Vega Report by Jesse

Sideways is good, right?!? With Bitcoin bouncing between $41,000 and $45,000, things have been relatively quiet in the markets this week. Last Friday’s 5-hour shakeout was a nice lesson in how fast these markets can move on sentiment alone. While not many winners overall this week, for big gains we have Decentralized Social at 80% and dYdX with 40% to certainly make some short-term holders happy. This week up to bat is a brand-new margin trading platform called Vega Protocol.

Introduction

Vega is a protocol for the decentralized trading and execution of financial products. It is designed for fully automated, end-to-end margin trading on open public networks, backed by a proof of stake algorithm. Networks are secured with a byzantine fault-tolerant consensus layer and install pseudonymous margin trading using a novel market-based liquidity incentivization scheme to solve the problem of attracting and allocating market-making resources in a decentralized system. Vega nodes also read from other blockchains that are used for collateral, and post transactions to the Vega network when they recognize a deposit or withdrawal on that blockchain. Allowing Vega to support collateral from many blockchains, and cross-chain settlement. Vega’s trading core is a modular application with functional separation between various components that allow for maximum configuration, including selective use of a subset of components in permissioned deployments that don’t need the protocol’s full functionality. The separation between the blockchain and application means that Vega is blockchain independent, because the application layer can process valid, ordered transactions from any source. This allows Vega to migrate to a new consensus protocol if better technology becomes available. Blockchain independence also means that the Vega protocol and core implementation can be easily reused in other decentralized, distributed, or even traditional server-based environments to cater to a wider range of use cases. Products on a Vega network can reference practically any underlying price or other data feed, allowing participants to define and trade a wide range of instruments across the full spectrum of global markets.

Vega Protocol includes a robust market framework that manages the network, markets, and participants, and provides a strong foundation for the functionality of Vega. Vega opens and decentralizes markets by fully automating the processes and incentives for trading and settling financial products between pseudonymous participants. This requires carefully designed mechanisms of economic rewards or penalties and a protocol that balances the desire for permissionless innovation with the need to protect markets and participants. In considering the design approach for Vega by examining existing centralized and decentralized solutions for the trading and execution of financial products in markets of varying size and maturity. From these, a total of nine key properties describe a good trading platform, a good decentralized system, or both in the eyes of the founders.

First, the platform must be Fair and Trusted as participants will not place their money on the line for a trading platform that they don’t trust to work as expected. Vega must demonstrate that it treats all potential participants fairly and predictably, even in a variety of potentially hostile conditions and under the constraints of decentralization. Second, It is important for any trading venue that sufficient Liquidity is available to sustain and grow each market. As relatively illiquid markets will not have a constant flow of traders and thus need strong incentives to attract liquidity providers and catalyze growth. The third part of the equation is the necessity for Low-Latency transactions at all times. In general, the faster a market can react, the more accurately the price reflects all available information. While there are limits to the social utility of ever-decreasing latency, it is important that any solution operates with low enough latency that traders are not disadvantaged compared to other trading venues. Forth, High-Throughput is necessary to provide a fair-trading venue with wide appeal, markets must support the trading needs of as many participants as possible, as a system that is too easily congested will either need to randomly exclude participants or create an undesirably high-cost barrier for entry. Related to throughput is Scalability and the fifth focus of the project. It is important that the system supports the needs of an individual market, and that there is also a clear route to supporting many hundreds or thousands of markets. Of particular practical interest is ensuring that the underlying protocol design doesn’t rely on all markets sharing global state or resources, like requiring that all transactions write to a single blockchain. Flexibility is the sixth concept as the usefulness of such a system is heavily dependent on its ability to effectively support the current and future needs of the many industries, organizations, and societies that interact with the global financial system. Vega must design a platform that allows for the permissionless creation of markets in bespoke and arbitrarily complex instruments, and their ongoing evolution. Seventh is the need to Minimize Trust with all participants to effectively deliver on the benefits of decentralization, and it’s very important to cut out the need for participants to identify themselves. If not for privacy alone but to prevent market creators and liquidity providers from using their position to gain an unfair advantage against other participants. As the eighth necessity, there must be a Self-Governing system in place to facilitate proposals and changes to the system as serious risks can be found with centralized governing systems. These include the potential for fraudulent instruments, fragmentation of liquidity, and reputational damage from unethical markets. To mitigate this, a strong system of decentralized governance is required that addresses these risks without jeopardizing the permissionless nature of the overall system. The ninth and final concept is that Vega must be Product and Market Independent to survive the vastly widening crypto landscape. With the global nature of a decentralized network and the existence of fundamental regional incompatibilities in terms of financial markets legislation, it is important that any solution is able to act as a neutral infrastructure layer that does not itself offer products or operate markets, so responsibility for legal compliance falls on the participants in each jurisdiction who create products, make markets, and trade instead of the protocol itself.

