What is Vega Protocol? All You Need to Know About VEGA

Introduction

For traders seeking a permissionless and equitable marketplace, understanding how Vega Protocol operates is pivotal to achieving this vision. Vega Protocol introduces a unique dimension to DeFi derivative trading by establishing an open and trader-centric ecosystem and prioritizing the needs of its users. In this article, we will delve into the core principles, innovative features, and potential challenges that position Vega as a standout player in the crypto derivatives space.

However, to truly appreciate the significance of the Vega Protocol, it’s essential to start with the fundamental concept of derivatives, which forms the very foundation of what the Vega Protocol represents. Derivatives are the binding force that shapes Vega Protocol’s identity, and you can’t discuss Vega in isolation from derivatives. Our journey begins with the basics: derivatives.

What are Derivatives?

Source: Market Business News

As an investor looking to invest in a company’s stock, one of the important factor to consider is how to secure your investment against potential losses while leaving room for gains, that is one of the challenges derivatives solves. Derivatives serve a multitude of purposes, expanding beyond mere risk hedging. They help with risk aversion, allowing you to safeguard against significant downturns by establishing a minimum selling price or limiting downside risk. Additionally, derivatives play a crucial role in price discovery, offering insights into market sentiment and expectations that inform investment decisions.

Another feature of derivatives is speculation. You forecast that Stock A will be worth $50 by November. You enter into a derivative contract based on this projection. However, there’s another player, Seller B, who speculates that the stock’s price will drop. Consequently, Seller B signed a contract to sell at the agreed-upon price in November, anticipating a lower price. When November arrives, if the stock price has decreased, Seller B gains while you, Seller A, face a loss. This example underscores a critical aspect of derivatives: every transaction involves two sides: profit or loss.

Vega is not the first derivative platform attempting to solve these persistent problems; it’s crucial to recognise the significant contributions of existing derivative protocols within the crypto space. Platforms like Synthetix, dYdX, and Hegic have shone the torch on derivatives trading. These projects have thrived within the DeFi ecosystem, equipping crypto enthusiasts with powerful tools to hedge risks, make speculative bets on asset prices, and explore innovative ways to generate income.

The Economic Times defines derivative as a contract between two parties that derives its value/price from an underlying asset. The most common types of derivatives are futures, options, forwards, and swaps. These contracts allow you to establish an agreement today to buy or sell, for example, stocks, at a specific price in the future. It enables you to lock in a price, offering you certainty about the minimum amount you’ll either receive or have to pay when that future date arrives. Derivatives provide the means to navigate the uncertain waters of price fluctuations.

Now that we have established what derivatives are and how they function, it becomes clear why they are a fundamental component of the Vega Protocol. Essentially, Vega Protocol leverages the power of derivatives to offer traders and investors a unique and decentralised way to trade and manage financial products. Let’s delve into how the Vega Protocol harnesses the potential of derivatives to redefine decentralized derivatives trading.

What is Vega Protocol? Redefining Decentralized Derivative Trading

Source: Validatrium

Innovation often arises when deep thought is dedicated to solving complex problems; occasionally, this profound reasoning transforms into powerful ideas that challenge the status quo. Barney Mannerings, the founder of the Vega Protocol, undoubtedly devoted considerable thought to the groundbreaking proposition that Vega offers.

We have witnessed, time and again, the shortcomings of centralised exchanges when it comes to fostering truly open markets and facilitating efficient trading of derivatives. While centralised exchanges (CEXs) have been a fixture in the financial landscape for some time and are favoured by many traders, they are not without their share of challenges — challenges that cry out for a transformative solution. This is the premise upon which Vega Protocol was launched.

Vega Protocol serves as the core derivative layer for Web3, functioning as a decentralised exchange specializing in margining financial products and derivatives. It grants users the opportunity to partake in trading various assets within a decentralized, permissionless, and easily customizable environment. Leveraging a second-layer proof-of-stake blockchain infrastructure built on the CometBFT (formerly Tendermint) framework, Vega’s network architecture is meticulously optimized for speed, affordability, and liquidity.

