This Time MCDEX is in CoinGecko’s Podcast — Bitcoin and Cryptocurrency Insights
This podcast is hosted by Bobby Ong from CoinGecko with the co-founder Jean Miao. The podcast highlights some major aspects like the difference between products V2 & V3, trading fees, APY, leverage on perpetual trade, how liquidation works on MCDEX, the reason to choose Arbitrum, the difference between competitors, and upcoming plans.
The session started with the introduction of Jean Miao and the story behind joining the defi space. She provided the insights and discussed each question extensively asked by Bobby during the session. Let’s get to the questions and answers.
Q: Can you briefly introduce MCDEX?
A: MCDEX is highly aimed to build a decentralized version of BitMEX. With leverages, anyone can buy or sell a certain asset without taking custody of it. The traders can also get the price exposures with the leverages.
Q: Commonly asked the question: when traders can trade perpetual contracts on MCDEX V3?
A: The team eagerly waits for the Arbitrum mainnet launch. And we are more confident to launch by this August. But currently, we are live on the testnet for anyone who wants to interact with it. It is suitable to practice the crypto trading methods and get familiar with them by the testnet.
A: In the middle of 2020, we launched V2 — the first ETH inverse perpetual swap in space. As we aim to provide faster trading confirmation, lowering gas fees, diversifying the market for the community, providing market-leading liquidity, the team has been flourishing the product V3. Describing more, the eye-catching changes on V3 are that it creates a fully permissionless perpetual market, which gives the power to the community to involve and boost the MCDEX ecosystem together. Another major change is bringing capital efficiency. The previous product followed the Uniswap V2 pricing formula that generated a higher slippage. After identifying the problem, we are continuously upgrading the AMM pricing formula to improve capital efficiency by concentrating more liquidity around the index. Perfecting it, the version V3 brings 1000x capital efficiency than V2 with a lower slippage, and liquidity providers enjoy more profits.
Q: Do we use an actual AMM or virtual AMM?
A: It’s a real AMM, where LPs need to provide liquidity to the pool.
Q: How do LPs need to specify the price range to provide liquidity?
A: Despite some similarities of the Uniswap V3 and MCDEX V3 product, LPs do not need to choose the price range as the AMM algorithm decides the range.
Q: After launching the product, what are the available markets for traders?
A: Being fully permissionless protocol, anyone can create the market. The DAO protocol itself acts like an operator, which is the creator of the perpetual market with general model pools and markets. On day 1, we will have two trading pairs: ETH-USDC and BTC-USDC. To elaborate more, many other teams showed great interest to open their token in the perpetual market. Example: team DPI will have a DPI pool to have their perpetual market. In the long run, our team believes more projects will focus on creating the perpetual market on our platform by using their tokens.
Q: Do LPs need to provide single-side liquidity or dual-side liquidity, like ETH-USDC?
A: Only one asset is sufficient.
Q: Do the traders suffer impermanent losses by providing liquidity to MCDEX?
A: As AMM only needs one single asset, the LP doesn’t take the impermanent loss in our case. But LP can suffer market-making risk and market-making profit. Consequently, we aim to try to balance their risks and profits.
If the trader goes bankrupt, all the profit goes to the liquidity providers. On the other hand, if the trader makes more money the market maker faces losses. In this mechanism, the traders and AMM are the counterparties.
Q: When a trader makes so much money, what is the chance for a counterparty to be bankrupted?
A: Good question! For example, A friend of mine runs centralized exchanges for about three years and is a great supporter of our AMM model. That centralized exchange acts as a counterparty of the traders. Although they don’t use the AMM, they act as market makers. Sometimes they hedge the market and sometimes don’t.
From these past several years of experience, we can say if we act as a counterparty the traders will get the benefit, and the probability of making a profit is high. Because in most situations, most people’s bets are wrong. We shouldn’t worry if the protocol is the counterpart of all traders.
Q: What is the fee charged on MCDEX? How can the charging fees compare against centralized exchanges, like BitMex?
A: For the traders, there are two types of fees: gas fees and transaction fees. To break it down, we are confident that the gas fee on the Arbitrum Rollup L2 will be approximately 1% of the Ethereum mainnet, which is $1 to $2 in MCDEX. The transaction fee set by the creator of the perpetual market is different from the gas fee. But the fee of the operators on MCDEX DAO is 0.075%, which is similar to centralized exchanges.
Q: Similar to BitMex or Binance if there’s any plan to increase the leverage to 100X or 125X?
A: We are very aware that most of the centralized exchanges use up to 100X leverages. But for the DEX the leverage is limited to the infrastructure. Therefore, we are keeping the leverage limit to 20X to be safer here. If everything acts stable with this leverage, we would consider increasing the leverage later. More precisely, if the TPS also can be higher, we could increase the leverage.
Q: From the charging fees (0.075%) what is the breakdown to the LP and MCDEX token holders?
A: Bringing an example, for the 0.075% is a transaction fee, 0.015% will go to the DAO vaults. The vault protocol is capturing a certain profit that is generated by the MCDEX platform. In addition, the $MCB holders have the right to decide how to use the assets that are generated from the platform. The rest of the amount, which is around 0.06% will go to the LP. Operators or individuals from other projects rather than MCDEX DAO are free to set the operator’s fee. In a nutshell, the transaction fees will go to three parts — the Lp, MCDEX DAO, and Operators.
Q: As the LP from the V2, V3, or testnet what percentage of APYs can be expected?
