FutureSwap (FST): Perpetual Futures Exchange Built On Ethereum | Deep Dive
Review Date: February 10, 2021
Futureswap is a decentralized crypto exchange focused on offering the best price execution for large perpetual orders on any perpetual market. The exchange utilises the automated market maker model (AMM) rather than the central limit order book model as used by centralised exchanges and other decentralised derivative protocols such as dy/dx. A novel AMM equation was introduced to reduce slippage for large perpetual orders similar to how Curve Finance used a new AMM equation for low slippage stablecoin-stablecoin swaps. This innovation will attract the attention of ‘DeFi whales’ and has the potential to capture significant derivative trading volume which will directly benefit liquidity providers via trading fee distribution in turn making Futureswap more capital efficient for perpetual trading.
Automated Market Makers For Perpetuals
Many DeFi protocols have modified their AMM beyond the Uniswap constant-product AMM equation for their application-specific use case in order to reduce slippage. For example Curve Finance a DEX for stablecoin-stablecoin swaps uses an AMM equation that has a flatter curve than the constant-product equation simply because stablecoins do not deviate much from their dollar peg hence this curve offers lower slippage for stablecoin swaps.
Futureswap has implemented a novel AMM to reduce slippage for large perpetual orders given enough liquidity in the perpetual market liquidity pool. Liquidity pools are of the same construction as Uniswap where liquidity providers deposit equal amounts of two assets into a pool and issued a LP token representing their proportional share of liquidity in the pool. In order to incentivize liquidity, LP’s are rewarded with the derivative trading fees conducted on Futureswap and rewarded in their native governance token FST.
However, as per all AMM’s Futureswap faces the common problem of impermanent loss described as the difference in value between holding a volatile asset and providing liquidity. In order to minimise impermanent loss for LP’s, a dynamic funding rate is used to balance the long and short pools in which the in-demand side will incur a funding rate every 8 hours to the less demanded side of the market (e.g. longs paying shorts).
FutureSwap V2
Futureswap V2 protocol upgrade aims to improve live pricing via the implementation of an Oracle relayer network and improved capital efficiency making the DEX the platform for best price execution of large perpetual orders.
Oracle Relayer Network:
Futureswap’s Oracle Relayer Network (ORN) involves a trader using his private key to sign a message that embeds the current price of the asset in the transaction which is then broadcasted to the Ethereum network to be validated [3]. In leveraged trading, it’s imperative that the price the transaction was executed at is the price the perpetual order was executed at otherwise slippage occurs with oracle delay which is what happens with the majority of on-chain oracles.
Capital Efficiency:
In DeFi capital efficiency is becoming increasingly important as capital from liquidity providers will flow to protocols that have the highest efficiency. In the case of derivatives trading this means a pool with the lowest amount of liquidity providing the best price execution and in the case of Futureswap the best price execution for large perpetual orders.
Futureswap claims that for a liquidity pool of $50m that it will provide the best slippage and price for any $1m perpetual order [3]. The consequences of such capital efficiency can be huge as better efficiency attracts more ‘DeFi whales’ which in turn increases the derivative trading fees distributed to LP’s and thus attracts more LP’s due to a higher APY. A perpetual cycle to further increase the capital efficiency of the Futureswap DEX.
FST Tokenomics & FutureSwap DAO
Futureswap as per any other DeFi protocol is transitioning to decentralized governance via a DAO and distributing a native governance token that allows users to participate in the future direction of the protocol. All FST holders will be allowed to vote on smart contract parameters such as fee for entering a liquidity pool currently set at 0.1% and also the transition to a new smart contract architecture as protocol improvements arrive to further improve trading experience and capital efficiency.
FST is currently a non-transferrable governance token that is currently being distributed in the form of liquidity providing and trader rewards. The current distribution is 40k FST daily based on your percentage of liquidity provided to the ETHUSD pool and the percentage of close trade volume during the distribution period. The Futureswap DAO will decide when the token becomes transferrable similar to the launch of Tornado Cash governance token TORN.
TFST supply is capped at 100m which will be minted over the next 9 years. The token allocation is the following:
- Users: Traders, liquidity providers & referrers. 30mil FST used to reward traders, liquidity providers and referrers. Current distribution is 40,000 FST daily.
- Development Fund: 18m FST issued over 9 years can have multi purpose use depending on the will of the DAO but will be primarily used for grants to advance protocol development by community developers.
- Team: 34m FST vests over 3 years.
- Investors: 12.58m FST 3-year vesting schedule.
Seed investors in Futureswap include the likes of 3 Arrows Capital, Framework and Synapse which are notable funds in the cryptocurrency asset class.
FutureSwap Onchain Data
Observing on-chain data for the decentralized perpetual exchange clearly validated it’s thesis for best price execution for large perpetual orders. Over the last 30 day period Futureswap has executed $697m in total volume from 2144 transactions meaning the average trade size in this period was around $325k. The ETHUSDC liquidity pool is currently sitting around $41.8m in total value locked (TVL) and has collected in the last 30D period $548k in derivative trading fees which are distributed to the liquidity providers.
Summary
Futureswap has demonstrated merit at providing low slippage trades to large perpetual traders using it’s modified AMM and has the potential to have the best price execution for $1m sized trades with $50m in available liquidity. The protocol’s superior capital efficiency and live pricing for perpetual trades will attract a large number of high capital traders and result in a significant capture of derivative trading volume and fees which will in turn directly benefit liquidity providers.
Although Futureswap has not integrated with any layer-2 scalability solution they are currently investigating integration with Optimism as it becomes production ready and Arbitrum. Protocols such as Perpetual protocol already have a significant advantage in regards to gas fees and executing trades but as layer-2 scalability becomes more mature the majority of derivative protocols will solve this technical constraint in due time. Futureswap token issuance schedule indicates a long-term vision for the decentralised exchange which will align incentives towards long-term development ensuring the best trading experience for protocol users.
References
- https://medium.com/bollinger-investment-group/constant-function-market-makers-defis-zero-to-one-innovation-968f77022159
- https://exchange.futureswap.com/
- https://medium.com/futureswap/announcing-futureswap-v2-on-chain-perpetuals-with-live-pricing-e6a440939033
- https://medium.com/futureswap/futureswap-governance-token-distribution-d2712c855da5