Within the Vega ecosystem, users enjoy the flexibility to create and tailor markets to their preferences, gaining access to an extensive array of financial instruments encompassing spot swaps, futures, options, and perpetual swaps. By exploring the persistent challenges Vega successfully tackles, we can truly appreciate its groundbreaking approach, effectively resolving the long-standing issues that have plagued derivative trading prior to the advent of the protocol.

Source: Vega Protocol Blog

Current Development, Prospects and Challenges

Vega Protocol launched live markets on its Alpha Mainnet, allowing trading without gas fees and introducing a comprehensive limit order book. Market makers and validators play essential roles in this phase, while on-chain governance empowers VEGA token holders to propose markets.

The latest release deployed by the validators upgraded the protocol to v0.72.14 and features stop orders, iceberg orders, and successor markets, along with a number of smaller fixes and improvements.

Future Plans

Cosmic Elevator is the protocol’s next development stage; the name is based on a team custom of naming releases after the Street Fighter stages (where the character shares a name with the project). Vega aims to enhance its capabilities further. Key highlights include the flexible Ethereum Oracle Framework, perpetual contracts, an on-chain referral programme, volume discounts, on-chain rewards, governance-initiated transfers, and improvements to the liquidity SLA protocol. This development represents a significant step in Vega’s evolution towards decentralization and user-focused innovation.

Challenges

Vega Protocol grapples with several challenges in its value proposition, particularly in the context of well-established industry leaders like centralised exchanges such as Gate.io and decentralized counterparts like dYdX. One of the primary obstacles on this journey is achieving widespread adoption.

Another potential challenge is regulatory compliance. Vega is a global platform, and it is important that it complies with all relevant regulations. However, the regulatory landscape for decentralized exchanges is still evolving, and it can be difficult to ensure compliance with all applicable laws and regulations.

Vega Protocol Vs dYdX

Vega Protocol and dYdX are two prominent platforms in the decentralized finance (DeFi) space, each offering unique features and capabilities that cater to the growing demands of crypto traders and investors. In this comparison, we will delve into the key features/differences between Vega Protocol and dYdX, providing you with valuable insights to make informed decisions.

How Does Vega Protocol Work?

Vega’s emergence aims to foster the growth of decentralized finance, advance its innovation, and fill the large gaps centralized finance has created. Vega Protocol proposes three major solutions: the cost of trading, permission market creation, and providing liquidity incentives.

Cost of Trading: The use of Automated Margin Calculation System

Vega’s margin calculation system plays a crucial role in solving the problem of cost-efficiency and risk management in financial markets. Vega uses an automated margin calculation system to efficiently determine margin requirements for traders and continuously recalculates the margin requirements after every market price move, ensuring that margin levels are appropriate, even in highly volatile markets. By automating this process, Vega reduces the need for costly intermediaries, making trading more cost-effective and accessible for a broader range of participants.

Permission Market Creation

Vega Protocol solves the problem of permission market creation by enabling permissionless innovation through its “Smart Products.” These are like smart contracts designed to allow anyone to create various financial products and propose new markets. Whereas in traditional markets, creating new products often requires approval from central authorities. Vega removes this permission barrier, allowing just about anyone to participate. Vega also decentralizes market decision-making by allowing market makers to be owner-operators of markets, reducing the dependence on centralized authorities for market creation.

Providing Liquidity Incentives

Vega addresses key challenges associated with liquidity provision and incentives for market participants. One of Vega’s innovative features is the distribution of liquidity rewards. These rewards are designed to benefit both market makers and token holders who support the network. Market makers, who commit to providing liquidity to Vega’s markets, are incentivized through a share of the liquidity value. This commitment is more than just a promise; it is secured by a financial bond, reducing the reliance on traditional offline liquidity providers.

