Drift, the perpetual swaps exchange, has announced $3.8 million in new funding for initial liquidity and a deep insurance fund following the launch of its alpha mainnet yesterday.
Consider BitMEX decentralized and built on Solana, and you’ll get a sense of Drift Protocol’s North Star. And, with $3.8 million in new funding, the project is getting closer to its goal.
Multicoin Capital led the round, with Alameda Research, QCP Capital, Robot Ventures, Jump Capital, Not3Lau, and a slew of other angel investors joining.
Despite similarities to BitMEX, there are some key differences between the emerging DeFi project and the crypto exchange, which has processed nearly $2 billion in trading volume in the last 24 hours as of press time.
What exactly is Drift?
To begin, Drift fills traders’ orders using a variant of an automated market maker (AMM) rather than an orderbook. Although the design choice can be found throughout crypto, most decentralized exchanges (DEXs) use an AMM. Despite the growing popularity of AMMs, there is still a trade-off.
Whenever a trade is executed on an AMM platform such as Uniswap or Drift, traders must keep slippage in mind. The price difference between the order placed and the order executed is referred to as slippage. During periods of high volatility, for example, the difference between these two figures can be significant, leaving traders in the dark. Slippage is especially noticeable on exchanges that use the AMM model and may lack sufficient liquidity.
Though order book exchanges continue to experience slippage, the effects are mitigated by the presence of third-party market makers. Market makers, on the other hand, will frequently accept a small fee in exchange for ensuring trades are executed as accurately as possible.
The tradeoff is this: should traders bear the brunt of slippage, potentially losing a percentage of their trade, or should market makers be compensated for limiting slippage?
The latter is what Drift co-founder Cindy Leow refers to as “market maker extractible value.” Furthermore, Leow and her team have chosen a Dynamic Automated Market Maker (DAMM) in an attempt to achieve the best of both worlds. “It combines the capital efficiency of a deep, robust market with the always-on extensibility of an AMM while providing traders with the features they want, such as cross-margining and leverage,” she explained. “In our DAMM testnet, Drift created at least 10x better capital efficiency than the market’s existing options.”
According to Leow, a portion of any slippage that occurs will be directed to the platform’s insurance fund. “Slippage fees will account for the majority of the fund’s contributions,” she said. “However, trading and liquidation fees will be added to the fund.”
4/ 🙋 Community Q #1
How does the funding rate mechanism work?
The insurance fund will fill funding imbalances between longs and shorts. Every time a user interacts with the AMM, it pays out the funding each user owes from the user’s collateral account.
— Drift Protocol (👾,👾) (@DriftProtocol) July 26, 2021
The most recent funding round will help provide initial liquidity to cushion any major slippage risks and secure the insurance fund.
Drift launched an alpha mainnet yesterday, but only those who own a Drift Alpha Ticket non-fungible token (NFT) can use it. These NFTs were given out to early Discord users and other members of Solana’s DeFi ecosystem.