Volatile Asset Collateral

Highlights

VDEX is the first exchange to accept Bitcoin and Ether as collateral without sale or taxable event

• Trading Collateral: Deposit BTC or ETH and get 20x leverage

• LP Collateral: VDEX is the first exchange to offer sustainable yield on Bitcoin

One of VDEX's standout features is the ability to accept non-stable assets, such as Bitcoin and Ethereum. This is atypical as most perpetual exchanges only accept a singular stablecoin, namely USDC. So accepting not only multiple types of stablecoins, but also non-stable assets allows for higher liquidity and a smoother user experience.

One-Click BTC Leverage

VDEX's model is simpler and easier. On any accepted chain, the user deposits their BTC, ETH, USDC, USDT, or other stablecoin. Unlike other exchanges which swap these assets behind the scenes, VDEX deposits are not swapped, but are held self-custodially for the user to later withdraw without taxes.

Accepting non-stable assets does present some changes. For example, because the user could be liquidated from their collateral depreciating, creating isolated leverage accounts from volatile collateral is not possible. Additionally, the user's buying power will constantly fluctuate, even if they hold no positions.

A cool feature this model supports is delta-neutral covered shorting. Say a user holds Bitcoin and believes the price will decrease in the coming weeks. However, they do not wish to sell which will subject them to capital gains taxes. The user can deposit their Bitcoin into VDEX and immediately 1x short the amount of coins they hold. Because VDEX offers leverage at par-value, not 80-90%, the value of their position will never change, regardless of the underlying price.

Sustainable Bitcoin Yield

Perhaps VDEX's most paradigm-shifting innovation is sustainable Bitcoin yield. The dollar as T-Bills, Ethereum has staking, and even Gold has leasing. The only other asset worth as much as Bitcoin with near-zero returns is the Japanese Yen.

This is not a pleasant comparison as the country's exchange rate with other currencies has plummeted as holders exchange Yen for Dollars and Euros to earn yield. There is an argument that this has similarly hurt Bitcoin's price as investors seek yield-bearing assets.

Where does the yield come from? Fees and spreads. Instead of trading, users can liquidity provide their Bitcoin to the VDEX Vault. These funds are allocated to the VDEX Market Maker (VMM) which will create open interest. Returns are awarded proportionally to the value of the Vault. These returns are not delta-neutral, but because 100% of taker and maker fees are also given to the Vault, profits are likely.

Vaults are commonplace within perpetual exchanges and regularly distribute 30%+ APY. VDEX did not invent vaults, we invented accepting Bitcoin and Ethereum into these high-yield-bearing accounts.

Significance

The market cap of USDC is just $33 billion. This is compared to Ether's $500 billion and Bitcoin's $1.5 trillion. While these figures vary widely, VDEX's opportunity is larger than those of other exchanges. Including the $130 billion of value from other stablecoins, VDEX's total addressable market (TAM) for deposits is 64 times bigger than other perpetual exchanges.

Compared to the status quo, VDEX offers a more competitive list of assets that can be used to gain leverage or yield. This capital efficiency also represents an improvement in UX. While existing exchanges only accept stablecoins as forms of collateral, ETH and WBTC holders can use lending markets to acquire USDC without selling, and thus paying taxes.

The problem with this is that users must manage loans on several different accounts. This is not only less convenient, but also riskier, as only 80-90% of the value of their asset. Don't also forget that the most liquid markets are on Ethereum, so users getting leverage on their ETH or WBTC should expect to pay gas at entry, exit, and partial liquidation.

Elimination of Bad Debt

Perhaps the next logical question is "why haven't other exchanges done this?" Well, some have for short periods of time but the answer is risk, specifically bad debt. Bad debt is surprisingly less of a problem with volatile assets as VDEX can simply liquidate collateral by inverting the position on the orderbook. For example, a user holding 1 ETH as collateral is liquidated due to ETH crashing, not their positions. In this case, VDEX would treat their 1 ETH as a position and sell ETH on the open market while holding the ETH in the Virtual Rollup contract.

The problem is more acute in stablecoins, which can depeg faster than BTC or ETH depreciate. Yet, the same solution can be used: listing the token on VDEX. For every stablecoin that wishes to be accepted as collateral on VDEX, they must create a market between their token and one of the following: USDC, USDT, BTC, or ETH.

So if the stablecoin Terra wanted to become a form of accepted collateral on VDEX, they must deposit X non-Terra tokens. Then, VDEX could accept as much deposits in Terra so far as the claims of non-Terra holders did not exceed X. This effectively isolates depositors without meaning that Terra depositors have their own orderbook and can only trade with other Terra depositors.

For example, say that Terra depositors represent 10% of all collateral. If Terra depositors are abnormally profitable compared to other traders, then there is no bad debt. A Terra collapse would actually profit VDEX as Terra traders would lose their deposits without affecting ecosystem health. If Terra traders were unprofitable—perhaps purposefully as an attack on the system—then the amount of the losses, say 20%, must be translated into a safe collateral, say USDC.

To eliminate this 2% of system bad debt (20% of 10%), USDC depositors must hold this 2% in Terra. The conclusion of this is the elimination of system bad debt. Of course, original Terra depositors will lose as expected. Additionally, the USDC depositors ensuring Terra will also lose, which is also expected.

The question is then perhaps is why anyone would insure another stablecoin. There are three archetypes of stabelcoin traders: the stablecoin foundation, liquidity providers, and VMM. As aforementioned, VDEX requires the stabelcoin foundation itself to create the initial market. If needed, VDEX can incentive depositors to denominate their collateral in this stablecoin. Because this stablecoin would trade at 1:1 with USDC and USDT, it should be easily incentivized with higher APY, which is controlled by VDAO.

The final method of eliminating bad debt is through VMM which can purchase the stable using its reserves. It would earn the higher APYs offered to other liquidity providers.

It is worth clarifying that in these three scenarios: foundation, LP, and VMM acquiring this accepted from of collateral, the stablecoin is not yet distressed. These methods remove bad debt so that if a collapse does happen, the same amount of losses do occur, but they were regulated and assigned appropriately, not to unexpecting users.