The history of derivative markets spans thousands of years of human history. The first modern derivatives exchange operated in 18th century Edo Japan, as the Dōjima Rice Exchange.
During Dōjima’s 300 years of operations, rice farmers, merchants and brokers feverishly traded the world’s first standardized, cash-settled secondary commodity future contracts through a central clearinghouse.
Dōjima is emblematic of an analogue world: traders yelling to fill orders, bookkeepers struggling to keep track of trades and a clearinghouse struggling to track of each merchant’s margin.
Over the centuries, technological and financial innovations created deep liquidity for traders, capital efficiency for clearinghouses and reduced costs for brokerages. Digitalization of exchanges has also catalysed the explosions of new use cases for derivatives contracts — today they can be used to hedge commodity, currency, interest rate risk, and have effectively become an integrated part of any scaled economy.
Even with these innovations, derivatives exchanges today remain structurally similar to Dojima’s Rice Futures Exchange — the participants and their roles are essentially unchanged. For instance, margining rules set by centralised clearinghouses are still incredibly opaque and brokerages are still gatekeepers for trading.
Fast forward to today, with the rise of cryptocurrencies — despite their decentralized nature, centralized crypto derivatives exchanges still remain dominant. They already serve as a fast, familiar and reliable trading venue for many.
Decentralized derivatives offer the first opportunity in history for a truly trustless, transparent, governable, and P2P exchange to flourish.
What is the current state of decentralized derivatives exchanges?
So far, the DEX futures trading experience hasn’t met that standard. Low liquidity leads to poor pricing and high slippage, transferring funds between platforms is subject to massive gas fees and the user experience doesn’t live up to its centralised counterpart.
Our goal: make futures DEXs the best way to trade.
Drift Lab’s vision is to bring a state-of-the-art trader-centric experience from centralized derivatives exchanges on-chain, and Drift’s team of experienced traders and builders are working hard to make this a reality.
Introducing Drift Protocol
It is our vision at Drift that a truly modern, crypto-native exchange should be:
- Smooth: Laser-fast with low-fees. Low-slippage. Joyful.
- Permissionless: Anyone can trade any market. Anyone can run a liquidator bot. Anyone can host a UI.
- Transparent: Transparent pricing mechanism, reducing the likelihood of front-runners or malicious actors. No hidden fees, no ambiguous fills.
- Immersive: Trading meets the metaverse.
Drift’s first version will be built on Solana. This will take the form of a perpetuals exchange.
Drift’s v0 Launch
Drift is built on Solana because it provides low latency block times and high bandwidth to enable the quickest settlement possible with the lowest transaction fees possible. It is imperative for the architecture to not compromise on pricing and speed. In addition, the <1s block time allows for hi-fi oracle data, enabling our perpetual architecture to accurately mark accounts’ margin values for PnL updates and real-time liquidations.
Here’s a snapshot of what v0 on our Devnet will look like:
All trading is done against Drift’s vAMM. Drift supports market orders with a pre-defined maximum slippage. Maximum slippage can be pre-set from a price to ensure that users can have their orders cancelled should there be risk of having poorer execution prices.
Cross-margining refers to collateralizing multiple leveraged positions with a single pool of collateral, with margin and risk is shared across the positions as a whole.
The benefit of cross-margining over isolated is that margin is effectively able to be distributed as needed across all positions. This ensures that liquidations don’t occur because of a single position’s margin ratio falling below maintenance margin.
Cross-margining enables users to trade without needing to move collateral across individual sub-accounts, which achieves greater capital efficiency and reduces liquidation likelihood of individual positions.
Anyone is able to run a liquidator bot to reduce and close positions of a user whose margin ratio is below the preset margin requirements (both partial and full). The remaining collateral penalty is split equally between the insurance fund and liquidator. Leveraged losses beyond 0% margin are solely absorbed by Drift’s Insurance Fund.
Drift introduces partial liquidations to reduce the likelihood of getting entirely liquidated by offloading users’ position. A user is in multiple positions will have each position reduced by 25% of their position’s notional size.
Litepaper and Next Steps
In the meantime, we’re on the hunt for traders who want to be beta testers of our platform. We will be releasing details for how to join our closed beta program alongside other community campaigns on Discord and Twitter so stay tuned for updates!
This paper is for general information purposes only. It does not constitute investment advice or a recommendation or solicitation to buy or sell any investment and should not be used in the evaluation of the merits of making any investment decision. It should not be relied upon for accounting, legal or tax advice or investment recommendations. This paper reflects current opinions of the authors and is not made on behalf of Drift Labs or their affiliates and does not necessarily reflect the opinions of Drift Labs, their affiliates or individuals associated with them. The opinions reflected herein are subject to change without being updated.