The Vega protocol is designed to be implemented in a distributed and decentralized manner on a network of nodes that may be the same or distinct from trading parties participating in markets. Nodes will maintain a mirror of the state of their Vega network, and process transactions to operate markets and their governance. Nodes are included in the infrastructure through a proof-of-stake mechanism with a certain stake being locked by a node as assurance they will operate correctly. Clients may connect to any infrastructure node and send orders for any available market, perform market actions, and take part in the governance of the network or markets. The current reference node implementation includes a REST API for light clients to be able to access the platform, a GraphQL API for web applications, and a native (GRPC) API to interact with the infrastructure, as well as a reference HTML based decentralized trading application that can connect to a local or remote node. Once all infrastructure nodes have sequenced actions consistently, those actions are processed by software implementing the Vega protocol. The first integration is with the Ethereum blockchain: an Ethereum smart contract allows users to send assets, either Ether or ERC20 tokens, to the Vega platform – effectively locking them into a holding account while they are available as collateral. Vega nodes read the Ethereum ledger and transform any locked assets into collateral that can be used for trading on relevant markets. Once trades have settled, clients may choose to withdraw their assets, by inserting into the Vega ledger a withdrawal request transaction. The Ethereum smart contract interprets those transactions, then unlocks and transfers the assets to the receiving Ethereum wallet. Simpler read-only bridges are also established between Vega and oracles providing data feeds to power certain markets. To secure the Vega platform the protocol uses a mixture of modern cryptography and distributed systems security mechanisms.

The Token

Operating across the network are standard ERC20 VEGA tokens with an initial total supply of 64,999,723 VEGA. This supply will remain constant, unless the community votes to issue more tokens after the mint-lock has expired. Tokens have been allocated to Seed round and early backers 26.5%, Strategic round 11%, Team (tranche 1) 6.5%, Team (tranche 2) 23%, Coin list sale 9%, Community bounties, and grants 5%, On-chain incentives 9%, and Project treasury 10%. Over the coming weeks and months, the team will release updates to the incentivized FairGround testnet (Terms & Conditions) along with a number of additional bounties and opportunities to be rewarded for engaging more deeply with the Vega community. There will also be a grants program for community members who are interested in being supported by Vega to develop their own proposals that benefit the ecosystem. Starting on September 3rd, VEGA tokens were made available to trade on CoinList Pro, following the VEGA Token Sale hosted by CoinList in June earlier this year. In total, 40,000 VEGA and the equivalent of $1,800,000 in ETH and USDC were initially deposited into the pools, and the price of VEGA was set to $45 per token. The mint-lock on tokens remains active until 31 December 2023, when all of the current token holders’ tokens will have been unlocked. Until then, all unissued tokens (up to the maximum supply of ~65m as above) will be under the control of the creator, which will deposit tokens, as they are issued, into the ERC20 Vesting Contract where all vesting terms are enforced. The Vesting contract also allows token holders to stake the tokens it controls.

The Founders

Founders and operators of Vega Protocol are GOBALSKY LABS LIMITED based in the British Territory of Gibraltar. The Team consists of around 20 individuals and engineers at the moment with a half dozen openings at Vega to be filled. Backing the project are investments from a menagerie of well-known funds and VC’s including Pantera Capital, Xpring, Hashed, NGC Ventures, Gumi Cryptos Capital, Rockaway Blockchain, KR1, Eden Block, Focus Labs, Greenfield One, Monday Capital, RSK Ecosystem Fund, Zenith Ventures, Arrington Capital, CMS Holdings, CMT Digital, Coinbase Ventures, Cumberland DRW, DeFi Alliance, Loi Luu, Mona El Isa, ParaFi Capital, SevenX Ventures, Signum Capital, Stani Kulechov, Three Commas Capital, and Zee Prime Capital.

Market Impacts

As stated before the VEGA token was released on Coinlist Pro on September 3rd, 2021. Releasing to market far below its ICO sales price at $18 VEGA had a brief 24hr window that pushed the price to the $20 mark before falling down to $14 a token. As most of the trading action played out in the first few days. VEGA is struggling to find the substantial trading volume it needs to greatly appreciate in price past this point, with only more selling pressure to be expected from early participants. In the community scene, the project has gained a following of 22k on Twitter, 9k in Telegram, and 9k Discord members. To the project’s credit, they’ve been actively adding to the Codebase on a consistent basis lately.

Concerns

It’s always offputting when a project describes itself with such certainty to this degree of decentralization and in this case, self-governance only to make your way over to the tokenomics to find a different conclusion entirely. In the case of Vega, not only did they sell their initial tokens at a massive markup, they gave themselves an inflated evaluation in the process and personally pocketed 30% of the total supply. To add insult to injury, Teams tokens have no cliff and a 9-month first tranche, 12-month second tranche schedule that begins not when the public Coin list sale concluded in September, but the previous Coin list sale from June. Make no mistake about it, Vega Protocol is and always will be as centralized as they get with a token allocated like this. This also breezes over the fact that with a 65M Supply at $45 a token the Team at Vega presumed they’re worthy of being in the top 50 projects in the market Day 1. A bit presumptuous and completely out of touch with reality, if you ask me.

Conclusion

While Vega has massive backing from industry icons, it’s not something inherently unique or special. There’s nothing that makes Vega stand out from similar products like Lever, Laminar, Fulcrum, or previously reviewed bZx Protocol. While the project could migrate to a better-controlled environment in the future, it’s easy to forget that Ethereum just isn’t the landscape to scale these products on yet. It’s like thinking you can win the Indy 500 in a Toyota Corolla. You can talk about it all you like, but as soon as you begin to execute, you’re met with the reality of the chosen tools’ limitations. With one of the worst distribution models seen this year and instant buyers remorse for Coinlist participants, VEGA is not off to a great start.

Until next time, remember that the only guarantee is BTC. So keep stacking that Satoshi.

-Jesse Koz

Follow Jesse on Twitter

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