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Written By: Ian Lee
Edited By: Charmyn Ho
At a Glance
In this series, we take a look at the latest news, developments and innovations within the ever-changing decentralized finance (DeFi) space. We will dive deep into the nitty gritty details to better understand how protocols within the DeFi space work, the problems plaguing the ecosystem, as well as how builders intend to overcome them.
Vela Exchange is a decentralized, fully on-chain order book exchange that is launching on Arbitrum. The exchange will support both spot and perpetual trading, as well as a decentralized peer-to-peer (P2P) over-the-counter (OTC) trading platform for both private and public trading.
The fall of FTX and the resulting ongoing contagion has led to a shift in focus onto order book decentralized exchanges (DEXs). This comes as a result of investors looking to mitigate risks of centralized exchanges (CEXs) potentially being insolvent. Thus in today’s quick dive, we take a look at Vela Exchange, an order book DEX launching soon on Arbitrum.
Formerly Dexpools, Vela Exchange is a decentralized, fully on-chain order book exchange that is launching on Arbitrum. The exchange will support both spot and perpetual trading, as well as a decentralized peer-to-peer (P2P) over-the-counter (OTC) trading platform for both private and public trading.
As of the time of writing, Vela Exchange just concluded its private alpha testing stage and is preparing for the launch of its public beta.
Vela Exchange was founded by Travis Skweres and Dan Peng. Both founders have had ample experience in the tech and consulting industries and met at BCG. Skewres has been involved in the cryptocurrency space since 2012 and founded Portal Finance which has since been acquired by Coinbase. The rest of the team and advisory board come from teams such as Balancer, Black Rock, BCG, and Polygon.
Source: Vela Exchange
In terms of backers, the team has raised ~$2.1 million from various funding rounds and has strategic partnerships with Big Brain Holdings, Jade Protocol, Magnus Capital, Orange Dao, and Quantstamp.
As the protocol is still in development, not much technical information has been released. Thus, the following is based on public information from their litepaper.
Vela Exchange will have three main products:
Perpetual Exchange — Fully on-chain order book perpetual exchange where users create positions against synthetic assets with up to 30x leverage. Users deposit stablecoins such as USDC as collateral.
Spot Exchange — Fully on-chain order book exchange where users can trade assets depending on available spot markets
OTC P2P Platform — Decentralized P2P OTC trading platform where users can trade assets publicly or privately to avoid slippage or frontrunning. This was the original product when Vela Exchange was known as Dexpools.
VELA is the utility token of Vela Exchange. eVELA (escrowed VELA) is non-transferable and can be unlocked by staking into a vesting contract, which unlocks the same amount of VELA tokens on a linear vesting period of one year. eVELA can also be staked to earn protocol rewards, as explained below (separate from staking into the vesting contract to unlock VELA tokens).
Source: Vela Exhange
Both VELA and eVELA can be staked to earn a share of protocol fees as rewards, both tokens can also be staked to unlock discounted trading fees. Rewards are distributed based on the total number of VELA and eVELA that are staked. Staked VELA has a lockup period of two weeks. It is important to note that the user’s entire staked amount does not earn rewards during the un-staking period of any given amount of VELA tokens. For example, Bob has 10,000 VELA staked and earning rewards. Bob decides to un-stake 4,000 VELA tokens. For the next two weeks while the 4,000 VELA tokens are un-staking, Bob does not earn any rewards — even from his remaining tokens that are still staked.
The team plans to implement a buyback model for VELA, which will happen over two-week periods. The buyback will be based on a percentage of fees generated from both spot (30%) and perpetual trading (20%). VELA tokens bought back will be reserved for eVELA rewards that will be distributed to VELA and VLP stakers, eliminating the need for inflationary tokenomics to incentivize liquidity.
Source: Vela Exchange
VLP is the token that users receive for providing liquidity to the protocol. Users can deposit stablecoins such as USDC, USDT, or DAI, and receive VLP tokens that represent their stake in the pool. VLP holders will earn 50% of the fees generated by the perpetual exchange. Users can also stake VLP to earn an additional 10% of the total fees generated by the perpetual exchange in the form of eVELA. This is not unlike GMX’s GLP liquidity model, except that on Vela Exchange, only stablecoins are accepted as liquidity.
vUSD is the token which represents the user’s stablecoin collateral. Users deposit stablecoins like USDC, USDT, and DAI into VELA, and receive vUSD at a 1:1 ratio to be able to trade margin on the perpetual exchange.
Fees on the perpetual exchange will be a flat 8 bps closing and opening a position. As mentioned previously, VELA/eVELA stakers can earn fee discounts, depending on the amount of VELA/eVELA tokens staked. Discounts start from 2% and can increase up to 50%.