A: It is hard to estimate directly for all. But in our testnet the API is very volatile, ranging from 100% to 20%. The API also depends on factors like market volatility, volume, and other parameters.
Q: Bringing the liquidation question — how to handle the liquidations? What is the penalty for who gets liquidated and is there any insurance fund?
A: Currently, the MCDEX ecosystem has a liquidation penalty for the traders and now part of the penalty will go to the LPs, the other part will go to the insurance fund.
Q: If the platform maintains any insurance funds or LP acts like insurance unless they go completely broke?
A: The insurance fund is very necessary for the whole trading ecosystem. At present, two sources of the insurance fund — 1. From the liquidation penalty 2. From the operator.
Q: Why does the team choose Arbitrum instead of Optimism or Polygon?
A: We have been using the Arbiturm platform since 2020 Q3, which was very early at that time. The team made this decision after conducting a vast amount of research on several solutions in the market. There are several aspects we consider carefully. First-composability, second-decentralization, and third is the fee and the performance matrix whether it can meet the requirements as a derivative. We also consider deeply whether the solutions are developer-friendly or not. For example, for Arbitrum we don’t need to rewrite any single line of the code. This solves composability issues like the Optimistic Rollup and ZK-Rollup. In our comparison, we found that other solutions are not very suitable in terms of product readiness. Therefore, we are choosing solutions between Optimism and Arbitrum that fit with our model.
The main reason that we choose Arbitrum rather than Optimism is that the smart contract size on Optimism is a little smaller than the Etherum mainnet. Our complicated protocol divides the smart contract into several parts that may increase the gas fee. Therefore, we considered Optimism might not be the best fit. And the Arbitrum also has lower gas fees, which is very important.
Q: What is the difference between MCDEX V3 and Perpetual protocol V2?
A: The eye-catching difference is the product-wise difference in providing liquidity. Their platform leverages the Uniswap V3, where LP needs to choose the range that they need to provide the liquidity. But in our V3, the AMM algorithm makes the ranging decision for the LP. In this way, the AMM differs from the Perpetual protocol’s situation by providing the liquidity and making the decision. In the long run, we will iterate it more to mature our protocol and continuously innovate our product and add more new features to the users’ needs.
Q: In your opinion, what are the key main factors to run the decentralized derivative protocol? What do the traders in centralized and decentralized protocols like?
A: Two key factors are essential to consider. One is user experiences and the other one is the ecosystem. As most users get the experience in centralized exchanges, letting them wait on decentralized applications might cost more that leads to dissatisfaction. That’s where we are focusing more right now to improve the user experience that can give a similar experience as centralized exchanges. Talking about the ecosystem, centralized applications can’t create the ecosystem. Therefore, we need to take full advantage of the fact that we can interact with other smart contracts. The whole ecosystem not only acts as a trading platform but also some other smart contracts that can be built on top of the protocol that generates more diversified products.
For example, the V3 protocol has two assets that can generate yields. One is LP tokens and the other one is perpetual positions. To elaborate more, we have been talking with projects, like Barnbridge, to tranche the LP’s risks. As the LP suffers from the market-making risks and market-making profits, it’s hard to evaluate the risk and profit by themselves. By collaborating with Barnbridge, it’s easier to evaluate market-making risk and profit. This kind of practice can widen the participants to become an LP on MCDEX and boost other products on our platform. For the second asset — perpetual position, we are working on some other projects. We also mentioned copy trading. Some copy trading products can be built on the MCDEX platform so that they can provide the services and products to a wide range of users. We can see that gradually in the long-term the dex has the probability to take over the centralized exchange’s trading volume.
Q: If you open a perpetual position on MCDEX, you can get a token that can be used for a lot of things. Is that a collateral token in NFT or ERC-20?
A: As of now, for LP the token is an ERC-20, and for the perpetual position we are still figuring it out. We are hoping it’s also an ERC-20 token but currently there are no tech solutions now.
Q: Do you think that defi derivative platforms will overtake the trading volume of centralized derivative platforms?
A: In the long term, I am very confident about it. As I have been on the operations side, I have been interacting with many traders since day one. Many traders realized that in centralized exchanges the counterparty of there is the platform itself instead of another individual. Therefore, they are switching more into the dex platform. In many cases, centralized exchanges act as a flash crash.
Q: So, on the MCDEX platform, the flash crash couldn’t happen?
A: This is something we try to avoid since designing the AMM algorithm. In the past 5 months, we have been testing our testnet and monitoring the market’s real environment. In the past months, we witnessed market volatility, and during the period the AMM worked as our expectations. Right now, we are more confident about our platform and its maturity level.
Q: What is the most exciting part of MCDEX coming in the second half of the year?
A: The biggest milestone is the launch of our product V3 that was tested for quite a long time. Besides launching the product, we also focus on expanding our ecosystem by collaborating with several other projects. We aim to build many other products on top of our ecosystem. Currently, we are also hiring many developers to implement these ideas. We are also considering the incubator program to work with more talents and implement our ideas come true.
Listen to the full conversation here.
About Jean Miao
She has been doing startups in the internet industry for more than five years. She has trading experience in crypto since 2015. But the defi space was quite new to her until she met Liu Jie, the founder of MCDEX. But back then it was just an idea and she started to explore more the defi space and learn more concepts. It was quite surprising for her to realize that like an internet industry, the defi space is already mature and still in the early stage. Thus, this inspired her to explore the defi industry and seek more opportunities in the long term to leverage the full potential. Currently, she is taking care of the marketing and operations side.