We are designing and building Vega from the ground up - ask us anything

Hello world,

Welcome to our first AMA, which will be hosted by members of our founding team to answer all things Vega.

The AMA will take place Friday 4th October 16.00-17.00 UTC + 1 right here. Feel free to start submitting questions beforehand.

We’re excited :star_struck:

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Hi guys,

Congrats on your announcement! Excited about what your guys are doing but really curious how this will fly in terms of regulation…What do you guys think about the proposed FCA ban on cryptocurrency products? Will you guys be affected by this and what is your take on the KYC/AML challenge?

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So in the press release I saw that you’re developing “a framework for creation and editing of products that give every market participant the freedom to create their own financial instruments and markets” Can you elaborate on this? Surely this will just lead to a bunch of illiquid markets? So I guess a follow up on that is what is the processes in place to ensure against this and ultimately address the persistent liquidity problem faced by most DEXs?

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So I get the choice Tendermint choice, and I understand how Tendermint relates to Cosmos - but should you not consider using Cosmos as well? Why/why not?

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Who do you guys consider to be your competitors, how do you define decentralisation and what makes you more decentralised than say UMA, Bancor or dydx?

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Hi Caocao,

The short answer (elaborated in the white paper) is that you can create your own instrument and a market but that commits you to being a market maker. This in particular means that you have to commit capital that you lock-up with Vega. You are also obliged to provide liquidity for your market. If you don’t provide specified level of liquidity then the capital you committed will be taken by the network. Hence if you create a market you commit to keeping it liquid.

As a reward you take a portion of any trading fee (the rest going to the node operators). The question is: as a market maker do you believe that your product will be popular enough so that the trading fees pay the cost of the capital you deploy.

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Hi, I’m Barney and I’ll be online along with some of the other people building Vega, a protocol for safe and non-custodial decentralised margin trading. We’re creating the tech that will let traders operate and participate in peer-to-peer markets with open access, transparent rules, and rewards for creating and supporting markets.

We’re building this because capital markets have been monopolised by privileged institutions and middle-men who have set up a system that benefits only them, and doesn’t allow for innovation, freedom, or flexibility. We know that markets don’t need to function this way, and we’re going to prove it.

We’ll be here for an hour - ask us anything!

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As the Cosmos ecosystem expands we will continue exploring how best to use their feature set alongside the roadmap for the Vega protocol.

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Hi @sldk90, great question, there are two sides to the answer:

Firstly, we’re creating a protocol and some software that implements it, but we won’t be running any platform, exchange, etc. That will be done in a decentralised way by all the people who download the software and choose to run nodes and crreate a network and trade together. In that sense, Vega is more like bitcoin or Ethereum than an exchange, and we’re certainly not offering any derivatives products ourselves. So the rules you mention, for instance, won’t apply directly to us (though maybe to some participants - see below.)

On the other hand, though, people and organisations that use Vega to trade or market make will be creating, buying, and selling products between each other. Depending on where they’re based, and what they’re doing, they will often need to abide by local regulations. Vega don’t think this is going away, and so we are in the process of designing tools that will allow people to prove their regulatory status via cryptographic signatures from trusted parties and specify their compliance constraints. The goal is to ensure that everyone can comply with the rules they need to within the framework provided by the protocol itself. Vega’s research team are still working out some of the details on this and there will be more to share in the coming months.

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To elaborate further on @cdm’s response, the biggest reasons Vega might not directly use Cosmos are that it has some fairly unique requirements and deisgn decisions at the level of consensus layer and validator incentives, for example the need for placing orders to be free (the protocol protects against spam using recency checks and escalating proof-of-work requirements for rapid order submission), and the way the protocol rewards node operators.

It’s also our intention that the protocol design remain consensus layer agnostic, so any use of Cosmos would need to be carefully thought out.

That said, it’s not impossible and we love the Cosmos and Tendermint team and their approach to architecting blockchain systems. I’m particularly interested in the potential for integrating with Cosmos to settle crypto-assets across multiple chains, as although we’ll directly integrate with Ethereum and almost certainly bitcoin, a single integration for settlement across multiple other chains would be very attractive. We’re excited to see how their work in this area progresses!

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I’m always interested in learning more about the risk side of things, so I’m sure other people are too.

Which financial products are the most complex to assess in terms of quant risk? How do investment banks deal with those… and how are we dealing with those?

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What is the need to create a decentralised derivatives exchange? Won’t the traders enticed by Vega already use BitMEX? I worry about the what-seems-to become an oversatured DEX market with basically no liquidity…

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Great question @caocao! As you’ve identified a key problem for decentralised exchanges is the acquisition and incentivisation of liquidity provision. The entrenched model used by centralised marketplaces is to establish business partnerships with market makers and negotiate obligations and rewards, governed by business contracts. This is an infeasible model in a psuedonymous, decentralised marketplace where no centralised ‘owner’ of the marketplace exists to source and establish such agreements. Moreover, such a model suffers from misalignment between market owners and liquidity providers and isn’t scalable beyond the central owner’s business development capacities.

