyst before venturing into blockchain and joining Enigma MPC, a blockchain protocol that introduced “secret contracts”.
Fredric Fortier
Co-Founder of DerivaDex: As an early contributor to the Ethereum community, Frederic Fortier began his career in decentralized finance in early 2017. After his contribution to Ethereum, he helped design and build the Enigma Protocol.
Competition
Although DerivaDex is a unique derivative-based protocol, other exchanges offer similar products.
- SYNETHIX: Synthetix is one of the leading decentralized protocols for creating global liquidity for synthetic-based assets on Ethereum. Facilitating the creation and trading of countless asset classes including traditional stocks, cryptocurrencies, equities, and commodities, all by way of smart contracts on the Ethereum blockchain. Tokens that represent these assets can be traded and collateralized throughout the Synthetix ecosystem, which uses a combination of collateral, staking, and trading fees to operate. Similar to DerivaDex, Synthetix transitioned to a decentralized autonomous organization (DAO) in July of 2020.
- Universal Market Access (UMA): Another competitor to DerivaDex, UMA, is another synthetic-asset-based protocol that allows individuals to recreate traditional financial assets, crypto-based products, and more. By way of UMA, two counterparties interested in trading can come together through a permissionless financial contract that is secured through collateral and enforced through Ethereum smart contracts.
- Dy/Dx: As the leading non-custodial decentralized exchange, Dy/Dx is on a mission to build an open, secure, and robust suite of financial products. Built on the Ethereum blockchain, DyDx enables trustless peer-to-peer short sells and options on any ERC20 token.
Early Investors
After months of research and development, DerivaDex finally decided to take the covers off of its project and attracted many reputable investors to fundraise a total of $2.7 million through two rounds of financing. DerivaDex has raised equity from some of the most reputable VC firms in blockchain — including Coinbase Ventures, Polychain Capital, DragonFly Capital Partners, Electric Capital, and CMS Holdings. In addition to this, notable investor Calvin Liu (strategy lead at Compound) joined in on the financing round.
Website Authenticity
The protocols website introduces the DDX token, Insurance mining, and notable investors. While there are many high-caliber investors, the website itself still does not include direct links to the project’s whitepaper and proprietary technologies. All information on the protocols technologies was found through research.
Community Size
The DerivaDex community is currently a small one.
Telegram: 1,889 members
Twitter: 6,406 members
Discord: 2,691 members
Reddit: 42 members
Non-Crypto Mainstream Press
DerivaDex has had minor exposure in mainstream press from CBS insights.
Company Scandals
No key team members have been involved in any scandals.
Verdict
Backed by Coinbase ventures, CMC holdings, and Parafly capital, DerivaDex has the potential to become the go- to DEX for traders who are looking to make the most out of their capital with minimum downside. DerivaDex was founded by two traders who are also ex-software engineers from Enigma MPC(creators of secret network and enigma) in 2019. Although the project has solid fundamentals, there are a few things that are important to note.
For example, the number of employees working on it is less than ideal. The project’s website does not provide nearly enough information for a user to learn about their platform or for an investor to decide whether or not DerivaDex is a viable investment. However, after much research and development into the protocol, one can see that there is a significant use case for the product.
DerivaDex’s position in the DEX space is obscured against its competition. Protocols like Synthetix and Dy/Dx attract much more user’s with their extensive marketing and vibrant communities. Still, DerivaDex has tremendous potential to capture market share from its competitors given the fact that their mainnet of DerivaDex exchange has not launched yet. Once it does and the benefits and features of the DEX become more apparent, the inflow of user’s from other exchanges with less community-based governance is going to be huge.
