The concept of Market Creation
To create a market on Vega, a user must define the parameters and rules of the market and issue synthetic assets to be traded on the protocol’s decentralized exchange. Initial liquidity can be provided by market makers or liquidity providers, who commit to maintaining a certain level of liquidity in exchange for a share of fees. Traders and investors can then buy and sell the synthetic assets on the exchange, with the Vega protocol using smart contracts to enforce rules and facilitate the exchange.
The insurance pool system
Each market on the Vega protocol has an insurance pool that acts as collateral protection in case of a shortfall when closing out distressed trades. The insurance pool is empty when a market is first created, but can be funded by trading activity and by the release of insurance pool funds from mature markets. It also receives funds if a trader tries to double spend collateral and from penalties applied to market makers who don’t meet their obligations. The insurance pool helps prevent problems from spreading between markets and grows over time to deter collateral mismanagement.
The Collateral management system
The Vega protocol has a simple system for depositing and withdrawing assets from the network using a host chain. This makes it easy to add new types of assets based on demand. The speed of deposits and withdrawals for a specific asset depends on the performance of its host chain, but once an asset has been deposited, it can be moved and used quickly within the Vega system, regardless of the host chain’s speed.