With the rapid development of blockchain technology, the landscape of the cryptocurrency market is quietly changing. Investors' demand for transparency, efficiency, and decentralization is growing stronger, and cryptocurrency trading, which was previously dominated by centralized exchanges, is starting to shift to the blockchain.
According to the latest data from Coingecko, the spot trading volume of CEX and DEX has reached a ratio of 55:45, with little difference. In contrast, the daily average trading volume of cryptocurrency derivatives on the entire network has reached billions of dollars, but the on-chain trading volume accounts for only 1%, leaving a growth space of hundreds of billions for on-chain derivative trading.
After continuous iteration and optimization, there are currently two main solutions in the on-chain derivative track:
The first is the Vault mode represented by Arbitrum's GMX and Hyperliquid, where LP serves as the counterparty to traders, and the trading price is determined by the Oracle's feed.
The second is the order book mode represented by dYdX, where off-chain matching and on-chain settlement are performed, such as AEVO and Vertex.
Of course, with the development of the DEX market, many projects generally combine these two methods to further enhance the user trading experience and optimize and improve trading depth and liquidity. For example, Drift Protocol based on the Solana ecosystem has performed well in the recent market, with a significant increase in the number of users and total TVL, attracting a large number of investors' attention.
This article will delve into the core mechanisms and technical features of the on-chain derivative protocol Drift Protocol in the Solana ecosystem, as well as how to address the risks faced by on-chain derivative trading and provide traders with a secure and trustworthy on-chain trading environment.
About Drift Protocol
Drift Protocol is an open-source decentralized trading platform built on Solana, established in 2021, mainly providing users with low slippage, low fees, and efficient trading experience. Currently, Drift Protocol mainly provides spot trading, perpetual contract trading, lending, and passive liquidity provision. The goal of Drift Protocol is to improve capital efficiency while protecting user assets and become the derivative and spot trading liquidity layer in the Solana ecosystem.
Drift Protocol launched its V2 version in January 2022, adopting a new hybrid liquidity solution, which has significantly improved trading volume and user experience. On May 16, 2024, Drift Protocol's airdrop started, distributing 12% of the total supply to early users and supporters, achieving continuous breakthroughs in TVL and trading volume. According to data from DeFillama, Drift's TVL currently ranks third among all on-chain derivative platforms, making it a notable dark horse in the race.
For trader users, transaction fees are a very important indicator of loss in cryptocurrency derivative trading. Drift Protocol has the advantage of low transaction fees, helping users reduce trading friction and gain more profits. Currently, the Taker fee for BTC, ETH, and SOL perpetual trading on Drift Protocol is only 0.025%. If an investor pledges 10K USDC in Drift Protocol's Insurance Fund, the fee can be reduced to 0.01%. For other currencies, Drift Protocol's trading fees are also only 0.03%-0.1%. In addition to the official commission discounts and rewards from Drift Protocol, the trading fees are already better than most CEX exchanges.
According to official data, Drift Protocol has accumulated a trading volume of 26 billion USD, processed over 17 million transactions, and accumulated over 190,000 users, achieving explosive and sustained growth in the recent period.
Drift Protocol's advisor, Arthur Hayes, is the CFO of BitMEX and the CIO of Maelstromfund. Drift has also attracted attention from capital and has received two rounds of financing. The seed round raised $3.8 million, with investment institutions including Multichain Capital and Jump, and in the Series A financing in October 2023, it raised $23.5 million, with the institution yet to be announced.
Core Mechanisms of Drift Protocol
Different from common on-chain derivative trading solutions represented by Hyperliquid and dYdX, Drift V2 adopts a hybrid liquidity mechanism, integrating and optimizing the two solutions, aiming to provide more collateral and reduce risks. In Drift Protocol V2, there are four types of liquidity providers that provide the best prices for traders when executing orders:
Just-in-Time (JIT) Auction Liquidity
When a user (Taker) submits a market order, it automatically triggers a personalized Dutch auction with specific start and end prices and duration. The auction forces market participants to compete to meet user demands at prices better than or equal to the current auction price. If there are no market makers participating after the initial window (about 5 seconds), users can complete the transaction on Drift's AMM.
JIT Auction is a supplementary liquidity mechanism that allows market makers (MM) to provide immediate liquidity. Through this Just-in-Time approach, traders can experience zero slippage in their transactions.
vAMM Liquidity
Drift's vAMM is the designated liquidity provider for trading. If a market order is not executed by JIT and meets the trigger price for vAMM execution, the trade will be executed by the vAMM pool.
In Drift V2, it includes Backstop AMM liquidity (BAL), where users can add liquidity to specific pools and receive a share of the acceptance fee. BAL further supplements vAMM liquidity, reduces slippage, and improves the execution quality of orders.
vAMM provides a continuous source of liquidity for all traders. Even without external market makers, Drift Protocol can support new markets without relying on external market makers to guide liquidity (although there is additional risk of immediately available unrealized P&L).
The protocol design also includes many safeguards, such as risk exposure limits, effective market making, income pool utilization, insurance fund rules, etc., to mitigate and isolate risks from individual markets. vAMM requires reliable price oracles for perpetual market spot reference assets. For example, Drift's SOL-PERP perpetual market will reference the SOL/USD spot oracle as a price reference and combine it with other channels to ensure the accuracy of quotes.
Decentralized Order Book Liquidity
Drift's decentralized order book is supported by Keeper Bot. Keeper bots are responsible for recording, storing, matching, and executing submitted limit orders. Each Keeper bot has its own off-chain order book. Orders are sorted based on attributes such as price, time, and position size. When an order reaches the trigger price, the Keeper submits the transaction to counter DAMM. In return, the Keeper receives transaction fees based on a mathematical formula.