Source: Vela Exchange
Source: Vela Exchange
The funding rate on the perpetual exchange has a fixed interest rate of 0.01% per funding interval of 8 hours plus a premium rate that depends on the difference in price between the index price and perpetual market. Thus, if the perpetual price is more than spot price, longs pay the shorts and vice versa.
The perpetual exchange also has borrowing fees to ensure sufficient liquidity. Users pay a borrowing fee for margin trading upon settlement of their positions. The borrowing fee is calculated on an hourly basis, and is equivalent to the borrowed amount of collateral divided by the total amount of liquidity available in the pool times 0.01%.
VELA will have a total supply of 100 million tokens. As of the time of writing, the protocol’s token is in the form of DXP, which is an ERC-20 token on Ethereum. Upon launch, DXP holders will be able to claim VELA tokens on Arbitrum on a 1:1 basis.
Community Incentives — 35% of the total supply will be set aside for community incentives and will be limited to 5% usage per year. These funds will be used for incentives like rewards for liquidity providers, market makers, beta testers, and other incentives.
Growth Fund — 25% of the supply will be reserved for future grants, DEX liquidity, market maker allocation for CEXs, and the liquidity provision incentive program.
Marketing — 10% of the supply will be used for marketing rewards such as airdrops, KOL partnerships, and other partnership efforts. These funds are limited to a 2% usage per year.
Core Team — 10% of the supply goes to the core team and will be on a 6 month cliff with linear vesting for 36 months.
DXP Allocation — 7% of the supply are in the form of DXP tokens as follows:
Private Sale: 4,238,000 DXP; 10% unlocked at launch (TGE), 3 month cliff, 12 months linear vesting
IDO: 1,000,000 DXP; 25% TGE, 8 months linear vesting
Copperlaunch LBP: 1,688,000 DXP, no vesting
Team Growth Reserves — 5% of the supply will be used for recruiting incentives. New contracts will have a 6 month cliff from date of hire and a minimum vesting period of 24 months.
Investors — 5% of the supply will be allocated for VELA investment rounds in Q4 of 2022.
Advisors — 3% of the supply are allocated to advisors and are on a 6 month cliff with linear vesting for 18 months.
Note: All tokens with vesting have begun vesting since April 8, 2022 unless otherwise stated.
Vela Exchange is one of the latest protocols to step into the growing DEX category. Its competitors — protocols like GMX, GNS, Injective’s Helix, and Kujira’s FIN that use order book or synthetic based trade execution models, are gaining traction in a space that is currently dominated by automated market maker (AMM) based holders like Uniswap, Sushiswap and Balancer. We see this happening due to the similarity in trading experience that order book based DEXs provide to that of CEXs. This also points to a shift in priorities for investors who have begun to look for protocols that not only provide great UX and CEX-like functionality, but also provide investors with sustainable yield from distribution of protocol revenue. Not to mention the recent FTX implosion has led to an exodus of assets and trading activity from CEXs to DEXs. Although the above count as tailwinds in Vela Exchange’s favor, the highly competitive landscape means that the protocol must stand out against the crowd by providing best-in-class UX, CEX-like functionality, and security.
A major issue for DEXs is the ability to attract liquidity. Failing to do so results in slow execution and high spreads on order book DEXs and high slippage on AMM DEXs. AMMs like Uniswap make use of inflationary tokenomics to incentivize liquidity provision, while order book based DEXs typically do the same by offering incentives to users who provide liquidity (GMX’s GLP, or dYdX’s market maker rewards). Vela Exchange, being an order book DEX, makes use of GMX’s GLP incentivized liquidity model as well as offer incentives for market makers, thus ensuring that the protocol can get off the ground running in terms of attracting liquidity. However, unlike dYdX in its current state, VELA is non-inflationary and can be sustained by protocol revenue in the long-term.
As of the time of writing, Vela Exchange is preparing to kickstart its public beta and are expected to launch with its perpetual exchange platform, with its spot exchange to launch once its orderbook engine is complete. Thus, we look forward to seeing developments and progress from Vela Exchange as it moves closer to launch.
Disclosure: Members of Bybit may be invested in some or all of the tokens and projects mentioned within the following article. This statement discloses any conflict of interest and is not a recommendation to purchase any token or participate in any of the mentioned ecosystems. This content is purely for educational purposes only, and should not in any way be construed as investment advice. Please exercise caution and practice your own due diligence if you are planning to partake in any of these projects in any way. The views expressed in this article are that of the author(s) and do not represent the views of Bybit.