As @david refers to, we’ve put quite a lot of thought into the best way to design Vega so that creation of new markets is easy and that markets launched are liquid enough to be useful and safe to trade. The incentive model rewards those who launch markets (or join as market makers early) at a higher level than those who join later. And importantly, like a centralised operator, these liquidity providers receive a portion of the total fees generated by the market. This is a very different revenue model to traditional market making and means that they are incentivised to weather periods of higher market risk for the larger overall return they are receiving.

The trading fees are dynamic in nature, responding to how much liquidity is needed to support the market. This allows the market to “attract” market makers to it when the market has a higher amount of open, margined positions. Conversely, trading fees become much cheaper when the market is liquid and well supported.

If a market has insufficient market making support, it will be suspended until the market has attracted new market makers to support it. This means that any markets on Vega that is open, has, by definition, a good level of liquidity.

We will soon be publishing some exciting papers about how the protocol will facilitate the dynamic valuation of liquidity on a market. This is an area of ongoing research for us and one we’re deeply passionate about!

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Hey! I was wondering what’s the competitive advantage of Vega compared to trading tools of traditional industry and other decentralised trading platforms?

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Thanks for your question @oshwa!

So compared to other decentralised trading platforms, Vega offers a number of advantages!

Firstly, all of Vega is fully decentralised. From order entry and matching through to settlement, nothing happens on a central server.

Unlike most or all other fully decentralised protocols, Vega supports capital efficient margin trading with variable margin requirements (by product and instrument) calculated using investment bank-grade quantitative models, atomic close-out of distressed positions to avoid the risk of excessive losses due to the mechanics of margin evaluation, and no-cost order entry.

The protocol’s use of a separate blockchain custom designed for derivatives trading also allows the protocol to mitigate issues like front running and makes it possible to easily support bespoke products with complex execution logic and risk models, in addition to providing 10-100x lower latency and higher throughput than blockchains like Ethereum on which many competing protocols are based.

Finally, because the protocol itself is blockchain agnostic and Vega doesn’t live on a blockchain with other applications or crypto-assets, it has the ability to relatively easily switch the underlying consensus algorithm in order to take advantage of technological advances that benefit users, even where these would be problematic in a more general purpose environment, allowing Vega to stay ahead of the curve.

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Thanks for the elaborate responses @david and @tamlyn. Makes a lot of sense and looking forward to reading the papers!

One more question from me - what are your thoughts about security/consistency and risk modelling in a decentralised network?

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@candida Good question because it isn’t so straightforward to answer. But there are essentially two things which really make life difficult:

  • dependence between different factors; so product referencing two underlying assets will be inherently more complex to model than a product referencing just one. The problem typically isn’t that you can’t find a good model to capture the dependence but rather that you need a lot of data to do a good calibration.
  • unpredictability of certain events in particular defaults of companies (e.g. Lehman’s stock price was nowhere near zero when they went bust because the market didn’t have the information the people working in the bank had). If certain facts are not visible externally then you get an unpredictable event. In this case there isn’t much that can be done on the modelling side and so you may require the derivative payoff to be bounded (ie there is a maximum possible loss) and ask the participants to be fully collateralised.
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Good question @sunchild!

The first thing to say here is that Vega isn’t really aiming at BitMEX, or indeed particularly at cryptocurrency derivatives at all. There’s a whole HUGE world of derivatives out there with and even more potential markets that people might create once they get their hands on what we’re building and as the ‘DeFi’ ecosystem matures and starts to challenge traditional finance, even if the logical first users might be crypto-nerds like us!

A lot of these participants pay pretty high costs for market access as commisisons and mark-ups and spreads applied by sales traders, brokers, and commercial bankers for access to the markets. Vega is a level playing field that lets anyone bypass these costs, which is one of the things that makes it so exciting!

Liqudity is super important though the the protocol includes really strong incentives to create liquid markets and to offer liquidity, paid from the fees that would go to the operator of a centralised trading platform but that are freed to remain within the ecosystem of (all the many types of) traders in a fully decentralised model.

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Where does the name Vega come from and when are you planning on launching a mainnet?

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@oshwa, re: competitors… good question but not something we spend a lot of time thinking about.

We know that decentralised finance has an absolutely massive opportunity to in terms of reducing cost and lowering the barriers to entry for existing products and providing the tools to enable a whole new wave of innovation and new products and markets. Compared to the market share that any potential competitor currently has we think it’s far more productive to focus on making the best, most professional, fastest and easiest to use protocol and tools for decentralised markets, than to be categorising and pitting ourselves against (and perhaps accidentally letting the protocol we’re building be defined by) any specific competitor.

Shout out to UMA as well! We really like their team and particularly what they’re trying to achieve with their oracle protocol (see https://twitter.com/hal2001/status/1149466877543845888). It would be super cool if it works and we could get our protocol working with it… there are a few complexities that make it not super-simple, but I think it ought to be doable.

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