Source: Edenblock

In addition to rewarding market makers, Vega introduces a fee structure that dynamically adjusts based on the market’s liquidity value. This means that price takers, those who access liquidity, pay a fee that reflects the real-time market conditions. By aligning fees with market dynamics, Vega encourages the efficient allocation of market-making resources and ensures that liquidity providers are fairly compensated for their role in the ecosystem.

The combination of liquidity rewards and dynamic fees creates a marketplace for liquidity within the Vega network. This marketplace allows market makers to compete and thrive based on their ability to provide liquidity where it is most needed. It also benefits traders by ensuring that they can access liquidity at a fair and competitive cost.

Vega Protocol Ecosystem

The architectural landscape that enables the Vega Protocol’s objectives includes the following components:

Vega Blockchain

Vega was designed to be chain agnostic; it connects to and integrates with the Ethereum network via the Ethereum bridge, allowing collateral to be bridged over from other chains and traded on Vega.

Vega blockchain is a custom-built proof-of-stake (PoS) blockchain, relying on validator nodes to run the software and oversee its markets. PoS consensus mechanism ensures security, performance, scalability, and flexibility, and token holders (stakers) can decide which validators they trust to manage the network by delegating their tokens to them. Trading fees are used as a reward for validators, token holders, and liquidity providers for their involvement.

Vega protocol forms a top-level conceptual layer of the Vega framework, encompassing all aspects within a physical Vega network, including markets, products, participants, and governance actions. Governance transactions primarily occur at this level, where network parameters and collateral balances are maintained.

Vega Markets

Vega’s markets serve as the cornerstone of the Vega ecosystem, offering a platform that empowers users to engage in trading activities and create diverse financial products with ease. Vega’s approach to markets aims to strike a delicate balance between structure and flexibility. This involves providing a standardized framework that ensures reliability and predictability while allowing for the evolution and expansion of various markets and product types. The goal is to create a user-friendly and transparent system where anyone can participate and transactions are processed efficiently.

Classification of Vega Markets

One distinctive feature of Vega markets is their classification into two primary categories: open markets and ad-hoc or OTC markets. Open markets, as the name suggests, are accessible to any participant who meets collateral requirements. They resemble traditional public markets found in sectors like stocks and foreign exchange. Open markets operate using mechanisms like limit order books, and promoting fair and competitive trading conditions. However, the creation of open markets goes through a governance process to maintain quality and security, with risk models and parameters subject to careful evaluation.

In contrast, ad-hoc or OTC markets offer participants more flexibility. These markets can be created on demand by individuals seeking to initiate a trade, whether based on pre-agreed terms offline or through the Vega protocol’s price discovery process. This adaptability allows users to design and launch markets tailored to their specific requirements, fostering innovation within the ecosystem. Vega’s market structure is layered. It begins at the product layer, where users have the creative freedom to pseudonymously create various market types, ranging from conventional spot swaps, futures, options, and perpetual swaps to entirely novel and customized markets.

Users define critical elements such as how products are valued and when settlement flows are calculated. They also have the flexibility to select trading modes, whether open continuous trading or private over-the-counter (OTC) transactions. Moving up the layers, the instrument layer comes into play. An instrument essentially combines a product with all its required parameters. These instruments are uniquely identified and cannot be duplicated within the Vega network.

Products

Products define how trades behave within the Vega Protocol. They specify when and how to calculate settlement cash flows and include metadata to provide information about product parameters. Products can also incorporate external data sources, such as prices from other markets or data from oracles, to enhance their functionality. The protocol defines interaction points with products but doesn’t control their internal functionality, allowing for product evolution within the market framework.

Instruments

Instruments represent a combination of a product and all its required parameters. This combination uniquely identifies them and cannot be duplicated within the Vega network. Tradable instruments, a subset of instruments, include all necessary data for Vega to execute trades, calculate margins, and perform settlements. To make an instrument tradable within Vega’s markets, it must be paired with one of Vega’s risk models, along with the necessary risk model parameters. Validated tradable instruments are essential for initiating trade and creating markets.

