DEFI

What is Alpha's new product "AlphaX" playing at with perpetual contracts without order books?

2021/3/5

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Alpha is not a fixed product.

(This article is authorized to be reprinted from Blue Fox Notes, the original title is "Alpha's AlphaX", original article here)

From what can be seen at the moment, Alpha's products mainly involve leveraged liquidity mining, helping providers of cryptocurrencies (such as ETH) earn profits, and helping liquidity miners increase their returns. Essentially, it is also a lending market, but it is not a regular lending market. It is combined with liquidity mining, thus opening up a new territory in the lending market.

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Looking at Alpha's official website, it mentions Alpha Finance Lab, which is not fixed on leveraged liquidity mining products. Instead, it will produce a series of DeFi products, aiming to maximize user profits while minimizing user risks. In other words, for Alpha, it may output many DeFi products as long as they meet users' needs.

Alpha's products focus on capturing needs that users have not yet fully satisfied. To meet these needs, Alpha also tries to find various implementation paths, through improving user experience, which is also reflected in new product mechanisms.

From the perspective of DeFi development, it not only requires DeFi thinking but also product thinking.

Alpha Homora currently has V2, allowing users to engage in leveraged mining on Sushiswap, Uniswap, Curve, and Balancer to increase mining returns, and asset providers can also provide assets such as ETH, DAI, USDT, USDC to earn higher returns. Of course, there have been various attacks in DeFi, which could potentially lead to losses. Last time, Alpha Hormora V2 had a vulnerability, where attackers exploited flash loans and Cream's Iron Bank to carry out attacks. Therefore, when participating in DeFi, participants need to have sufficient risk control to avoid significant losses.

Currently, Alpha's next product is targeting the hot area in DeFi: perpetual contracts.

AlphaX Perpetual Contracts

AlphaX is a decentralized non-order book perpetual contract product. On AlphaX, users can leverage long or short various cryptocurrencies. The entry of AlphaX into the perpetual contract field is driven by the significant demand in this area, attracting more DeFi users. Additionally, it can assist users who mine through leverage in hedging their positions on Alpha Homora. For example, users can borrow ETH for mining and simultaneously short ETH to hedge against market fluctuations. From the users' perspective, AlphaX helps reduce asset downside risks for Alpha Homora users.

According to Alpha's announcement, it differentiates itself from platforms like dydx by introducing some new features:

*Non-order book model

This is similar to spot trading on Uniswap and Sushiswap, where users interact with a smart contract liquidity pool. This model suits the current DeFi market and demonstrates its advantages.

*No "Explicit" Funding Rates

Funding rates are crucial for maintaining contract trade balance. For regular users to participate in perpetual contract trading, they need to understand the concept of funding rates and why fees are paid or received.

Funding rates are essential for the perpetual contract market. Poor design can increase risks, volatility, and lower market efficiency. Funding rates balance between long and short positions, adjusting costs to ensure contract prices closely track the underlying asset's price. If a contract's market price is higher than the spot price of the underlying asset, the funding rate is positive. Long positions pay fees to short positions, suppressing long positions and encouraging short positions to achieve balance, and vice versa.

However, many users, especially those in spot trading, may find this concept challenging to grasp initially. AlphaX's solution is to simplify the concept by removing the "explicit" funding rate concept. It integrates funding rate payment into traders' opening and closing prices, automatically adjusting prices based on funding rate payments. Therefore, it eliminates the need for long or short traders to explicitly pay fees while ensuring prices closely follow the underlying asset's price.

AlphaX does have funding rates, but it incorporates them into spot quotes from a user's perspective, making it easier for ordinary users to understand. As a result, trading perpetual contracts on AlphaX is akin to spot trading, where users buy or sell without worrying about funding rates, making it intuitive for regular users.

How Does AlphaX Specifically Implement This?

In the perpetual contract market, people trade leveraged contract transactions based on the price changes of digital assets rather than the assets themselves. A trading price is needed in the perpetual contract market, known as the mark price, which can track the actual price or price index of external exchanges.

To balance the trading market, funding rates are paid periodically (e.g., BitMEX executes funding rate payments every 8 hours). During funding rate payments, if the mark price is below the index price, short traders pay fees to long traders. This incentivizes long traders to open positions or short traders to close positions, as they know this will result in profit or loss. Through the funding rate mechanism, the mark price is pushed higher to approach the index price. Conversely, if the mark price is higher than the index price, long traders need to pay fees to short traders.

AlphaX integrates funding rates into the mark price, eliminating the need for users to consider concepts beyond opening and closing prices. Multiple platforms require long and short traders to pay fees to each other, but AlphaX accomplishes this through automatic mark price adjustments. As the mark price deviates from the index price, once it reaches a specific threshold, the mark price undergoes readjustment, gradually converging to the index price.

