Understanding MCDEX's Decentralised Perpetual Contract With Jean Miao, Co-Founder of MCDEX - Ep.38

Bobby Ong [00:00:00]:
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Hey guys, welcome to the CoinGecko podcast. For today's episode, we have Jean Miao, co-founder of MCDEX, decentralized derivative exchange. If you're watching this on YouTube, we at CoinGecko really appreciate it if you hit the subscribe button below. So let's start the podcast, Jean. Welcome to the show. 

Jean Miao [00:00:54]: 
Oh, thanks Bobby. Thanks for having me. 

Bobby Ong [00:00:57]:
Yeah. Jean before we kind of talk about MCDEX, right? I'm just curious to hear about your background. Where do you work before and how do you ended up working for a crypto decentralized derivative exchange?

Jean Miao [00:01:07]:
Yeah. Yeah, for sure. Actually before MCDEX, I have been doing startups in the industry of internet for about like five years. So I'm have my own business in the industry of internet. But personally, I have been trading crypto like since 2015. But the word DeFi, this phase is quite new when I met Liu Jie and the founder team. And back then, like MCDEX is just an idea yet. So I started to get learned more about like what's the DeFi concept. And it's quite shocked to me because as you know, like internet industry is kind of already quite matured. And the DeFi is still like in a pretty early stage, which I think is like very rare in the world right now. So that's the most exciting thing that I think the DeFi space is. And then I joined the team and basically taking care of the operation and marketing side and then start to take care of my MCDEX baby. Yeah. 

Bobby Ong [00:02:06]:
Yeah. You're right. I mean, like, if you look at the internet space, like a lot of things that you think can be built, has already been built. And then look into crypto DeFi's so primitive, like everything is kind of like arcane, like it hasn't been built, but when you look at the potential of DeFi, like that's kind of where finance is going to go about. Like that's every single centralized financial services will be built in a decentralized manner. It's just a matter of time. So I think you said it well. Yeah. 

Jean Miao [00:02:28]:
Yeah, exactly. It's pretty rare because I've been looking for somewhere that is like in early stage that has much opportunities for a long while. And then I found the DeFi. 

Bobby Ong [00:02:40]:
That's great to hear. So for those of us who are not really familiar with MCDEX, can you maybe give a brief explanation of what it is? 

Jean Miao [00:02:49]:
Yeah, for sure. To put it simple, I think, MCDEX is basically aimed to build a decentralized version of BitMEX where anyone can buy or sell a certain asset without taking custody of it, and with leverages. So, yeah, so that is what MCDEX is trying to build right now that people can get the price exposure of a certain asset with leverages. And yeah. So I think that would be a simple version of it. 

Bobby Ong [00:03:16]:
Are you guys already live or when do you guys launched the first version? Can I go to MCDEX and start trading and buy a perpetual contract, for example?

Jean Miao [00:03:23]:
Actually we are right now are waiting for our official V3 launch. So right now we have been testing on the Arbitrum testnet for a couple of months. You can just feel free to go to mcdex.io to play with it. And for the official mainnet launch, we are expecting it like, I think it's in July or next month. Pretty close.

Bobby Ong [00:03:47]:
And you guys launch the V3 of MCDEX on Arbitrum, what's kind of new with V3, and what are the main differences with V2? 

Jean Miao [00:03:55]:
Ah, right. Good question. So yeah, last year in the middle of last year, we actually  already launched our V2, which is like basically the first ETH inverse perpetual swap in the space. And yeah, we have been doing a lot of changes in our V3. I think there are mainly two changes. The first change is that V3 is fully permissionless. That means like not only anyone can trade V3 permissionlessly but also anyone can create any perpetual market permissionlessly. We think this is crucial because this is kind of shaped a power of the creation of the perpetual market to the whole community. Now we can involve the whole community to boost the MCDEX ecosystem together. And the second change I would like touch upon is about the capital efficiency. Because back in V2, we still use the Uniswap V2 pricing formula, which is everyone knows that it's like a low slippage, low capital efficiency system. We have been continuously upgrading our AMM pricing formula so that it can reach much, much higher capital efficiency. The general idea is actually similar to Uniswap V3 that we concentrate more liquidity around the index. Yeah. So right now, like our V3 the capital efficiency is about like 1000 times better than our V2, which means like the traders can enjoy lower slippage. And the LP can enjoy more feature. So, yeah. So this will be the two biggest changes regarding the product iteration. 

Bobby Ong [00:05:33]:
Do you guys use an actual AMM or do you guys use a virtual AMM? Yeah. 

Jean Miao [00:05:38]:
Yeah. We do use real AMM where we need LPs to provide, as I said, yeah, into the pool. Yes. 

