Can the "customized" DeFi derivatives protocol bring a "better solution"?

Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc), published with permission.

Editor's Note: This article comes from

Babbitt Information (ID: bitcoin8btc)

Babbitt Information (ID: bitcoin8btc)https://www.chainnode.com/ama/456246

, published with permission.

In recent years, encrypted derivatives have continued to be hot and become a must for top exchanges. However, as the market matures day by day, the disadvantages of these products are gradually revealed. First of all, the targets of the contract market still exist in relatively monotonous products such as 78% BTC, 9% ETH and 3% EOS, which cannot reach the most popular projects in time. Additionally, there is a lack of transparency and insufficient liquidity. The current hottest DeFi has brought more room for imagination to derivatives transactions because of its decentralized nature. "Chain + DEX + Futures" is expected to significantly reduce the threshold for issuing financial derivatives.

At 2 pm on August 6, the Injective Protocol team, a decentralized derivatives protocol, will conduct an AMA at ChainNode. Will the DeFi derivatives protocol launched by DEX bring better user experience? "One-click issuance contract" lowers the issuance threshold. Is there a corresponding review mechanism? How to conduct risk control on DEX contract products? What are the advantages of DEX over CEX? The "one-click issuance contract" brought by the Injective Protocol lowers the issuance threshold. Is there a corresponding review mechanism? The Injective Protocol team invites Defi enthusiasts to be creative and design decentralized derivative products, including designing perpetual contracts, CFDs, options contracts, swap contracts and other products.

AMA full content link:

Derivatives have always been an important part of the business of a centralized exchange (CEX), and they are a big piece of cake. Now, after several years of development, cryptocurrency derivatives have become very mature, but for DEX, this area is still very new. So how do DEX derivatives compete with CEX derivatives? What are the advantages in comparison?

Lin Weihao:

Eric_Chen：

DEX has high transparency, credibility, fairness, and the accumulation and reflection of Token value (through tokenecon design), and it cannot "unplug the network cable". The disadvantage is that it requires everyone to spend time on development, testing, verification, and implementation. For technological innovation and breakthroughs, refer to other answers below.

First of all, for ordinary users of DeFi, the Injective trading platform will provide a high-quality trading experience. For high-frequency DeFi market makers and traders, Injective has a verifiable delay function (VDF) protection mechanism to prevent front-running transactions, eliminating the risk that DeFi itself is limited to the performance of Ethereum. In this way, users can place an order, update their wallet, and re-transact within a second. This process takes at least 3 minutes on Ethereum.

For CeFi users, Injective will provide unprecedented product diversity. Since our derivatives protocol is open, anyone can initiate any market, from CFDs to options to perpetual contracts, everything is possible. If users can't find the market they want to trade on a centralized platform, maybe they can find it on Injective. Even if you can't find it, you can start a marketplace in minutes.

Behind the popularity of DeFi, security issues are also occurring frequently. Since this year, many major DeFi security incidents have occurred, such as the dydx flash loan incident, the dForce theft incident, etc. Many industry leaders have also called for attention to DeFi security risks. Where are the main risks of DeFi at present?

First and foremost is the security of smart contracts. The design of the Ethereum Virtual Machine (EVM) is much more complicated than people imagine. The original intention of Ethereum to design solidity is to create a programming language If you are proficient, you are likely to encounter many security risks. The majority of developers need long-term practice and accumulation to gain a deep understanding of the writing, deployment, and invocation of smart contracts. Of course, if the code audit is done adequately, security will be enhanced, but potential problems will never be completely avoided. In fact, the current security audit is already very powerful. Many security incidents are caused by project changes after the audit or ignoring the hidden dangers raised by the audit report.

Eric_Chen：

Another point that has begun to attract attention is financial security. Complex financial products are likely to lead to the collapse of the entire agreement. We have also recently seen some financial security research institutions such as Gauntlet, but such institutions are usually expensive, so usually only large-scale projects can afford it, so we look forward to more popularization of financial auditing in the future.

