Prepare for the mother of all market creations

Vega Protocol will drastically increase the efficiency of our financial system through countless new-market disruptions.

Part 2 of a series on Vega Protocol as a disruptive innovation. See part 1

Clay Christenson splits disruption into cost-saving and new market creation. New-market disruptions are like what dirt-bikes were to the Harley Davidson (No one had thought of selling motorbikes for cross country joy riding until Honda accidentally fell into this market with their cheap lightweight classic, the Super Cub). New-market disruptions aren’t just competing for the attention of the same customer, they access a whole new population or demand.

A cheaper alternative to Harley Davidsons which accidentally became the first dirt-bike

Generally, a competitive marketplace will increase the informational efficiency of the system the market applies to. If I “owned” my music library (even if I owned just the curation, not the underlying songs) and could switch providers at any time, then there would be many additional market dimensions for Spotify and Apple Music to compete on for my business. I think in general, new markets are positive for the world.

Vega Protocol is a network which allows the permissionless creation of leveraged derivatives markets. I think it’s one of the most exciting projects in blockchain (and hence the world). | testnet | discord | vega.xyz |

New Markets! Just make em

The current space for expressing views in crypto markets is very small compared to the breadth of opinions. If you want a specific exposure, you will be able to permissionlessly create a market for it, commit to providing liquidity, and in doing so be rewarded for your bet that other traders want that exposure too. You will also be able to propose a market and liquidity providers will be able to bid on the price they are willing to provide liquidity to that market for.

A new market for market making (liquidity provision).

Vega have devised a method for liquidity providers to bid on the rewards (or penalties) they are willing to risk while promising liquidity to a market. Say no one currently wants to risk their capital in providing liquidity for your lamp-shade futures market, while they could simply market make for USD stable coins. This new-market allows you to get your lamp-shade futures*, it might just be that the normal spreads are 1000 basis points. This is extreme, but the point is there — more markets will be able to exist and function.

Watch Barney’s walkthrough of the liquidity protocol if you want to get your dendrites dirty. This new-market, in combination with permissionless market creation is so exciting to me. Liquidity will now be free to move, and incentivised to move towards markets which have true demand for liquidity.

  • Provided you have an oracle for lamp-shade prices ;p
New market, make I

A market for market-level risk

Since all wallet balances, open positions and orders on Vega will be public, there will likely arise a new market for market-level risk. If traders can see the price at which every wallet will be forced to close their positions, there will be wars around who gets to reap the benefits of huge market swings past these thresholds. And opposing traders might trade to keep a market from entering a distressed state. It may be visible which wallet is the resistance, which wallets are the support. Revealing more pieces on the chess board.

Liquidation markets already exist in DeFi. Vega is another example, this time in order book leveraged markets.

Traders might choose to move their liquidity to exchanges which have more or less market-level risk in order to chase volatility, or specific psychological effects that risky market conditions might have on the participants. I’m speculating here, big-time, btw.

While at first it may appear that all this public data will encourage the “manipulation” of markets by whales and cartels (Wall St bets, hedge funds etc.), I hold a different opinion. I would hope that the exposure of new information on Vega’s blockchain would lead to more efficient price discovery, as the knowledge of predatory market participants and one’s risk of liquidation is more bleedingly obvious, and more traders will be able to compete based on this now very accessible information.

Markets within markets within markets within …

Bring on developing-world traders and liquidity providers

No more lobbying your unresponsive government and derivatives provider for a financial instrument. Third-world markets might not have regulatory bodies that they can trust, let alone rely on to set up markets for derivatives that are needed.

Traders and liquidity providers who don’t have a relationship with exchanges, US citizenship, or corporate labyrinthine know-how to get trading with the lowest fees on CEXs will have access to a level playing field on Vega’s markets.

Vega will attract more volume based on traders’ ability to remain anonymous

Businesses are more likely to engage with public hedging markets if they know they don’t risk giving away business secrets through placing orders.

There are cookie trails one can follow to track the activity of businesses hedging their risk and trading using their proprietary information in traditional markets. The brokers who place their orders, and the size and timing of trades are some of these clues. Traders and their associated wallet addresses are public on Vega, but not linked to KYC or a broker (by default). Also, critically, creating wallets is fast and free. One could create and destroy wallets at will and sprinkle their orders across these wallets. It will be much easier for real users of hedging products to hide and not be preyed upon.

Market for identity on markets

As above there will be a new market for hiding and discovering identity. Anonymity as a service may appear as a module to plug in to Vega. Conversely, some traders might be able to make a living from tracking the behaviour of different accounts and keeping track of where agents are in the system.

A Market for money-legos

Part 3 will delve into how Vega opens up an ecosystem of innovation. Decentralised finance is well known for its interoperability, and the ability to fit together different money legos to quickly find the right financial product for each user. Vega’s fundamental innovation of automating trust in leveraged order-book based markets will create a platform for many more plug-ins and outer layers to function alongside.

Freedom, information and competition

In Vega, the world will have an open and liquid, market for markets, products and user experiences. Vega opens so many more market dimensions, I’m hopeful for it being a force of good in the world. For sure, it won’t all be good, but that’s anti-fragility, baby.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary. The author is a founding member of Vega’s Community Core program.