Project Insight: 01 Exchange - Decentralized Derivatives Exchange on Solana

The 01 protocol intended to provide the Solana community with exotic derivatives products with the efficiency of a CEX in a decentralized manner.

By
Abhinav Tewari
on
April 24, 2022
Category:
DeFi

Introducing 01 Exchange

01 Exchange is a fully decentralized derivatives protocol that runs on the smart contracts on the Solana blockchain. The protocol is built by traders and built for traders as it brings the efficiency and experience of a centralized exchange (CEX) to a decentralized ecosystem.

The project features an on-chain orderbook through deep integration with Project Serum while offering traders unique features such as cross-collateralization (ability to collateralize multiple positions using different tokens), powerful cross-margining (sharing leverage across all positions using a single account), and yield-earning deposits (traders earn a yield on deposits automatically while collateralizing positions). Borrowers can utilize 01 Exchange's large collateral pool to take on loans, which generates passive yield for depositors. Both traders and yield-seekers can earn yield through a variety of pools and products within the exchange.

Source: 01 Website

Value Proposition

01 provides a full-suite trading experience while maintaining decentralization. Due to transaction throughput limits, Decentralized Exchanges (DEXs) on other chains either use a virtual automated market-maker instead of an order book or even offer an orderbook that runs on a centralized server. Because of Project Serum's on-chain matching engine, 01 can provide a true orderbook experience without sacrificing decentralization. 01 is also the only DEX that offers Power Perpetuals based on order books. Thanks to Solana’s incredibly high throughput and low transaction fees, traders can execute trades instantly and have them confirmed on the blockchain within seconds.

01’s Key Unique Offerings:

  • Perpetual Futures: 01 offers deep liquidity perpetual futures markets, empowering traders with up to 20x their buying power.
  • Power Perpetuals: 01 is the first protocol to introduce orderbook-based power perpetuals, a novel asset type providing global options-esque exposure.
  • Yield-bearing Deposits: All deposits on 01 accrue passive Annual Percentage Yield (APY) through algorithmic borrow lending markets.
  • Decentralized Orderbook: 01 is built with Serum's fully decentralized on-chain limit orderbook, providing traders with the ultimate trading experience without sacrificing decentralization.
  • Cross-Collateral: Traders can deposit a variety of supported tokens as collateral for their positions, saving on swap fees.
  • Cross-Margin: Leverage is shared across all positions under a single account, allowing for unparalleled capital efficiency.

Let’s dive deeper into some of the offerings of the 01 exchange.

Perpetual Futures

Perpetual futures are derivatives that enable traders to obtain exposure to a variety of underlying assets. Traders can use leverage to increase their exposure to asset price swings, which means their earnings and losses both grow dramatically. Any of the supported collaterals can be used to collateralize positions. 

Source: Twitter

However, a typical futures contract is an agreement between two parties to buy or sell an underlying at a specific price on a specific date. This contract can then be traded until its expiration date. When the contract expires, it is exercised, and the ultimate seller provides the underlying to the buyer. 

The main difference between a typical futures contract and a perpetual futures contract is that perpetual futures contracts do not have an expiration date. This implies that the perpetual stance can be maintained indefinitely––provided sufficient collateralization. Buyers (longs) of the contract must pay a funding rate to sellers in order to maintain a perpetual position (shorts). This permits the derivative to keep its price close to the underlying's index price.

Advantages of trading Perpetual Futures:

  • They enable users to hedge positions and manage risks across other assets.
  • Traders have increased buying power through leverage as they can trade volumes larger than their collateral.
  • They can speculate on underlying assets without having to own them. 

Power Perpetuals (SQSOL–Squared SOL)

Power perpetuals are a derivative of perpetual futures that provide options-like exposure and a unique payout structure to traders. Power perpetuals with powers greater than one (SOL^>1) have positive convexity, which implies that holders make money faster as prices move in their favor and lose money more slowly as prices move against them. It is indexed to a power of the price of the underlying instrument, which implies that if the price of SQSOL doubles, the holders’ investment will quadruple. 

Source: 01 Medium

Expanding on the Power Perpetual contract further, if SOL is trading at $5, and the SOL^2 power perpetual is trading at $25.5 at the time of funding. Then the longs would have to pay the shorts $(MARK-INDEX) = $(MARK-SOL^2) = $(25.5 - 25) = $0.50 per contract. In the context of power perpetuals, this funding fee is called a premium yield to reflect that this cost generally represents a premium being paid from longs to shorts in return for options-like exposure.