After evaluating the project entirely, the Token Metrics team scored the DerivaDex protocol objectively, and the results were the following:
Competition – 5.5/10
Team – 11.5/15
Web Design – 2.5/5
Use case – 18/20
Investors/Partners – 12.5/15
Token Distribution – 6/10
Tokenomics – 3/5
Community- 2/5
Audit – 10/10
ROI Potential – 5/10
Pros
- community-led decentralized exchange governed by a DAO
- first DEX to implement an insurance fund to limit downside on trades
- Investors, backed by some of the best blockchain VC’s
- Deflationary native token (DDX)
- Extensive audit by quantstamp
- Co-founded by two individuals who have worked on successful protocols in the past( Enigma and Secret blockchain)
Cons
- The website lacks vital information about the protocol, still no whitepaper
- Liquidity – very low across 6 centralized and decentralized exchanges
- a very small community, no major partnerships with any blockchain projects
- The team is still very small even though the DDX token is in the top 500
With the all-star team and investors on board, DerivaDex is a project to keep an eye out for. Unique in the value and benefits it provides users, we believe DerivaDex can become a significant player against other major DEX’s. However, the current liquidity of the DDX token against competitors’ native tokens makes it a much riskier asset to hold. To attract a larger user base to the protocol, DerivaDex needs to provide more transparency for potential investors. Without a white paper, roadmap, and minimum team information the project is currently deterring potential investors and users.
Risk-Averse strategy
One way an individual can accumulate DDX tokens is through their insurance mining program, by bootstrapping liquidity on the exchange, a user can get rewarded the native token. At $2.50 each, providing liquidity to the protocol could result in significant returns if the protocol becomes more popular.
Risk-Seeking Strategy
Accumulate DDX tokens by bootstrapping the liquidity mining program and purchase DDX in bear markets. If one is a true believer in the project, they can also provide liquidity for the token on other DEX’s like Uniswap and earn additional DDX rewards. Understand, however, that there is very high risk holding assets with low liquidity across exchanges.
Conclusion
Aiming to provide the best of both traditional and decentralized exchanges, DerivaDex has the potential to deliver investors a 10X return, especially for early adopters and investors who get in before the launch of their main net. Regardless, one should always be cautious and remember that cryptocurrencies are only a decade-old invention. AKA there are no sure bets.
References
- Palepu, Aditya. “Insurance Mining with DerivaDEX.” Medium. December 05, 2020. Accessed July 06, 2021. https://medium.com/derivadex/insurance-mining-with-derivadex-a8c3b65d9548.
- Palepu, Aditya. “Insurance Mining with DerivaDEX.” Medium. December 05, 2020. Accessed July 09, 2021. https://medium.com/derivadex/insurance-mining-with-derivadex-a8c3b65d9548.
- Palepu, Aditya. “DerivaDEX Token Economics.” Medium. January 12, 2021. Accessed July 09, 2021.
- Sutherland, Ainsley. “The Diamond Standard: A New Paradigm for Upgradeability.” Medium. August 26, 2020. Accessed July 09, 2021.
- Sutherland, Ainsley. “The Diamond Standard: A New Paradigm for Upgradeability.” Medium. August 26, 2020. Accessed July 09, 2021.
- Palepu, Aditya. “DerivaDEX Token Economics.” Medium. January 12, 2021. Accessed July 09, 2021. https://medium.com/derivadex/derivadex-token-economics-7344d8fe73c6.
- Quantstamp, “DerivaDex Audit”. Published December 4th 2020. Accessed on July 7th, 2021 https://certificate.quantstamp.com/full/deriva-dex
Disclaimer
Token Metrics Media LLC is a regular publication of information, analysis and commentary focused especially on blockchain technology and business, cryptocurrency, blockchain-based tokens, market trends, and trading strategies.
Token Metrics Media LLC does not provide individually tailored investment advice and does not take a subscriber’s or anyone’s personal circumstances into consideration when discussing investments; nor is Token Metrics Media LLC registered as an investment adviser or broker-dealer in any jurisdiction.
Information contained herein is not an offer or solicitation to buy, hold or sell any security. The Token Metrics team have advised and invested in many blockchain companies. A complete list of their advisory roles and current holdings can be viewed here: https://tokenmetrics.com/disclosures/