For instance, if the mark price is lower than the index price, long traders pay fees to short traders, causing the mark price on AlphaX to increase. In this scenario, long traders close positions at a higher price than before the mark price adjustment, resulting in higher profits. Meanwhile, if short traders close positions, they do so at a higher price than before the adjustment, resulting in lower profits. Through this profit adjustment mechanism, long positions are encouraged to close, while short positions are restrained, balancing the long and short markets.

In AlphaX's mechanism, traders' profits are solely influenced by entry and exit prices, without needing to consider conventional fee rates.

In cases of extreme imbalance between long and short positions, the mark price may temporarily deviate from the index price. AlphaX's protocol automatically adjusts the mark price to incentivize tracking the index price.

Of course, mark price adjustments also present various arbitrage opportunities. Traders can open or close positions at better prices to rebalance price deviations.

*Tokenizing Long and Short Positions

AlphaX tokenizes traders' long and short positions, both adhering to the ERC-1155 standard, with plans to package them into ERC20 tokens. This allows long and short positions to be traded, staked, or used as collateral in other protocols.

By tokenizing long and short positions, there is a chance to increase the utilization of user assets, attracting more users to participate. Moreover, by tokenizing leveraged positions in perpetual contracts, users can easily participate in AlphaX perpetual contracts, even without opening positions on AlphaX. They can simply purchase perpetual contract long or short position tokens on Sushiswap or Uniswap. Alpha Homora users can hedge their downside risks by holding these position tokens. For example, if the current ETH price is 1500 USDT, a trader opens a 3x long position on AlphaX. Depositing 1500 USDT with AlphaX and selecting 3x long, the trader receives 3 ETH-1000 tokens, each worth 500 USDT (1500-1000=500). Therefore, the user's 3 ETH-1000 tokens are valued at 1500 USDT.

If the USDT price rises to 2000 USDT, the value of each ETH-1000 token is now 1000 USDT (2000-1000=1000). The trader has 3 ETH-1000 tokens, now valued at 3000 USDT, resulting in a pure profit of 1500 USDT (3000-1500=1500). In this case, the trader's profit triples the price change, as ETH price increased by 500 USDT, and the 3x long position earned 1500 USDT. Of course, the user would also incur corresponding losses if the price decreases.

*No Bots, Automated On-Chain Liquidation Mechanism

AlphaX operates a perpetual contract market without order books, utilizing the constant product X*Y=K model. AlphaX aims to dynamically adjust K, a liquidity coefficient determining trade slippage during opening and closing transactions.

If K is set too high, traders face lower slippage, requiring significant capital to drive price changes, leading to reduced efficiency. Conversely, if K is set too low, traders experience higher slippage, hindering the market from sustaining large positions and extensive trading.

Both excessively high or low K values are detrimental to the sustainable development of the perpetual contract market. To address this, AlphaX dynamically adjusts the K coefficient to avoid excessive slippage, preventing scenarios where the market cannot continue to grow.

AlphaX plans to manually adjust the K value through administrators or community governance. As experience grows, algorithms will be utilized through smart contracts to adjust the K coefficient.

Lastly, a significant concern for Alpha token holders is the utility of the Alpha token.

Alpha Token Utilities

The Alpha token will be used in various protocols under Alpha, not limited to the leverage mining platform Alpha Homora but also in AlphaX and future products.

The primary purpose of the Alpha token is to drive the growth of the Alpha ecosystem, primarily by incentivizing liquidity outflow to boost protocol value. Similar to most DeFi tokens, the Alpha token serves this role. Additionally, the Alpha token has the following utilities:

*Governance Token

Almost all DeFi project tokens have governance functions, eventually moving towards DAO governance, with tokens being a critical medium. The governance role of the Alpha token will become increasingly important, allowing Alpha token holders to make decisions on Alpha's development direction at various levels:

- Product-level governance, enabling Alpha token holders to manage core parameters of each Alpha product.

- Financial-level governance, allowing Alpha token holders to manage interoperability of Alpha product portfolios.

- Alpha token holders can vote on public proposals on Snapshot.page, influencing Alpha's roadmap.

*Value Capture

By staking Alpha tokens to receive a percentage of protocol fees, which Alpha is in the process of implementing. Upon implementation, it will lock a portion of Alpha tokens, reducing circulating supply and potentially increasing the token's value.

*Security Value

Alpha tokens can also be used as insurance pool funds, a feature currently in development.

*Work Token

For example, only token holders can access more features on Alpha products. If Alpha's products are sufficiently appealing, more users will be incentivized to purchase ALPHA tokens. This feature is currently being implemented.

Given that the Alpha protocol is community-governed, ALPHA token holders can also leverage their creativity to enhance the utility of the ALPHA token, evolving in line with the development of the Alpha protocol ecosystem.

**Risk Warning: The content of this article from Blue Fox Notes should not be taken as investment advice or recommendations. Investment carries risks, and individuals should consider their risk tolerance. Conduct thorough research on projects and make investment decisions prudently.