Advantage of trading Power Perpetuals:

  • Traders can hedge impermanent loss from LP positions implying that power payouts can allow users to avoid losing on the impermanent loss while staking into constant product market maker pools such as Atrix, Raydium, Orca, etc., by composing a well-defined portfolio on 01. 
  • They can formulate automated vault strategies, which means by pairing the Power Perpetual with an underlying asset or a corresponding perpetual, vaults can earn passive yields for Decentralized Finance (DeFi) users.
  • They can also hedge any vanilla option with the same underlying asset. 

Borrowing/Lending

01 Exchange offers over-collateralized loans through its borrowing and lending pools. Users can deposit collateral into these pools and borrow different types of tokens which are withdrawn directly to their wallets. Borrowers pay an Annual Percentage Yield (APY) directly to the lenders. This method enables users to increase capital efficiency as they can hold multiple tokens and put them to work simultaneously. For example, if a user has 100 SOL and believes that the price of SOL is expected to double, the user can deposit the SOL as collateral and borrow a different token type instead of selling the SOL. 

Source: 01 Website

Cross Chain Deposits

These types of deposits are unique to the 01 Exchange and are designed to accommodate token transfers from different chains. Users can make deposits into their margin accounts from other supported blockchains in addition to Solana. For example, a MetaMask wallet can be connected to 01, and the token can be directly transferred without having to access a centralized exchange. This mechanism is revolutionary as it keeps the protocol completely decentralized. 

Source: 01 Medium

01 is able to deliver this service because of its partnership with Wormhole. It is a generic message-passing protocol that connects to multiple chains, including Ethereum, Solana, Terra, BNB Chain, Polygon, Avalanche, and Oasis. It enables tokens to be transferred across different chains. At present, 01 supports Ethereum transfers––more chains will be added in the future.

Trading Circle

In order to further the goal of decentralization, protocols need to have the maximum possible community involvement and engagement. For this precise reason, 01 Exchange has constituted the Trading Circle, an insider group of traders on 01. 

This group has access to exclusive channels and benefits such as regular giveaways, insider and alpha chats, future releases news, access to exclusive masterminds, private AMAs, the ability to create referral links, etc. By obtaining the 01 Allegiance Non-Fungible Token (NFT), traders will be automatically verified on the discord server and be eligible to be a part of the Trading Circle. 

Source: 01 Medium

Recent Developments

As previously reported by Web3Wire, the 01 protocol announced the launch of the Trading Circle on March 4, celebrating the one-month anniversary of the protocol’s launch. The Trading Circle is an exclusive community of traders who use the platform extensively and thus will be given exclusive access to private QnA’s, Masterminds, trading credits, and more additional benefits.

On April 24, the exchange announced the start of the BYTE REWARDS competition that allows members in the community to win prizes just by sharing memes, trading ideas, and playing games with friends on the protocol’s Discord server.

Partnerships And Funding

On 29th Jan 2022, 01 Exchange completed the first seed round and raised $2.2 Million. The initiative was co-led by Alameda Research and Multicoin Capital with participation from Solana Ventures, Ledger Prime, Pattern Research, Finlink Capital, Inscribed Ventures, Smile Asia, and Dropout Syndicate. The project is also supported by Chris McCann and Edith Yeung, general partners at Race Capital and early seed investor in FTX and Solana, Alfred Cheung, also a general partner at Race Capital and co-founder of BEA Systems, and Lily Liu, co-founder of Earn.com and advisor to the Solana Foundation. 

Source

Additionally, It has partnered with the following protocols: 

  • Serum: For its matching orderbook design.
  • Pyth: To power contract pricing.
  • Atrix: To create liquidity pools and farms.
  • Chest: For passive yield generation.
  • Friktion: For maximizing returns while proving volatility protection.
  • Wormhole: For communicating with various blockchains.

Concluding Thoughts

The 01 Exchange was created with the objective to become the “most powerful” decentralized exchange (DEX) built on the Solana blockchain network. Even though, the documentation highlights the project’s value proposition well, a look at the project’s total value locked (TVL) trend doesn’t speak much for the growth of the protocol in the last 45 days.

On March 12, the TVL on 01 stood at $10.94 million, and at the time of writing on April 24, the TVL stands at $11.89 million, as per the data from DeFiLlama. This means that the TVL only grew by nearly 8% in nearly 45 days. However, considering that the current market conditions are mostly bearish, it is too early to comment on the growth expected for the protocol. It will be important to note how the platform’s users adapt to its product suite.

Source: DeFiLlama

Find more about 01 Exchange here:

Website | Twitter | Medium | Documentation | Telegram | Discord

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Abhinav Tewari

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