If there are buy and sell orders with exactly the same parameters, Keepers can match them directly without going through vAMM, maximizing efficiency.
Market Making Vaults
Market Making Vaults are delta-neutral market-making and liquidity provisioning strategies. By integrating Circuit's Market Making Vaults, Drift Protocol further enhances liquidity and trading experience, and captures more revenue for liquidity providers.
This strategy generates returns unrelated to the overall market performance by hedging the price fluctuations of underlying assets. Users can deposit USDC into Vaults and earn returns based on the market-making activities executed by Circuit in Drift Protocol. Currently, the APY of Supercharger Vaults reaches 47.06%, and Turbocharger Vaults reach 36%.
Introduction to Drift Protocol Features
Perpetual Trading
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Open the website and log in using the Phantom wallet at https://app.drift.trade/.
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After logging in, you can enter the perpetual contract trading interface. First, you need to activate your account and deposit assets. Click "Depoist" on the page to activate your account. Activating an account requires a small amount of SOL.
- You can switch between the Pro and Lite versions of the page and set RPC and transaction gas settings through the lower-left corner.
- After depositing assets, you can select the trading pair, enter the price, and leverage to place an order. The maximum leverage ratio can currently reach 20x. The trading pairs include most mainstream currencies.
Spot Margin Trading
By selecting "Trade-Spot" in the upper-left menu on the page, you can enter the spot margin leverage trading page. Drift provides a maximum leverage ratio of 5x, and for stablecoins USDT-USDC, it provides a maximum leverage ratio of 10x.
By default, the margin is not enabled. Users who need to use leverage can enable the margin mode through settings. Before enabling the margin mode, you need to set up a sub-account. The funds in each sub-account are independent and will not affect the main account and other sub-accounts. The activated sub-account will be refunded when deleted.
Click the settings icon in the upper right corner of the page to enter the Settings page and select Margin/Leverage to make the settings.
After completing the settings, you can select the corresponding leverage ratio for margin trading.
Swap Trading
Drift Protocol also provides Swap spot trading through cooperation with Jupiter. Similarly, Swap trading can also provide a maximum leverage ratio of 5x and requires the opening of a sub-account.
Insurance Fund and Market Maker Vault
By depositing funds into the Insurance Fund, users can earn fees from perpetual trading, borrowing, and liquidation, ensuring the protocol's solvency. Pledgers can receive rewards from the income pool, and the current APR yield of USDC can reach around 37%.
The Market Maker Vault is a delta-neutral market-making and liquidity provisioning strategy provided by Circuit. It can significantly increase investors' yield, and the deposited funds have a 7-day redemption period.
Drift Draw Rewards
Drift Draw is a lottery activity where Takers who trade $1 can receive up to 10 tickets. A lottery is held every Monday at 2:00 PM UTC, and one of the three prize pools is randomly selected and allocated to the winning users. Three lucky users will be randomly selected for the highest prize, and another 30 users will receive special consolation prizes. Currently, the prize pool has a total prize money of up to $280,000.
Tokenomics of Drift Protocol
The main purpose of the DRIFT governance token is to give Drift users actual ownership of the protocol and empower them with rights such as speaking and voting in the future development of the Drift DAO. By distributing power and decision-making rights throughout the ecosystem instead of centralizing them, Drift ensures sustainable and healthy development with the most active participants.
The total supply of DRIFT is 1 billion, with 53% allocated to the community. Among them, 43% is used for ecosystem development and trading rewards, and 10% is used for Launchpad airdrops. 25% is allocated to protocol development, and 22% is allocated to protocol contributors.
On May 16, $DRIFT officially started its airdrop, distributing 120 million tokens to over 150,000 early users and supporters. Users can also deposit $DRIFT into the protocol as collateral. The airdrop deadline is August 17, 2024. The launch of $DRIFT has also received widespread attention from the industry, and its token $DRIFT has been listed on mainstream CEX exchanges such as Coinbase, Gate.io, KuCoin, and Huobi.
The Future Potential of Drift
The recovery and continued prosperity of the Solana ecosystem have brought more liquidity and users to the blockchain, as well as increased trading demand. According to data from Coingecko, 4 out of the top 10 DEXs are native DEXs in the Solana ecosystem, with Jupiter, Orca, and Raydium ranking first, third, and fourth, respectively. This indirectly reflects that on-chain transactions on Solana have surpassed ETH and become the most active public chain.
By adopting a hybrid liquidity mechanism, Drift Protocol has already demonstrated its enormous potential, achieving significant improvements in TVL, trading volume, and the number of users. Currently, Drift is the top-ranked derivative protocol in terms of TVL and trading volume on Solana. In the future, Drift is likely to become the liquidity layer for the entire Solana ecosystem, providing momentum for the ecosystem.
In addition, Drift's support for the Solana ecosystem is also very fast. Currently, popular coins in the Solana ecosystem, such as WIF, W, TNSR, and KMNO, can be traded on Drift. This also indirectly shows that Drift's support for popular coins in the Solana ecosystem is also very fast, which is a key factor in rapid user growth. With the arrival of the bull market, the cryptocurrency market will once again experience rapid development, which is also an important opportunity for Drift to achieve overtaking in the curve.
Conclusion
The bull market has just begun, and in the future, with the efficient and low-cost infrastructure of Solana, as well as active on-chain users and transactions, Drift will continue to capture more liquidity and trading demand, grow strongly with the entire ecosystem, and may even surpass EVM-based derivative protocols, but the future is yet to be known.
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