The Quest for a Risk-managed Future
Long before crypto, in traditional finance, traders and producers faced a fundamental problem: the future is uncertain. A farmer worries the price of their crop will fall before harvest. A baker worries the price of wheat will rise before they can buy it.
To solve this, derivatives were created, financial contracts that derive their value from an underlying asset. The most direct solution was the futures contract: a simple agreement to buy or sell an asset at a predetermined price on a specific, future date.
Alongside futures, another powerful tool emerged: options. Options gave the holder the right, to buy or sell an asset at a set price, offering a more flexible way to manage risk or speculate on market movements.
These instruments became the foundation of finance, but they were all built around a central concept: a set expiration date.
A Market That Never Sleeps
When crypto arrived, it brought with it a market unlike any other, one that operated 24 hours a day, 7 days a week.
The old financial products, with their rigid settlement dates, felt clunky for this new, relentless pace. Traders wanting to hold long-term leveraged positions had to constantly close their expiring futures contracts and open new ones. It was inefficient.
The market needed a new tool, one that combined the leverage of futures with the continuous nature of spot trading. Then, in 2016, this tool arrived.
BitMEX introduced the perpetual future, changing crypto trading forever. It was a futures contract with no expiration date, allowing traders to hold a position for as long as they wanted.
This solved one problem but created another: if the contract never settles, how does its price stay anchored to the real-time price of the asset?. The answer was the funding rate. This is a small, periodic payment exchanged between long and short traders.
This constant, gentle pressure keeps the two prices in sync. The perpetual future was born, and it quickly took over crypto trading.
The Remaining Challenges
This explosion in popularity brought new challenges. The first generation of perpetual exchanges, while innovative, had flaws:
• Liquidity Providers (LPs) became counterparties: In many DEXs, LPs who provided the capital for trades were directly exposed to trader profits and losses. A single smart trader could drain LP funds, making it a risky and often unprofitable endeavor.
• Listing new assets was difficult: The risk models were often too basic to handle the wild volatility of new and less common "long-tail" assets. This stifled innovation and limited trading opportunities to the same few popular coins.
• Insolvency lurked: In the quest for high capital efficiency, some protocols took on more risk than they could manage, putting the entire system at risk of collapse.
Vest: Writing the next chapter
This is the landscape into which @VestExchange arrives. It was built with a deep understanding of this history, designed specifically to address the problems that the perpetuals arrival created.
Vest's approach is not just an iteration, but a new framework for managing risk. Its core is the zkRisk engine, a sophisticated system that prices risk in real-time.
Instead of fixed fees, Vest calculates the precise amount of risk a new trade adds to the system and charges a dynamic premium for it. Thus, changing everything.
It protects LPs by creating a buffer and making traders pay for the risk they introduce. Vest shields LPs from being the direct counterparty to smart money. This makes providing liquidity a more stable and reliable source of yield.
It innovates because the system can accurately price the risk of any asset with a price feed. Vest can safely list a much wider variety of markets, from volatile tail assets to real-world assets and so on.
The story of derivatives is a story of managing the uncertainty of the future. Perpetual contracts were a massive leap forward in that story, perfectly adapted for crypto.
Vest represents the next step in that evolution, seeking to finally solve the complex problem of risk.
