Vela Exchange - the Emerging Player in the Arbitrum Derivatives market

The application of decentralized exchanges has also risen along with the increasingly mature Layer 2, coupled with the public’s doubts about centralized exchanges recently. When it comes to new Defi protocols, we have to mention GMX, which has made a breakthrough in the derivatives market and has become the new favorite on the Arbitrum chain. Its TVL has reached $600 million (data source: DefiLlama), and the price of GMX token has reached $85.07, an all-time high (data source: Coingecko).

Actually, besides GMX, there are lots of different protocols competing for this market share, and what will be introduced in this article is Vela Exchange, also a derivatives protocol on the Arbitrum chain. They just started public beta testing in February 2023 and got more than $10 million locked up in just 24 hours, showing the extraordinary popularity of a super-emerging star.

Defillama: https://defillama.com/protocol/vela-exchange

Defillama: https://defillama.com/protocol/vela-exchange

Introduction to Vela Exchange

Vela Exchange is a decentralized exchange protocol that provides a basket of assets and services for users to trade, including spot and futures trading of cryptocurrencies, over-the-counter trading (OTC), foreign exchange trading, and market value trading to be launched etc. It aims to provide a fair, transparent, and self-custodial asset protocol for users while creating a low-fee, high-efficiency platform. The team members of the platform have rich experience in development and are mainly from the Dexpools (decentralized OTC trading protocol) team.

Trading assets include:

• Cryptocurrencies (1x – 30x leverage)

a.BTC/USD

b.ETH/USD

c.DOGE/USD

• Forex (1x – 100x leverage)

a.EUR/USD

b.GBP/USD

c.USD/JPY

• To be launched: Token Market Cap - Market Cap of USDC/USD (1x - 30x leverage)

Price source of the Asset

Different from GMX which uses ChainLink to provide instant prices for oracles, Vela Exchange uses data from centralized exchanges (including Kraken, Bitfinex and Coinbase) and other on-chain data to obtain real-time prices of assets to achieve faster real-time data updates. All this can also be queried from the contract address. Its data is updated every minute or when the cryptocurrency price moves more than 0.1% (0.02% for Forex).

Trading fees and other fees (cryptocurrency)

• Fee for opening and closing positions: 0.1%
• Funding rate: dissimilar to the more familiar centralized platform Bybit, the funding rate of Vela Exchange is calculated every moment after you open a position, and it will be automatically deducted from your position no matter whether you open a long or a short position.

But it is worth noting that if users stake a certain amount of $VELA tokens, they can enjoy discounts on trading fees.

The fees recovered by the platform will be distributed according to the following ratio:

50% → $VLP Liquidity Pool (in USDC)

10% → $VLP stakers (in eVELA)

5% → $VELA stakers (in USDC)

10% → $VELA stakers (in eVELA)

25% → project funding

Unique points of user experience

• Allow users to set their own slippage indicators
• Allow users to change the amount of collateral in a position at any time, so as to change the liquidation price or free up principal
• Allow users to increase the leverage on open positions at any time, but there will be a one-minute delay to avoid front-running
• Cooperating with other platforms, it allows users to exchange fiat and trading currencies at any time, but KYC may be required on other cooperative platforms
• Users can earn 20% of the trading fees in the form of USDC from users they invite

Token economics

Similar to GMX, Vela Exchange adopts a dual token economy - $VELA and $VLP:

$VELA and $esVELA

Users can obtain $VELA from other decentralized exchanges or from staking. By staking $VELA or $esVELA, users get the following rewards:

1. Trading fee discount
2. Earn $esVELA from buybacks of $VELA (equal to 10% contract fees)
3. Earn 5% contract fees in $USDC
4. To be launched: Earn 40% spot fee, 30% spot fee for $VELA repurchase to distribute with $esVELA, and 30% OTC trading fee, etc.

Unlocking of $esVELA:

The obtained $esVELA can be converted to $VELA at a 1:1 ratio, but it will take six months to be unlocked.

$VLP

$VLP is mainly designed to provide liquidity to Vela Exchange. Users can stake $USDC to mint $VLP to earn trading fees on the platform. Users can also exchange VLP coins back to USDC at any time.

Similar to $GLP, holding $VLP is like betting on the dealer. When other traders lose money, $VLP will rise in value and vice versa. And users who stake $VLP can get 60% of platform trading fees (10% of which will be distributed in the form of eVELA, and the rest will directly provide value for VLP coins).

The price of $VLP is subject to the platform’s fee revenue, other traders’ gains or losses, and changes in the vault:

Rewarded tokens

• $VLP value = trading fee income + platform trader’s loss + platform trader’s forced liquidation value —> all into the vault
• $EsVELA: Obtained via staking VLP or VELA
  1. it takes a while to be fully unlocked
  2. A certain percentage of {trading fee income + platform trader’s loss + platform trader’s forced liquidation value} will be used to purchase VELA for distribution.
• USDC：
  1. Refer new users to earn a portion of their trading fees
  2. VELA or eVELA stakers can obtain part of the revenue rewards on the trading platform in the form of USDC
• Platform revenue distribution
  1. 55% in USDC
     1. 5% for $VELA or $esVELA stakers
     2. 50% for $VLP holders
  2. 20% in $esVELA (via buyback VELA)
     1. 10% for VELA or esVELA stakers
     2. 10% for VLP stakers
  3. 25% in vault

Vela Exchange VS GMX

*data date: Feb 22, 2023

conclusion

The above analysis shows that Vela Exchange is similar to GMX in terms of functions. GMX is slightly more centralized than GMX in such aspects as using only USDC (centralized stable currency) as platform collateral, using centralized exchanges as oracles, and orders executed by team contracts, etc. However, these also bring benefits to the protocol, for example, faster and more efficient price update rates and price order execution speeds, which are extremely crucial in the derivatives market.

Regarding reward distribution, Vela Exchange distributes fewer staking rewards than GMX in proportion, and it focuses more on the growth and marketing of the platform. Certainly, Vela Exchange is still in a very early development stage (open beta in February 2023), and it’s still well worth watching them in action. Vela has an ambitious plan to expand its market, which indicates that it will launch more activities (such as trading competitions) in the future to seize more market share. Retail investors can also participate in it, and may also get airdrops!