Vega Protocol is a technology designed to help facilitate a blockchain-powered public network for full end-to-end trading and execution of financial products.
In a traditional financial system, financial products and services are dependent on the organizations and individuals who use technological systems to create and execute contracts. This poses a challenge of entry as these technologies vary in sophistication, cost, and effectiveness.
While some organizations have been able to find a way around this issue, some aren’t as lucky, which is why we have some markets that are more manually intensive while others are more technology-intensive. Regardless of this issue, the third party problem still exists, and with it, the presence of censorship and regulations that control the availability of products and the creation of markets. This is the challenge that Vega Protocol is looking to solve by creating a decentralized platform for these financial products where no one individual or organization would pose a substantial risk to a market.
Vega Protocol is led by Tamlyn Rudolph, who has over 14 years of experience trading in volatile power markets. Rudolph also had interests in the trading and settlement of derivatives. As it turns out, the potential blockchain holds in usurping the system’s around money fascinates her.
Other team members have experience spanning different fields of the crypto space and have achieved considerable success with the level of their outputs in the industry.
What is Vega Protocol?
Vega Protocol is a technology designed to help facilitate a blockchain-powerd public network for full end-to-end trading and execution of financial products. The protocol helps to solve the issue of attracting and allocating market-making resources in a decentralized system.
It functions as a decentralized platform that enables financial products to be available to the general public on a more equal basis. With Vega, access to these markets becomes available to all and the creation of these markets and products would not depend on a central authority or organization.
With its smart product feature, users of the platform are able to create new products and at the same time, propose new markets. The protocol essentially allows for markets to be open and decentralized by fully automating all processes while also providing incentives for trading activities.
The platform also allows for settling financial products between these market participants. To fully achieve this, the protocol uses a set of carefully planned mechanisms of economic rewards and penalties to balance the innovative platform. And at the same time, it helps to protect the market generally and the participants in such markets.
What Is a Market in Vega?
A market in Vega Protocol deals with a tradable instrument that has been set to a particular method of trading. Markets have life cycles and are dependent on instruments, risks, and even governance to determine if they would be proposed, activated, suspended, or closed.
There two types of markets: open and ad-hoc markets. An open market is open to all sufficiently collateralized participants to transact while an Ad-hoc market is created on a needs basis by a participant who needs the market to fulfill a certain trading agreement.
What Is a Market Maker in Vega?
A market maker is a trader on the platform that has chosen to participate in the market-making process by placing a stake on one or more markets available on the protocol. One does this with the intention of being able to receive certain rewards for participating in the process.
A market maker plays a pivotal role in the protocol as they are saddled with providing liquidity for the market, which is why the Vega Protocol has incentivized market-making as they invariably act like owners or operators.
Market maker funds are held at the base currency of the market, and the size of this fund determines the minimum volume that can be deployed to each side of an order book.
There are two types of market makers on this platform. They are:
- Active market maker
This individual actively participates in managing a price strategy for their marketing volume.
- Passive market maker
On the other hand, this individual allows participants to support the market whilst also providing liquidity. Here, this market maker has no need to actively make prices or risk-manage a portfolio of positions.
All markets would have an insurance pool that can be used as a layer of collateral protection in situations where there is a shortfall or when a distressed trade is being closed out.
Market insurance pools would not contain any funds immediately after a market is created. At the closure of a market by a governance action, the available insurance pool is then shared among the markets with the same base currency.
Features of Vega
Vega has the following features that sets it apart from its competitors, which are:
- Liquidity incentive
- Collateral Options
Vega has a built-in liquidity incentive that matches traders and market makers together across varying financial products.
The liquidity incentive of the market helps the protocol cater to markets with different trading volumes at different points of the market lifecycle.
The markets achieve this through the facilitation at the protocol level of dynamically priced liquidity, which recognizes that market making is capital intensive and thus aims for a market-driven solution that efficiently balances the need for order book depth on the one hand with a preference for low fees on the other.
The protocol depends majorly on these collaterals to avoid being closed out. To effectively do this, the collaterals in base currency and other assets are held and managed in a decentralized way by the network.
Collaterals are placed under Vega network’s control.
The ease of market creation on the platform makes it easy for any participant to create and launch markets.
The participants on the platforms have a wide range of toolkits of product features and economic primitives to easily carry out cash flows and settlement instructions from the market makers.
Vega’s Decentralized Governance
The protocol is designed to run without any human intervention. Instead, its operational governance is defined by rules embedded in the platform. This allows for on-chain governance, which is the key function that enables the creation and maintenance of a highly decentralized environment.
It should be noted that the network governance in Vega does not intend to replace all forms of other governance on the public Vega ecosystem, but only on-chain aspect.
As a protocol that looks to facilitate a decentralized marketplace where every trader can create and execute financial products, Vega could help solve many issues such as attracting market-making resources, enabling a product to be available to the general public.
There is also the issue of regulation and entry barriers that vary based on the sophistication of technology that central bodies used to create these markets. Fortunately, with Vega, all of these challenges are solved.
The protocol has designed different toolkit features that would be used to efficiently build markets and also develop a way to use them in a simple way.