Vertex is a cross-margined decentralized exchange (DEX) protocol offering spot, perpetuals, and an integrated money market bundled into one vertically integrated application on Arbitrum.
Vertex is driven by a hybrid unified central limit order book (CLOB) and integrated automated market maker (AMM), whose liquidity is augmented as positions from pairwise LP markets populate the order book. Vertex offers minimal Gas fees and MEV, due to the batched transaction and optimistic rollup model of the underlying Arbitrum layer two (L2), where Vertex’s smart contracts control the risk engine and core products.
In an interview with Vertex’s co-founder Darius Tabatabai, we talked about the vision behind Vertex, its public mainnet launch, its wide array of features, its future roadmap, and much more.
1. What was the vision behind creating Vertex? What problem does the platform aim to solve?
Vertex’s mission is to provide the best possible decentralized trading experience. Today’s DeFi is fragmented, capital inefficient, unfamiliar, intimidating, and inconvenient. Decentralized protocols need to reduce the barrier for entry for mainstream users if they want to compete with centralized exchanges (CEXs).
Vertex approaches this problem with its vertically integrated exchange – bundling spot, perpetuals, and money markets with unified cross-margin. Paired with a hybrid order book-AMM design, Vertex can achieve low-latency performance competitive with CEXs while still offering the benefits of passive liquidity and self-custody of on-chain DeFi apps – all with a more capital-efficient design.
Pairwise LPs from the AMM populate the order book, fusing the advantages of the market efficiency and price discovery mechanics of order books with the popularity of LP’ing and swapping the long-tail of DeFi assets on-chain.
2. What makes Vertex stand out from other DEXs in the crypto space?
There are a few notable aspects of Vertex separating it from a crowded DEX field.
First, Vertex provides an all-in-one DeFi experience by integrating three core primitives of DeFi into a single application. Users can trade by going long/short crypto assets with spot or perpetuals, borrow/lend with the embedded money market, or passive LP market pairs with the on-chain AMM. This reduces the transaction costs of switching between siloed DeFi apps while providing a more capital-efficient exchange platform for various types of users.
Second, Vertex’s unique design makes it well-placed to evolve into a liquidity hub for Arbitrum and eventually for much of DeFi. Specifically, the benefits of bundling multiple products into a unified margin engine help to reduce margin requirements and provide more capital flexibility in expressing a position in the market. The API/SDK also enables HFT-friendly trading, while allowing composable DeFi apps to utilize the low fees and low-latency performance of the DEX. Overall, the experience is intended to feel more like trading on a CEX than a conventional DEX where other DeFi applications can utilize its architecture.
Third, Vertex’s Hybrid Orderbook-AMM model aids the price discovery process in a way not characteristic of most incumbent DEXs. For example, while the order book supports low-latency order matching, the AMM ensures censorship resistance while supporting long-tail assets on-chain. Liquidity from both the order book and AMM is fused together to bridge the gap between trade-offs often seen between central-limit order book exchanges (CLOBs) and AMMs.
With the sequencer order book, Vertex can scale liquidity more effectively while still adding long-tail DeFi asset support with a lower fee model and better liquidity.
3. How will the platform’s public mainnet launch on Arbitrum propel Vertex forward in the crypto ecosystem?
Our primary KPI is volume. The public mainnet launch near the end of April was the ultimate test for our vision, and we’ve done some impressive volume in the roughly 3 weeks since then, with our highest 24-hour volume of over $60 million in aggregate across only 4 total spot and perpetual pairs. Naturally, there’s always more to do and improve upon (and more data to populate), but we’re confident the upcoming roadmap will help get us to where we want to go.
As more capital flows into Arbitrum, Vertex is aiming to capture a significant portion of the market share for trading on Ethereum. Much of the effort related to manifesting the long-term goals of Vertex includes helping to build a composable ecosystem around Vertex (e.g., delta-neutral vaults, options, etc.), releasing a variety of features that users want when they trade on an exchange (either CEX or DEX), optimizing the product, and scaling liquidity to a place where Vertex is the preferred trading venue for Ethereum users.
4. Can you elaborate on the“off-chain” programming used by Vertex to speed up transactions?
Absolutely, this is a good question. Vertex uses an off-chain sequencer that hosts the order book and matching engine. The sequencer provides a 15 – 30 millisecond latency. This is the time it takes for a market order to be filled after placing it. This speed is comparable to that of most centralized exchanges. In comparison, the latency of on-chain DEXs will usually be a function of the underlying blockchain’s block time. No blockchains have block times of 30 milliseconds, so Vertex’s sequencer makes it incredibly fast.
