Five minutes to understand on-chain derivatives agreement Shield: “No risk” perpetual contract and dual liquidity pool

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Shield pioneered a decentralized “risk-free” perpetual contract and deployed dual liquidity pools to solve the long-term and criticized liquidity problem of DeFi derivatives.

Written by: Dove

As we all know, it is precisely because of the endless emergence of new gameplay in the DeFi world that DeFi explodes at a staggering speed. And derivatives trading, which occupies a very high position in traditional finance, is also blooming in the cryptocurrency market. According to data collected by The Block Research, the total trading volume of Bitcoin futures in March hit a record high of US$2.13 trillion, an increase of 1.90% from the previous high in January. At the same time, the trading volume of Bitcoin options in March reached 28.63 billion U.S. dollars, an increase of 16.19% from the previous month.

With the increase in popularity and the high demand for decentralized derivatives trading products, in the past period of time, the market has paid a lot of attention to decentralized derivatives trading, which also gave birth to such products as dYdX, Perpetual, Injective, Opyn and other high-quality on-chain trading derivatives agreements.

Existing decentralized derivatives agreements still have pain points such as insufficient depth and liquidity, transaction delays, low leverage, insufficient market education, etc., in order to solve the current stubborn problems of the decentralized derivatives track, thereby promoting the derivatives competition With the development of Tao, Shield, an on-chain trading derivatives protocol, has proposed a series of brand-new solutions.

What is Shield?

To put it simply, Shield is a decentralized derivatives trading platform, and in the framework of the existing derivatives trading products, it pioneered the “risk-free” perpetual contract based on Layer1, and it is also the first to achieve full on-chain transactions. Perpetual contract.

Due to the constant changes in investor risk appetite and exposure, derivatives trading has become a core component of the contemporary cryptocurrency market. Especially in the perpetual contract market, which does not require frequent management and establishment of positions, its trading volume far exceeds that of spot and margin trading. However, decentralized derivatives trading platforms are limited by various reasons, and their liquidity is slightly insufficient compared to centralized trading platforms. To this end, Shield has configured a unique dual liquidity pool to solve the long-maligned liquidity problem of DeFi derivatives transactions.

In Shield’s view, only a decentralized blockchain network based on a completely non-cooperative game can establish a safe, stable and open derivatives trading market. And through risk-free trading products, coupled with a perfect incentive mechanism, unlimited liquidity is introduced to the center of the decentralized financial world. Therefore, Shield is committed to developing a trustless, censorship-resistant, and accessible protocol, aiming to become the next generation of global derivatives infrastructure.

A perpetual contract that will not “explode” due to price fluctuations

To understand the so-called non-risk perpetual contract, we must first start with the characteristics of the perpetual contract.

Perpetual Contracts (Perpetual Contracts), also known as Perpetual Swaps, digital currency perpetual contracts were first (in May 2016) launched by the centralized exchange BitMEX, which is also the rapid rise of the platform to become the world’s largest derivatives The core key of the trading platform.

Perpetual contracts allow users to buy and sell the underlying asset value in the market, which is similar to traditional futures contracts, but has its own characteristics. The main features are as follows:

  • There is no expiration date/settlement date for the position, which is suitable for long-term investors and saves the handling fee of frequent delivery;
  • No need to actually hold the underlying assets, which means there is no custody issue;
  • The price of the perpetual contract closely tracks the market price of the underlying asset;
  • Flexible leverage multiples magnify capital efficiency;
  • Buyers and sellers are easier to participate and have high liquidity.

Five minutes to understand on-chain derivatives agreement Shield: "No Risk" Perpetual Contract and Dual Liquidity Pools

Perpetual contracts have high leverage and are therefore very sensitive to time and price fluctuations. At the same time, it is necessary to reduce the risk of misjudgment of market conditions or delays in transactions while increasing the utilization of funds as much as possible. Shield’s non-risk perpetual contract is based on the existing perpetual contract, innovatively adding new content, so that traders will not “explode” due to unfavorable changes in prices. In extreme cases, the biggest loss is only It is the sum of the small capital fees paid during the opening and holding process. The opposite of low risk is a high rate of return.

To give a simple example, the investor Xiao Zhou opened a long position at the price of 400 DAI/ETH (the default multiple does not need to be selected), and prepaid a capital fee of 10 DAI, the opening transaction fee is 0.4 DAI, and his account has 9.6 DAI.

In subsequent transactions, if the ETH price is greater than 400 DAI, the balance of Xiao Zhou’s account will increase accordingly. On the contrary, if the price of ETH drops compared to 400DAI/ETH, his balance will not decrease. However, regardless of whether it is up or down, the Shield agreement will deduct the funding fee in a fixed proportion every 24 hours.

In other words, even if the ETH price drops to 1 DAI and then rebounds and breaks through 400 DAI, as long as the fund fee in Xiao Zhou’s account is not deducted to the liquidation threshold, or made up before the deduction, then his position will not appear so-called “Broken positions”, and can liquidate profit or stop loss at any time.

