Vega, a blockchain project that is building a decentralized protocol and infrastructure to run programmable financial markets, launched its testnet today, encouraging traders and developers to explore its capabilities. Those who would like to experiment with the platform can register with their email here. Once granted access, participants can start exploring the protocol and follow along with development as new features are regularly deployed.
Decentralized Finance (DeFi), a popular topic among cryptocurrency and blockchain enthusiasts, has yet to bridge into the world of traditional finance and assets fully. Vega believes that it can close the gap between niche crypto speculating and professional market making with a more trading-focused platform.
“At the moment, if you want to build a DeFi protocol, you’re probably building it on Ethereum,” said Barney Mannerings, Vega co-founder. “This means you’re working with the slower speeds of Ethereum, and with a blockchain that can’t prevent frontrunning and shares its very limited capacity with thousands of other protocols and Dapps. Recent events, like the bZx exploit, highlight some of the challenges in the Ethereum architecture and how they affect systems built on it. We need more sophisticated solutions to safely support the more complex financial products and risk models necessary to push decentralized trading to mainstream markets. We’ve built Vega from the ground up for fairness, safety, and speed, and so as crucial DeFi infrastructure, Vega offers traders and developers many advantages in this regard, and I like to think of it as a kind of ‘Web 2.0’ moment for DeFi.”
Vega Protocol addresses five critical issues that could limit the success of DeFi products on Ethereum and other blockchains.
- Low Liquidity
- Difficult Interface
- High Costs
- High Latency
While market makers have noted significant interest in DeFi products, these issues have meant that the majority of trading, even within crypto-assets, has remained on traditional centralized exchanges.
How Significant is the Vega Disruption Model?
According to DefiPulse.com, there is roughly $1 billion worth of crypto-assets locked in existing DeFi marketplaces. While that number is fairly high relative to crypto markets, it constitutes only 0.0002% of the value of the total daily volume of global derivatives markets.
Traditional assets trade hands at a rate of trillions of dollars per day and often rely on middlemen and banking entities to facilitate the exchange. Moreover, traditional markets require significant human capital and their upstart and upkeep present billion-dollar costs that are passed on to consumers of the products being traded.
The derivatives world alone is worth about $500 trillion in total notional amounts outstanding for contracts, and middlemen absorb about 1 to 1.5 percent (about $7.5 trillion) of that value.
Vega’s testnet marks a significant milestone for permissionless and non-custodial markets and gives market makers a first-look at this disruptive technology. Their testnet is the first step towards offering people a platform to create, customize and deploy markets in basically anything and run them safely with minimal effort. Through Vega Protocol, traders will be able to abstract away middlemen, eliminate maintenance costs associated with traditional exchanges and condense frontend and backend services into singular, self-regulating systems.
“Vega Protocol was designed by professional traders looking at legacy markets and deciding ‘we can do this better,’” said Mannerings. “We looked at the amount of human capital required to deploy traditional exchanges, evaluated the costs and issues with existing custodial formats, and designed a system to best service the needs of traders.”
New Incentives for Market Making
One key feature of Vega is the sophisticated market making rewards built into the protocol. By dynamically pricing liquidity, Vega ensures that market makers are incentivized to deploy capital where it is needed most. This creates a dependable supply of liquidity which entrepreneurs and market creators can tap into to support new markets. The market creation process allows market proposals to gather market making support and ensures that new markets are only created once they have sufficient liquidity commitments, thus minimizing the risk to the market creator and other traders.
Vega’s market-based liquidity reward allows any participant to become a market maker by committing to provide liquidity. This mechanism, built into the protocol itself, rewards liquidity providers on a market with a share of the fees generated by that market. Thus, in exchange for meeting their liquidity obligations, market markers can derive profit from the entire trading volume on that market.
Novel Markets Worth Considering
Vega Protocol doesn’t just present opportunities for crypto derivatives; it poses a decentralized framework for a nearly infinite number of potential markets and financial products.
Participants in the network could choose to create markets tied to climate change. They could trade derivatives based on fluctuations of weather, take a position on a company’s data security, or even hedge bets on the market price of Trump Tower office space.
Unlike traditional markets, which are dictated by select gatekeepers and liquidity providers, Vega Protocol enables anyone, anywhere, to create markets in anything.
“One of the strongest benefits of blockchain is global access. With Vega Protocol, people can start creating markets and add liquidity at unprecedented scale,” said Paul Veradittakit, Partner at Pantera Capital. “The Vega team is solving a critical infrastructure issue that’s precluded mainstream adoption and now opens more doors for financial innovation.”
Vega is building tools that guarantee the freedom to trade and make capital markets available to everyone. This vision will be realized through a protocol for creating and trading derivatives on a fully decentralized network. Traders can use the Vega protocol pseudonymously and be rewarded by other participants for creating new products and providing liquidity.
The Vega Protocol team held a seed round fundraising, led by Pantera Capital, where the team raised $5 million to support project development.
Follow along on Twitter to see the latest updates, including news and details about the concepts underpinning Vega. This communication is issued by Vega Holdings Limited.