Speed isn’t the only utility of the sequencer, however. Automated traders like institutional market makers and high-frequency trading firms can connect to the sequencer via the API or SDK. They can quote limit orders to provide deep liquidity to the exchange and execute sub-second arbitrage trades to ensure price consistency with other trading venues. Deep liquidity and price consistency are very important functions in markets. Together, they promote better price discovery.
The sequencer also contains important safeguards where the core functions of a DEX remain housed on-chain on Arbitrum. For example, all of Vertex’s core product logic, liquidations, and custody are controlled on-chain similar to other DEXs. The sequencer never takes custody of
assets nor can it forge transactions or stop trading and withdrawals. Vertex preserves the advantages of self-custody and on-chain settlement.
If the sequencer were to ever go down, the protocol reverts to its default state, known as “Slo-Mo” mode, which is just the on-chain AMM without the order book.
It’s important to note that while the sequencer is off-chain, it can also be decentralized over time by implementing a distributed network of sequencers controlled by the Vertex DAO, which is the plan once the DAO launches.
5. How does the Hybrid Orderbook-AMM Design maximize the performance of Vertex?
The Hybrid Orderbook-AMM design improves performance in two primary ways, one of which was alluded to earlier: the ability to fuse the low-latency and market efficiency mechanics of an off-chain order book with the passive liquidity and self-custody of the on-chain AMM.
The second way is a bit more nuanced and revolves around miner extractable value (MEV). Basically, on Ethereum’s layer one, validators that slot transactions into new blocks can prioritize trade flow through their ability to include, exclude, or re-order transactions within the blocks they mine. The amount of profit that miners can make via such opportunities is the MEV.
The value extracted from such maneuvers has become lucrative, and it’s generally considered a zero-sum practice that can produce toxic flow on-chain – mostly for retail users who may be unknowingly front-run by MEV bots on potentially profitable transactions. This “extracts” value from users at their expense, with the MEV operator profiting.
On-chain order book DEXs are also vulnerable to MEV, where on-chain activity is visible to a “Dark Forest” of bots which extract value from transaction re-ordering, exclusion, or inclusion. Such bots are becoming increasingly commonplace.
On Vertex, the existence of the off-chain order book enables trades to be processed on a first-in-first-out (FIFO) basis without exposure to on-chain MEV bots. Additionally, since the sequencer operates on a millisecond latency timescale, it becomes more difficult to profit from MEV since front-running compared to the longer block time of Ethereum’s layer one – reducing the incentive for MEV on the Vertex order book.
Comparatively, on-chain order books built to be MEV-resistant frequently use something called frequent batch auctions (FBA), which forces all prices to be uniform on a discrete basis. FBA’s weakness is that having all trades occur at the same price removes the bid-ask spread. A market maker’s profit comes from the bid-ask spread, so FBA basically disincentivizes liquidity provision. The result is of course lower liquidity and higher volatility.
Reasoning about the problem of MEV is difficult, and it’s a fascinating area of ongoing research. Generally, Vertex’s design seeks to minimize the value extracted from users.
6. What benefits does Vertex’s cross-margin design give the users in terms of effective portfolio management?
The simple answer is that cross-margin lets you do a lot more with your capital. It helps reduce margin requirements, optimize risk/reward ratios, and reduce the risk of single-position liquidation. Vertex’s unified cross-margin allows for deposits, PnL, and positions to contribute to an account’s margin.
For example, if you have 1 wBTC, you should be able to short 1 wBTC perpetual with minimal impact on your remaining capital to trade since the positions offset each other, where the redundancy is automatically recognized by the protocol. This is opposed to isolated margin, where the 1 wBTC perpetual short position would require additional margin on top of the 1 wBTC spot holding of the user.
7. Talk to us about the vertically-integrated spot and perpetual features offered by the platform.
Spot and perpetuals are both tradable on Vertex. But what’s really special is that the two markets are integrated with a money market that facilitates leveraged spot positions via borrowing along with the passive yield on positions via lending.
All unrealized PnL and other asset values are automatically counted towards margin requirements for any trade that uses leverage. The three integrated markets– spot, perps, and money market– enable a capital efficiency previously uncommon in DeFi.
8. How does Vertex aim to play an important role in the financial system of the future?
We believe more trading will coalesce on Vertex as people see the value of a vertically integrated DEX and the correlated advantages of maximizing capital efficiency without sacrificing the low-latency performance characteristic of CEXs.
9. What lies ahead on Vertex’s future roadmap?
We’re currently focused on incorporating user feedback, improving the front end, adding new features like one-click trading (including trigger orders), and listing new assets for people to trade and use as collateral.
We’ve kept mum about some of the upcoming features and app upgrades since launch besides the above, but there are some exciting releases on the near-term horizon that should generate considerable noise amongst seasoned traders and retail users alike.
For more information on Vertex, please check out their official website.
Disclaimer: This is a paid post and should not be treated as news/advice.