Taking our own project as an example, the team members have experience in code auditing and are confident in security, but in the end they still put security first and decided to invite an organization to audit.

Lin Weihao:

The popularity of DeFi has caused high transfer fees. Will this impact on the Ethereum ecosystem continue?

This peak of transfer fees will not last, especially with the emergence of Eth2.0 and other expansion solutions. Many people say that the popularity of DeFi will make it impossible for Ethereum to fork forever, and they agree with this. Even if DeFi may not be the main application of Ethereum in the future, the liquidity that DeFi brings to Ethereum will make it very difficult for Ethereum to be replaced by other chains.

Will the DeFi outlet cool down soon? What challenges are you facing today?

Lin Weihao:

DeFi will grow exponentially. I cannot predict what scale it will reach in the next 2 years, but I believe that the market share will reach 30-40% of the entire encrypted assets. But there are also many challenges:

1. The problem of expansion. We know that even the national debt itself and derivatives are used for frequent transactions. If the speed and expansion of the Ethereum base layer are not done well, then DeFi will encounter a strong bottleneck.

2. Compliance issues. Many DeFi protocols are very centralized, so they are essentially the same as centralized infrastructure in the eyes of the US SEC. This is why we see cases like Etherdelta, the suspension of Basis Protocol, and IDEX starting to use KYC.

3. User experience, we observed that most users do not have an Ethereum wallet like Metamask. For a new user of DeFi, they need to cross many trust and user experience thresholds.

DeFi is still very early, but growing very fast. I believe that DeFi is fundamentally a technology to achieve freedom, which will truly change the world and subvert the existing financial system. This will of course take time and true believers will work tirelessly to accelerate the realization of this new and wonderful financial system! (big waves wash the sand, unreasonable, irrational fading, excellent emergence)

A big problem with DEX is liquidity. Compared with centralized exchanges, DEX has very low liquidity. What is the reason?

Lin Weihao:

Compared to today's centralized exchanges, DEXs are less liquid and account for a very small fraction of the global crypto market trading volume. This difference in liquidity is due to several factors;

Market maker friendliness. The current DEX is not friendly to a large group of professional traders, especially algorithmic traders and high-frequency traders. The main reason is that the cancellation of orders on DEX happens on the chain, which not only requires the payment of transaction fees (Gas), but also takes a long time to execute.

Lin Weihao:

The average block time of more than 15 seconds and the probabilistic finality of Ethereum greatly limit the transaction throughput and transaction volume. This means that market makers cannot react quickly to market changes, so making markets on DEXs incurs additional risks. As a result, when DEXs act as secondary markets, users face inefficient prices, higher spreads, and ultimately lower liquidity.

Extreme market conditions frequently occur in the encryption market, and some CEXs will "unplug the network cable". How can DEX deal with this situation?

Lin Weihao:

Lin Weihao:

In the case of a big market, we will prioritize certain transactions based on the proof of VDF, and the data submission plan depends on the oracle system used in the market. Our market maker partners and investors can hedge and supply depth with centralized exchanges. The oracle system changes according to the market. Except for the partners we will disclose, any market creator can connect to the oracle on Ethereum. As a "completely" decentralized DEX, Injective cannot unplug your network cable, and the oracle and price data are not controlled by the project.

Exchanges often run off the road. DEX can put an end to the method of cutting leeks, but how to attract users to use it? How to increase liquidity? Will there be liquidity mining?

Eric_Chen：

Lin Weihao:

The current centralized derivatives trading market for encrypted assets is not perfect, and efforts are needed from infrastructure, stability, security, fairness, market and asset maturity (including BTC) and diversity. To allow users to move assets from one platform to another for trading requires a conceptual additional 20% income incentive, so it is definitely important to provide good incentives to institutions and individual traders. Injective will not only have liquidity and PNL (profit and loss) mining and other attractive things to participate in, but! We don’t think it’s healthy for everyone to focus on defi/dex and focus on “yield farming”. More importantly (for Injective) as a derivatives DEX, how can we actually make this transaction demand run and introduce new capital and transaction requirements. In this regard, for example, our ongoing Injective Idea Competition (IDEA Competition) has confirmed the participation of Columbia University, MIT, New York University, University of Chicago, Duke University, etc. Their students have already paid attention to Injective and even started The design can issue derivatives trading market on Injective.