Bobby Ong [00:05:47]:
And when it comes to, you know, you talk about concentrated liquidity, and it's similar in nature to Uniswap V3. When it comes to MCDEX V3, do the liquidity providers need to specify the range at which they want to provide liquidity or is kind of automatically determined by the AMM but is the sort of concentrated at where the trading happens?

Jean Miao [00:06:06]:
Yeah, that's a good question. There is the difference between Uniswap V3 and our V3 that our LP don't need to choose the price range, because the AMM algorithm already kind of decide that. Yeah. So this is the one difference here. 

Bobby Ong [00:06:21]:
Okay, cool. So when you participate, I mean, it's kind of hard because now it's all on testnet and it's not on mainnet, when it goes live, what are the markets that will be opened? And I suppose anybody can create any market. Like I, if I want to trade like a shitcoin, I can just kind of provide two-sided liquidity into it and trade I suppose? 

Jean Miao [00:06:41]:
Yeah, exactly because it's fully permissionless. Anyone can do that. But what we are doing right now is that MCDEX DAO will also act as an operator, which is the creator of the perpetual market that will kind of have some general model pools and market. For example, we will have like a USDC pool that can support ETH-USDC trading pair and BTC-USDC trading pair, such like this. And meanwhile we have been in contact with several teams that have great insurance to open their own token perpetual market. For example, the DPI team they will have a DPI pool to have the DPI perpetual market. I believe there are many other like projects that have these kinds of names. So yeah. Long tail market will be extremely boosting, I think. 

Bobby Ong [00:07:33]:
And when it comes to liquidity providers, do they provide single-side liquidity, like just the token or do they have to provide dual-sided liquidity kind of like what you see in Uniswap, like ETH-USDC? 

Jean Miao [00:07:44]:
Only one asset is enough. Yeah. 

Bobby Ong [00:07:47]: 
So that's kind of good, right? Because then do you, I mean, I'm trying to think, do you suffer from impermanent loss where you provide liquidity on MCDEX? 

Jean Miao [00:07:56]:
Yeah, that's a good question because the logic here is like AMM is acting as the counterparty of the traders. So the LP doesn't take the impermanent loss in our case. What they take is actually the market making risk. Yeah. So what the LP suffers is the market making risks and the market making profit. So our aim and algorithm is trying to balance their risks and profits. 

Bobby Ong [00:08:22]:
So essentially what you're saying that if a trader goes bankrupt, all the profits basically goes to the liquidity providers, but if the trader makes like a lot of money, the market makers suffer a loss because it's a zero sum game, right? So is that kinda what it is? Yeah?

Jean Miao [00:08:36]:
Yeah. Yeah. Basically like that, because yeah. Derivative is a zero sum game, and being the, in the mechanism right now that traders and AMMs are basically the counterparties. Yeah. 

Bobby Ong [00:08:50]:
And is there a situation, I'm trying to imagine, where a trader makes so much money from a trade that the liquidity providers or market makers, the counterparty, or these other trades gets bankrupt instead?

Jean Miao [00:09:00]:
Yeah, that's a pretty good question because I can give you a case that I heard from my friend who is the founder of a centralized exchanges. Because he has been running a centralized exchanges for about like three years. He is a great supporter of our AMM model because what he does when he runs the centralized exchanges is basically act as the counterparty of their traders. 

Bobby Ong [00:09:24]:
Oh, that's dangerous! 

Jean Miao [00:09:26]:
Yeah. And what they do, they don't use the AMM, although they still use order book model, but what he does is like, they are basically being the market makers, and sometimes they may hedge but sometimes they don't. So from his experiences in the past several years, usually if we act as the counterparty of the market, which means that traders usually will profit from it. Because for most of the time, the decision made by the most traders are usually [inaudible]. So you're basically acting as the counterparty of the traders, all the traders usually in terms of probability. 

Bobby Ong [00:10:06]:
Yep.

Jean Miao [00:10:07]:
Yeah. There is a great probability that you are making profit. 

Bobby Ong [00:10:10]:
Yup. Yup. So I guess the next question is what's kind of the fees that is charged on MCDEX and how do they compare against centralized equivalent, like BitMEX for example, that you mentioned earlier?

Jean Miao [00:10:20]:
So for a trader like, we are basically have two kinds of fees, the gas fee and the transaction fee for sure. So in terms of the gas fee because what's being testing on the Arbitrum Rollup for a while, we are kind of quite confident that the fee on L2 will be about like a one percentage of that Ethereum mainnet, which is like $1 to $2 MCDEX, and this is a gas fee part. The second part is about the transaction fee and because the transaction fee is actually set by the creator of the perpetual market it will be different. But for MCDEX DAO as an operator, the fee is about like 0.075%, which is quite similar to the centralized exchanges. So yeah, these are basically the two parts. 