Vega Wallets

Vega wallets allow participants to connect to Vega dApps securely, deposit funds, and approve or reject transactions with the Vega wallet. Participants can easily manage multiple key pairs in one place with the Vega Wallet extension, or for full multi-wallet functionality, they can download the Vega Desktop Wallet.

Wendy

Wendy is a set of low-overhead protocols developed to prevent validators from showing bias towards specific transactions, with a primary emphasis on maintaining fairness in the relative order of transactions within a blockchain. Wendy can be implemented as an additional feature for existing blockchains, regardless of their specific security assumptions, and offers flexibility in applying fairness concepts to subsets of transactions, enabling multiple independent fair markets to operate on the same blockchain.

Governance

Vega operates a democratic government system where decisions are made. Decisions on the Vega network are on-chain, with token holders creating proposals that other token holders vote to approve or reject. This is how the protocol powers the creation of DeFi products.

Getting started is easy. You can start by proposing new cash-settled futures markets or suggesting modifications to an ERC-20 asset for collateral purposes, among other possibilities. After making your proposal, it’s up for consideration by the token holders, who will ultimately decide its fate through voting. To participate in this process, you’ll need VEGA tokens and a Vega wallet to securely sign off on transactions.

What is VEGA Token?

Owning VEGA tokens not only grants participants a significant role within the ecosystem but also empowers them to influence critical governance decisions related to new market approvals, exchanges, and market parameters. VEGA tokens serve a dual purpose, acting not only as governance tokens but also as valuable assets for staking.

Holders have the opportunity to stake their tokens to operate validator nodes on the network, opening up the possibility to earn fees from traders through both direct staking and delegation processes. This multifaceted utility of VEGA tokens enhances their value and utility within the Vega ecosystem.

VEGA tokens are not needed for gas fees, allowing easy access to the Vega Protocol. They can be staked with validators for infrastructure fee rewards and wield governance power for market and network decisions. Trading fees affect only price takers, fostering liquidity. VEGA has a fixed supply of 64,999,723 tokens. The cap was implemented to ensure economic stability and safeguard the interests of token holders.

Token Allocation

The token distribution includes:

• Team–29.7%
• community–26.3%
• Seed round–23.5%
• strategic–11%
• Private sale–2%
• Public sale on coinlist option 1–2.5%
• Public sale on coinlist option 2–2.5%
• Public sale on coinlist option 3–2.5%

Source: Coinmarketcap

Is Vega Protocol (VEGA) a Good lnvestment?

With the launch of Cosmic Elevator underway, which comes with new features, there is anticipation of an increase in trading volume, potentially impacting the price movement. The sustainability of this forecasted increase in trading volume is something we will have to watch out for.

Another way to measure a project’s reliability is its practical use case. In the context of the Vega Protocol, its mission to establish a bridge that champions fairness for traders has garnered substantial acclaim. This innovative approach has earned recognition and support within the crypto community, indicating that Vega is on a promising trajectory. Nevertheless, investing in its native token ultimately rests on individual judgment. Remember, before making any investment moves, ensure you’ve conducted thorough due diligence and seek expert guidance.

How to Own VEGA

You can buy VEGA from notable centralized exchanges. For example, Gate.io offers traders different trading pairs: VEGA/USDT and VEGA/ETH. To own the token, create a Gate.io account, and complete the registration process. Also, you need to fund your spot trading wallet and go through the steps to buy VEGA.

Highlights

Vega Protocol Achieves $600+ Million Trading Volume Milestone in USDT

Vega Protocol has recently celebrated a significant milestone, surpassing a total trading volume of over $600 million in USDT. This achievement underscores the growing adoption of this derivatives platform, driven by the appeal of gas fee-free trading and a range of other features highlighted in the accompanying article.

Launch of Vega’s Alpha Mainnet

A few months ago, Vega launched its alpha mainnet. Users can now trade on live markets without worrying about gas fees, while market makers can contribute liquidity and earn fees. Community members can propose changes, while validators play a crucial role in network security.

Take Action on VEGA

Check out VEGA price today and start trading your favorite currency pairs:

• VEGA/USDT
• VEGA/ETH