After the success of the AMM (Automated Market Maker) model for setting up decentralized spot exchanges, several projects are now racing to bring this concept into the world of derivatives. One of them is Futureswap, an AMM-based futures exchange designed specifically for large trades.
Futureswap recently released version 2 of its platform, which features a unique oracle design that can be used to increase capital efficiency for large trades. Benji Richards, co-founder of Futureswap, explained the idea to Cointelegraph:
“When you think of AMM, you think of the constant product like Uniswap. The main difference from ours is that we took the AMM and didn’t use the same formula. We designed it around the thesis that big trades shouldn’t be penalized for being big trades, which then creates a better ecosystem for what we call whale traders or massive arbitrageurs. “
AMM platforms use special formulas called “bonding curves” to determine how each trade changes the price of an asset. Uniswap’s formula is the simplest as it tries to keep the product of the two sides of the pools constant. Graphically, such a formula defines a hyperbola – a shape that approaches both infinity and zero on both sides without ever reaching them. While this is great for general-purpose AMMs, this curve is inefficient for large trades as the slip increases exponentially with large order sizes.
However, in order to use a more efficient curve, one more constraint needs to be added to ensure that it is effective. In the case of Curve Finance, for example, the bonding curve can be made significantly more efficient if the platform is limited to tied assets – different iterations of US dollars or packaged cryptocurrencies. With futureswap, custom oracles offer a similar limitation.
Richards said this was necessary to avoid the off-the-shelf solution problems. “Most of the oracles on the chain have a lag, so if you use that on something with leverage it probably won’t work,” he said. An Oracle-based design was attempted by Bancor for its fickle loss protection system, but appears to have been unsuccessful due to front-running problems.
Futureswap’s oracles are unique in that they make it possible to capture the small price fluctuations between two Ethereum blocks that are 15 seconds apart. It’s a similar mechanism to meta-transactions where others can pay someone’s gas fee, explained Derek Alia, co-founder of Futureswap:
“The idea is that you sign some parameters and say,” I want to do this action with this information. “You sign that with your private key. It’s basically like a ball that someone passes on to the Ethereum blockchain.”
In futures swap trades, users essentially tie in the Oracle pricing data they used to create this transaction and the system guarantees that the value was valid when the transaction was created. By using the oracle prize as an anchor, the platform can use much more aggressive connection curves with less slippage. Alia added:
“We need less capital to be more competitive with someone like Binance. Binance may need $ 6 billion on its order book. We’d need $ 300 million – or something like that – to have the same slip. “
Like other AMMs, Futureswap also has passive liquidity providers who receive a fee for every trade that goes through the platform. Traders interact with these liquidity pools and can take both long and short positions with up to 10x leverage. While this can be considered low by cryptocurrency standards, that cap will be raised over time, Richards said.
Futureswap is still in the early stages of release, which is also reflected in its token model. Users and liquidity providers are currently receiving a non-transferable token that they can use to participate in the governance of the platform and benefit from discounts. The team has had a total volume of over $ 500 million to date with no direct incentives. Alia concluded:
“I think what is really cool is that a lot of people who are a little bit more ‘rapier’ come in and ask if the token is transferable and how they can buy and sell it. They find out they can’t and then leave. “