Five minutes to understand on-chain derivatives agreement Shield: "No Risk" Perpetual Contract and Dual Liquidity Pools

Seeing this, I believe that professionals will respond that the essence of Shield’s non-risk perpetual contract is a kind of exotic option with no delivery date. The benefit from this is that it has greatly innovated the operating form of perpetual contracts, and to a certain extent, circumvented the complex trading rules of options, whichever is better, breaks through the shackles of existing derivative products, and realizes While high leverage, the risk is lower.

Five minutes to understand on-chain derivatives agreement Shield: "No Risk" Perpetual Contract and Dual Liquidity PoolsShield non-risk perpetual contract transaction structure diagram

According to the information on the official website, Shield currently supports six trading pairs including ETH/DAI, ETH/USDT, ETH/USDC, WBTC/DAI, WBTC/DAI, and WBTC/DAI.

Dual liquidity pools laid the foundation for “unlimited liquidity”

In terms of guaranteeing transaction liquidity, compared to the single Peer-to-Pool liquidity pool transaction model commonly used in the market, Shield has again innovatively launched a dual liquidity fund pool mechanism. The dual liquidity pool not only ensures that contract orders can be directly traded with the liquidity pool to replace complex matching calculations, but also ensures that professional market makers can hedge in a true sense, thereby reducing their market-making risks.

There are two types of Shield’s liquidity providers: liquidity provider LP1 (public pool) and liquidity provider LP2 (private pool). Position requirements are higher, so they are usually institutional market makers.

In the specific process, once a user selects the target and price to establish a position, Shield will give priority to the liquidity of LP2 and give specific information about the order for hedging. Only when LP2 lacks liquidity or the order is cleared, will it be transferred to LP1. That is to say, during the entire transaction process, professional market makers will assume the main counterparty risk in the private pool, while ordinary users participating in the public pool are more of the final “insurance” for the private pool, so the risk Lower.

Five minutes to understand on-chain derivatives agreement Shield: "No Risk" Perpetual Contract and Dual Liquidity PoolsDiagram of Dual Liquidity Pool Architecture

In contrast to payment, LP2 will receive the active mobile mining reward Shield platform tokens (SLD), and LP1 will receive the standby liquid mining reward SLD.

It is worth noting that in the Shield agreement, when the investor’s or liquidity provider’s account fund balance is less than 2%, the liquidation will start, and the liquidator can get about 150% of the gas fee reward from the insurance fund. SLD can be obtained after exhaustion, and the three who consume the highest gas each week will also receive additional SLD rewards.

In this way, under the premise of ensuring that professional market makers can hedge stable returns, based on the first large liquidity pool created by professional market makers and the second largest insurance pool built by the majority of DeFi users, through the use of platform tokens SLD incentivizes it, and the Shield non-risk perpetual contract has realized a solid wall of “unlimited liquidity” to a certain extent.

SLD’s economic model

SLD is the native token of Shield. Its main uses include but are not limited to being used as the basic currency in the ecology, on-chain governance, incentives for contributors to ecological development, and fuel in the ecology.

The total supply of SLD is 1 billion, of which liquid mining and third-party liquidation rewards account for 60%. Each time the distributed reward reaches 20% of the undivided reward, the reward is halved; early investors and strategic partners Accounted for 13%; core team accounted for 15%; consultants and project builders accounted for 1.2%; project development funds accounted for 10%; airdrops accounted for 0.8%, and airdrops will be issued when the main network is launched.

Five minutes to understand on-chain derivatives agreement Shield: "No Risk" Perpetual Contract and Dual Liquidity Pools

In terms of specific rewards, public pool liquidity mining rewards 32 SLDs for each block.

The liquidity order mining reward is: order settlement fee 10% 0.05SLD.

Mining rewards are halved for every 20% mined.

The transaction fee (one-thousandth) charged by Shield is used for value capture, of which 10% will be invested in the system insurance fund. The remaining 90% will be used for SLD repurchase and destruction to empower SLD.

As the transaction volume increases, there is no upper limit to the increase in the transaction fee pool, and the number of SLDs in circulation on the other side will be halved due to mining and repurchase destruction. In the long term, SLD has long-term value-added potential.

summary

On the development route, Shield will soon launch a test event on the Ethereum Kovan network, and early community members will have the exclusive right to test the testnet; the Shield mainnet plan built on Ethereum Layer1 and BSC will be completed in April; 6 It will support more types of underlying derivatives transactions and try to release it on Ethereum Layer 2 in September; it plans to release version 2.0 in September, which is compatible with ZK Rollup, or it will be released on more public chains such as Polkadot and NEAR; 2022 will focus on The construction of more structured products.

In Shield’s view, the existing decentralized derivatives trading protocol still faces many problems, which is why this track cannot reach the heights of Uniswap or SushiSwap for the time being. To attract more professional users to understand the charm of DeFi, it is not only necessary to solve problems such as liquidity, capital use efficiency (utilization), handling fees, risks, etc., but also to learn from other centralized exchanges that are conducive to user development.

This is where the advantage of Shield lies. Whether it is products such as non-risk perpetual contracts or the mechanism of the agreement itself, they are combining the strengths of various places to promote the development of the DeFi world.