Bobby Ong [00:11:08]:
So basically it's kind of like Balancer, where the pool creator can sort of create and decide the fees, and in this case, like, can the pool creators, they put two tokens in there, or they kind of like follows the Balancer model to also allow you to add like three or four tokens, for example? Or just single the token, right? Is it?

Jean Miao [00:11:25]:
Yeah, single token.

Bobby Ong [00:11:26]:
Alright, yeah. And I understand that on MCDEX that you guys allow for up to 20X leverage on trades, on perpetual trades, right? Is 20X kind of a theoretical maximum, can you kind of go up higher to 125X like on Binance Futures or like 100X on BitMEX, or what's the kind of plan here?

Jean Miao [00:11:49]:
Yeah. Yeah, because right now, like most centralized exchanges are providing like about 100X leverages. So yeah, actually for a DEX that leverage is basically limited to the infrastructure. So for now, like we on Arbitrum Rollup, we actually could be a bit higher, but to be like more safer here. So we are trying to, well our approach is that we are starting with about like 20X, and if we test for a while and everything is kind of stable, we may increase the leverage later. So yeah, generally speaking, if aim for that CPS could be higher, then we could have higher leverages. So this general idea is like this. Yeah. 

Bobby Ong [00:12:33]:
And coming back to the fees question again, you charged on average 0.075%, like what's the breakdown to the liquidity providers and to the MCDEX token holders, the treasury, for example? 

Jean Miao [00:12:46]:
Yeah, that a good question. For example, for the 0.075% is a transaction fee, about a 0.015% will goes to the MCDEX DAO vaults and the vaults is basically capturing a certain profit that generated by the MCDEX platform and our holders, MCD holders could have the decisions to, how to use the assets that generated at the platform. Yeah. So this goes to the DAO vault part. And then the rest about like 0.05, around that figure, will goes to the LP. 

Bobby Ong [00:13:23]:
That's interesting.

Jean Miao [00:13:24]:
Yep. Yeah. And sometimes, if the operator is not the MCDEX DAO, they may be some other project or other individuals, they are free to set operator fee also that they could take share of the transaction fee. Yeah. So basically the transaction fee will go to those three parts, the LP, the MCDEX DAO and the operator.

Bobby Ong [00:13:46]:
Yeah. And say if you're on LP, I'm curious to hear, maybe I'm not so sure if you have any data from the V2, V1 or some of the testnet, like what sort of returns or APYs were you kind of expect to see for any of this pair, do you have any of these stats, for example? 

Jean Miao [00:14:01]:
Yeah. Yeah. Honestly, that's a pretty hard question to answer.

Bobby Ong [00:14:05]:
You don't have any stats, any data, right? 

Jean Miao [00:14:07]:
But what we have right now is our testnet that would  have been ready since February. It's been like about five months here. So we have been like, during this time, our API for the LP has been like, kind of volatile ranging from about APY from 100% about like 20% in terms of APY. Because it basically depending on the volume and also depending on the market volatility, there is a lot of like apparent meters. Yeah. 

Bobby Ong [00:14:36]:
It's similar to SushiSwap right? It's volatile. Like the APY goes up very high on those days because volumes go up. 

Jean Miao [00:14:42]:
Yeah. 

Bobby Ong [00:14:42]:
Cool. What about liquidations? It's always an interesting topic, right? How do you handle liquidations? Is there a penalty to traders who get liquidated and where does the penalty goes to? Is that to an insurance fund like BitMEX or to the DAO, for example? How does it work? 

Jean Miao [00:14:58]:
So, yeah, that's a good question. So right now, right, MCDEX ecosystem we do charge a liquidation penalty for the traders and the penalty will basically goes to the LPs for now, but this could be changed by the governance that maybe parts of them will go to insurance funds. But for now in the mechanism that most goes to the LP. 

Bobby Ong: [00:15:18]:
And do you guys maintain any insurance fund or it's not really necessary because the LPs are sort of the insurance, unless they go completely broke, in which case the trader's profits are kept?

Jean Miao [00:15:28]:
Yeah. Insurance fund is also quite important for the whole trading ecosystem. So right now we are kind of have the operator be the one who try to solve this problem. And meanwhile we are also considering those, as I mentioned that to use part of the liquidation penalty goes to the insurance fund, also to take care of this asset insurance fund. Yeah. 

Bobby Ong [00:15:53]:
You guys chose to launch on Arbitrum. I'm curious to hear why Arbitrum instead of Optimism, or instead of Polygon, which is really live? A lot of projects have gone on Polygon.