In addition, we have learned from the successful cases of the centralized trading platform. We will take the Make Order Rebate at the beginning. currency. And because of our special node mechanism, it also allows decentralized referrer incentives (Referral Bonus).

Injective Protocol is a "custom" DeFi derivatives protocol, how big is the so-called "customization"?

Eric_Chen：

Through Injective, market creators have a very large degree of freedom. They can use any oracle machine solution to create futures, perpetual contracts, binary options, and more financial instruments. Creators only need to abide by the protocol's minimum collateralization and fee rates.

As an important part of the Injective Protocol, what is the function of "one-click contract issuance"?

Eric_Chen：

Lin Weihao:

The "one-click contract" has been realized, the Injective Protocol's derivatives agreement (perpetual) has been perfected and the test network has been launched. Not to mention that three parties outside Injective can use it to issue, Injective officials can launch fair and credible digital asset collateralized derivatives trading pairs in three minutes when any asset is hot (after due diligence review).

"One-click contract issuance" mainly highlights the ease of use and flexibility of derivatives agreements. As a market creator, the most important thing is to provide traffic and depth. One of the original intentions of our design is to hope that this ecosystem can use the wisdom of the crowd to discover potential hot markets that the project side did not expect, which is why most of our partners and investors are market makers.

Eric_Chen：

Although DeFi is very popular now, it will inevitably cool down in the future, and the derivatives market needs continuous popularity and popularity. How to maintain this? In addition, mainstream DeFi products and derivatives are now concentrated on the Ethereum platform. Is this a head effect?

We will focus on developing diversified futures on the Injective client, and when this market reaches sustainable flow, we can switch to perpetual contracts. This will not lead to diversion of users, and can quickly discover the next hot market. Although the speed and rate of ETH are not good, both Layer-2 and ETH2.0 are developing rapidly, which can effectively solve the expansion problem.

ETH's Defi popularity is not a head effect, but because Ethereum's financial and technological infrastructure is stronger than all other ecosystems. We're not seeing a strong diversion trend right now.

One-click issuance of coins has led to piles of garbage coins. Will one-click issuance of derivatives reduce the quality of derivatives and lead to a flood of junk derivatives?

The release of derivatives is not the same as the real application and quality. Although the Uniswap market is completely open, the traffic is still high, and the focus will still be on the high-quality market. While anyone can issue a market and make a client that supports all markets, Injective's client chooses which derivatives to display based on voting.

Eric_Chen :

At present, DeFi is mainly facing multiple problems, namely the low performance of the public chain and high fees, the threat of code loopholes, and the systemic risks brought about by the black swan event. So what strategies does Injective Protocol have to deal with these problems?

Lin Weihao:

Injective uses layer 2 to make the transaction speed theoretically 1800 times that of Ethereum, and optimistic rollup can effectively reduce the problem of handling fees. In terms of code security, it is divided into smart contract security and the use of DeFi’s composability (composability) advantages and individual DeFi The protocol is designed to arbitrage. Taking our own project as an example, the team members have experience in code auditing and are confident in security, but in the end they still put security first and decided to invite an organization to audit.

Compared with traditional centralized exchanges, DEX has its own advantages and disadvantages, but from the perspective of market sentiment, DEX has more obvious shortcomings, such as high user threshold, poor transaction depth, and high operation and on-chain procedures, which seriously restrict The current situation of DEX development is like two markets, one is full of traffic and the other is cold. Why did Injective choose the track of derivative DEX instead of derivative CEX?

