Apr 17, 2020
MCDEX’s Perpetual Contracts to Leverage Chainlink Oracles for Index Prices
DeFi is a promising new financial market supported by a new set of infrastructure that redefines how trust is administered within value exchange. The DeFi ecosystem is continually expanding this new trust model into new markets, moving from crowdfunding services and decentralized exchanges to collateralized stablecoins and more complex derivatives products.
MCDEX has closely monitored DeFi’s changing dynamics and identified a large market demand for improved infrastructure in decentralized derivatives. To fill this critical market need, MCDEX set out to build DeFi’s best derivatives trading platform by developing decentralized Perpetual Contracts. MCDEX’s first Perpetual Contract, ETH-PERP, was recently launched live on the Ethereum mainnet with the following features:
- Deribit-like continuous funding rate
- Uniswap-like Automated Market Maker (AMM) to Perpetual contracts
By running an on-chain AMM and off-chain order book, the Perpetual Contract has two trading pages. Users can trade with the AMM, which is fully decentralized, simple, and intuitive; or trade with the Order book, which is similar to Perpetual Contracts on centralized exchanges.
With the vision of providing transparent, secure and intuitive trading experience, a key component is having a decentralized oracle mechanism for obtaining the index price (spot price). We are thrilled to announce that we are using Chainlink’s ETH-USD Price Reference Contract as the index price for the ETH-PERP contract.
The Importance of Index Prices to Perpetual Contracts
A Perpetual Contract is a derivative product similar to a futures contract but has no expiration date. The Perpetual Contract market operates as a zero-sum game — each participant’s gain or loss is exactly balanced by the losses or gains of the other participants (longs pay shorts and shorts pay long).
To keep the balance between longs and shorts, Perpetual Contracts implement a dynamic funding rate. The funding rate is similar to an interest rate but with the goal of incentivizing traders to take the lower value side of the trade to balance out the short/long ratio.
Also, as a platform with leverage trading, MCDEX uses the index price to enable liquidation when hitting the liquidation price.
Therefore, MCDEX needs an index price, which is the wider market’s spot price of ETH-USD. The goal is to keep the perpetual contract structure reliable and transparent.
Using Chainlink’s Price Reference Contracts for Index Prices
The challenge with index prices in DeFi is making sure that the price feed is accurate, yet the sourcing and delivery of the price to the smart contract is done in a decentralized manner.
After extensive research into decentralized oracle solutions, MCDEX team unanimously concluded that Chainlink’s Price Reference Contracts are the best option in the market for sourcing and securing data. Chainlink already has an ETH/USD Price Reference Contract live on the Ethereum mainnet that is used and supported by several other top DeFi protocols. We are currently leveraging Chainlink’s ETH/USD price feed as the index price for the ETH-PERP contract.
Chainlink’s ETH/USD price feed is currently secured by an aggregation of 21 independent, security reviewed, and Sybil Resistant node operators, many of which are run by leading blockchain DevOps and security teams. Each node sources data from high-quality data aggregators such as BraveNewCoin, with at least seven different Aggregators used on the ETH/USD Reference Contract. This architecture ensures that Chainlink’s ETH/USD oracle consistently provides highly accurate and on-time data using a decentralized aggregation of independent nodes and data sources.
Importantly, by sourcing data from numerous different aggregators, MCDEX gets far better market coverage for its index prices than centralized derivatives platforms, which either don’t disclose their data sources or only use a few exchanges. Not only will the ETH/USD index price reflect the price discovery happening throughout the entire market, but it will better follow rapid volume shifts as they occur across exchanges.
With Chainlink having already launched 30 Price Reference Contracts on mainnet, MCDEX can leverage these reference contracts in the future and/or create custom ones to quickly launch Perpetual Contracts for new assets. Thus, MCDEX can expand its product offerings at an accelerated pace while still ensuring the highest security standards and accuracy of MCDEX’s index prices.
“MCDEX is excited to work closely with Chainlink to bring decentralized Perpetual Contracts to the DeFi ecosystem. Having accurate index prices directly available on-chain brings great transparency and reliability to our users, making MCDEX a superior solution for trading derivatives. — Liu Jie, CEO of MCDEX
About MCDEX
MCDEX is a decentralized derivatives exchange that provides top service and experiences. By introducing AMM, MCDEX has become the first project has enabled decentralized perpetual contracts with transparency and unparalleled experiences. Learn more by visiting MCDEX and stay tuned on Twitter and Telegram.
About Chainlink
If you’re a developer and want to connect your smart contract to existing data and infrastructure outside the underlying blockchain, reach out to us here! We can help you quickly and securely launch your data-enabled application or Chainlink Price Reference Data Contract on mainnet today. You can also visit the developer documentation or join the technical discussion on Discord. Learn more by visiting the Chainlink website or follow us on Twitter or Reddit.
Chainlink is a decentralized oracle network that enables smart contracts to securely access off-chain data feeds, web APIs, and traditional bank payments. It is well known for providing highly secure and reliable oracles to large enterprises (Google, Oracle, and SWIFT) and leading smart contract development teams such as Polkadot/Substrate, Synthetix, Loopring, Aave, OpenLaw, Conflux, and many others.
