After the automated market maker or AMM, a model for building decentralized spot exchanges making a success in spot exchanges, numerous projects are seen rushing to take this idea into the world of derivatives. Futureswap, an AMM-based futures exchange primarily built for big trades, can be considered one of these.
Futureswap has recently launched Version 2 of its system featuring a unique oracle structure enabling a boost in capital productivity by large trades. The co-founder of Futureswap, Benji Richards, explained the concept to Cointelegraph:
“When you think of AMM people think of the constant-product like Uniswap. The main difference with ours is we took the AMM and didn’t use the same formula. We designed it around the thesis that large trades should not be penalized for being large trades, which then will create a better ecosystem for what we call whale traders or massive arbitrageurs.”
The AMM platform is using a special formula called “bonding curves” to evaluate how each trade affects the price of the assets. The formula of Uniswap is the easiest since it tries to hold a constant equal to the product of the two sides of the pools. Such a formula graphically defines a hyperbola— a shape that approaches both infinity and zeroes on either side, without ever reaching them. Although this is perfect for general-purpose AMMs, this curve is however not efficient for large trades, since, with large order sizes, slippage increases dramatically.
Whales are usually penalized in #DeFi, but @futureswapx is launching a derivatives platform to accommodate extremely large trades. A combination of AMMs and oracles makes it much more capital efficient than standard exchanges. https://t.co/ZCNcyfRjVY — Cointelegraph (@Cointelegraph) February 1, 2021
Using a more efficient curve nevertheless involves adding further restrictions to make sure that it is accurate. For instance, in the case of Curve Finance, the bonding curve can be rendered exponentially more effective if the platform’s limited to pegged assets — various iterations of U.S. dollars or wrapped cryptocurrencies. A similar constraint is provided by custom-built oracles with Futureswap.
Richards said that this was needful to prevent the problem with off-the-shelf solutions. He said:
“Most on-chain oracles have a delay, so if you’re going to use that for anything with leverage, it likely will not work,”
An Oracle-based design has been sought by Bancor for its unchanging loss protection system, but due to front-running problems, it appears to be a fiasco.
Futureswap’s oracles are unique oracles as they permit the small price changes between two Ethereum blocks, which are spaced out by 15 seconds. This is a mechanism that is similar to meta-transactions that allow others to pay for someone’s gas fee, Futureswap co-founder Derek Alia explained:
“The idea is that you sign some parameters, you say, ‘I want to do this action with this information’. You sign that with your private key. That’s basically like a ball that someone passes to the Ethereum Blockchain.”
Users would simply embed the oracle price data they used to make the transaction with Futureswap trades, along with the scheme guaranteeing the value is true when the transaction was made. By utilizing the oracle prices an anchor, the platform can use robust bonding curves with lower slippage. Alia added:
“We need less capital to be more competitive with someone like Binance. Binance maybe needs $6 billion in their order book. We would need $300 million — or something like that — to have the same slippage.”
Futureswap also has passive liquidity providers, like other AMMs, who receives a fee for each trade going through the platform. Traders deal with these pools of liquidity, with the potential to enter with up to 10x leverage in both long and short positions. While cryptocurrency standards will consider this to be low, this ceiling will be increased over time, Richards said.
Futureswap, which is also reflected in its token model, is still in the early stages of release. Currently, users and liquidity providers receive a non-transferable token that allows them to engage in the governance of the network as well as gain utility through discounts. So far, without any direct incentivization, the team boasted over $500 million in total volume. Alia concluded with this:
“I think what’s really cool is that a lot of people who are a little bit more ‘degen’ will come in, ask if the token is transferable and how they can buy and sell it. They find out they can’t, and then they leave.