In today's DeFi ecosystem, the availability of decentralized trading platforms that use the "Central Limit Orderbook" model on the chain is still relatively limited. The problems include poor liquidity, long waiting times, and lack of incentives. attention-grabbing products, etc. Beyond that, almost all DEXs have a fairly centralized design, which makes them an easy focus for scrutiny. In order to realize the full potential of decentralized finance, we believe these issues need to be addressed.

We built Injective not only to bridge the user experience gap that people experience in traditional centralized exchanges, but also to provide exciting new ones that even the top centralized exchanges (such as Binance, BitMEX, Bithumb, Upbit) cannot provide. products and features.

Seeing this reality, we decided to innovate in two aspects: 1) provide unique products; 2) innovate the trading platform business model."trade"1. Unique products - As we have observed from the meteoric rise of centralized derivatives trading platforms over the past year, derivatives products in the crypto asset space have huge, proven potential and market fit. While it is popular and has a huge global market turnover, it is also one of the most strictly regulated financial markets in the world, imposing many strict restrictions on users."However, our fully decentralized nature allows users to create derivative products without permission, and we have been actively working with multiple futures agreements to support the creation of derivatives markets, which cannot be supported by centralized exchanges."2. Innovation of the trading platform model - Unlike the traditional centralized trading platform that acts as the gatekeeper of the encryption industry, Injective uses

trade

become a decentralized

public facilities

Although CEX has the risk of being stolen and may run away, mainstream exchanges basically have the possibility of repaying user losses. If Injectiv Protocol is hacked, will Injectiv Protocol be able to pay for user losses? Will Injectiv Protocol be obliged to compensate users?

Lin Weihao:

Lin Weihao:

What I see as a paradox in the crypto industry is that while the crypto industry supports decentralization, many parts of the industry are still centralized, which is what dissatisfied us and was one of the reasons why we decided to build the Injective Protocol in the first place. Centralization requires trust in often opaque third parties, incurring potential risks for users, including hacking, front-running, and other unfair events. However, our entire platform is completely decentralized and open source, and it has been trustless since the first day of release, allowing users and investors to use it with confidence, and the platform does not store user funds.

Lin Weihao:"trade"We use the Verifiable Delay Function (VDF) to simulate real-world time to sort and execute orders. By forcing time delays, we solve the problem of fairness in transactions and the problem that high mining fees in Ethereum will be packaged first."FPGAs and ASICs are much faster than standard von Neumann architectures for VDF computations. We closely followed the research on RSA-based VDFs and contributed support for their implementation. While the FPGA is under active development, the gap in computing speed is currently within our expectations and will not have a significant impact on the trading experience. However, since we anticipate that better FPGAs and ASICs are also being actively developed, we are developing a competitive computing service model that will allow traders to submit orders to multiple computing providers (often also acting as nodes), and contract A fee-sharing protocol, settled at delivery, nodes will compete for orders to be accepted and executed in blocks. The core fee sharing mechanism is similar to our existing node order discovery reward mechanism. For larger orders, there is a fallback mechanism with commit-reveal that traders can opt in to. While this makes no difference in UX on a well-designed client, the probability of order execution is higher, and traders can increase the amount of pending orders to ensure they are successfully accepted."The Injective Chain is a Layer-2 sidechain linked to Ethereum and Cosmos Zone. We use the verifiable delay function (VDF) to implement a fair transaction ordering consensus. By enforcing a time delay, we solve the problem of fairness in transactions and the problem that high mining fees in Ethereum will be packaged first. Currently, the Injective Chain powers our Layer-2 derivatives platform, acts as a decentralized Trade Execution Coordinator (TEC), and hosts a decentralized open order book. The chain itself is built on top of Tendermint, allowing the transfer and trading of Ethereum-based assets on the Injective chain. In the future, Injective will integrate with Cosmos IBC to bring advanced cross-chain decentralized financial functions. For the Injective trading platform, Injective uses