Jean Miao [00:16:02]:
Yeah. Yeah. We actually have been supporting Arbitrum since last year. Yeah. Last year Q3, which is quite early at that time, like few people have heard of it yet. Yeah. We made this decision because we have did a several research on all of the other solutions in the market. So there are several aspects that we do care a lot. For example, the composability, and the second thing is the decentralization, and the third thing is about like the fee and their performance, whether it can beat our requirement as a derivative. And also we care a lot about whether they are developer-friendly. For example, for Arbitrum we don't need to rewrite any one line of code. So, which is pretty good. Yeah. So this are the several aspects that we care a lot about. So in terms of composability I think, which is one thing that we think is a top priority. So that leaves us some options, like the Optimistic Rollup and ZK-Rollup, they are all composable. But for example, for other solutions, they are kind of cannot do that. So we only have like OP, and Arbitrum, and ZK-Rollup. So we have did like kind of do a some comparison of the OP and Arbitrum because ZK-Rollup at that time, it's a little bit far away yet. So in terms of product readiness we are kind of choosing between OP and Arbitrum.

Bobby Ong [00:17:30]:
What did you say, ILP? 

Jean Miao [00:17:32]:
OP, sorry, Optimism. 

Bobby Ong [00:17:33]:
Oh, Optimism. Okay. 

Jean Miao [00:17:35]:
Yeah. Usually call them OP. 

Bobby Ong [00:17:36]:
Yeah. 

Jean Miao [00:17:38]:
Yeah. And yeah, so after we did some, like comparison between the OP and Arbitrum, we realized that like for example the smart contracts DAI on OP is a little bit smaller than Ethereum mainnet. So as a protocol, which is complicated like us, so we have to split our smart contract into several, which may increase the gas fee. So this is the one thing that we consider that Optimism might not fit us that much. And meanwhile, we have been studying the gas fee on the Optimism and Arbitrum. Like at that time the result is like Arbitrum is still a little bit lower in terms of gas fee, which we think is important. But I believe that things might change now because of Optimism team is still working on it. So they have just announced something yesterday. So we are still doing this kind of research. So yeah, so back at that time, so because of this several reasons, we choose Arbitrum in the early stage. Yeah. So that's the thoughts here.

Bobby Ong [00:18:45]:
Yeah. It's always an interesting choice and I always like to ask teams why this solution instead of the other solution, because it's kind of a big, it's a big mess, right? There's so many different solutions and everyone claims that their solution is the best and it's kind of leading to a quite a fragmented DeFi space, but I think it's interesting to see how all this play out, and we get a better idea in the next few months. 

Jean Miao [00:19:04]:
Yes, correct. Exactly. Things always change. 

Bobby Ong [00:19:07]:
Yeah. So there are several decentralized derivatives platforms and you guys are not the only one in the market. I spoke to Perpetual Protocol guys last week, for example, on the CoinGecko Podcast. I'm just curious to hear from you, what's kind of the main difference between MCDEX V3 and Perpetual Protocol V2?

Jean Miao [00:19:27]:
Hmm. Yeah. I think they have announced it that like V2 will also goes towards the permissionless path, which is good. Yeah, which is good. I think this is how DEX will win over centralized exchanges. And I think product-wise for now, I also have take a look at their paper about the V2. I think one thing that I would touch about on product-wise differences is about the LP part that you've mentioned, because they are leveraging the Uniswap V3 that the LP needs to choose the range that they provide the liquidity. However, in our V3 the AMM algorithm kind of decided for the LP. So in this term, I think we don't have any comparison yet, but I think in this way, the AMM always could be probably make better decision when providing the liquidity. Because the LPs, they may don't have such knowledges to decide which price range is better or something. Yeah. So this is a minor different, the product differences here. But I think in the long-term we need to iterate a lot because this is still in the initial stage. This is not the end. This is only the start. We'll need to continuously innovate, continuously generate some more new feature, maybe some new directions later. So it's a long term run here. Yeah. 

Bobby Ong [00:20:49]:
In your opinion, what are the key success factors or key factors to running a successful decentralized derivative protocol? What do traders in a centralized or decentralized platform look for? What do you need to do correctly to ensure success? And yeah, it will be interesting to hear from you.

Jean Miao [00:21:09]:
Yeah. I think there are basically two key factors. The first one is that user experiences. Because most traders have get used to the centralized exchanges already. And if we made them to wait or too much cost to place a trade it will not attract many traders. So that's exactly what we are working on right now, to provide the user experiences that can on par with the centralized exchanges. And the second thing I think is also quite important, which is also something that centralized exchanges cannot do is the ecosystem because we need to fully take advantage of the DEX that we can interact with other smart contracts. So that the whole ecosystem is not only an exchange itself.  Other smart contracts can build on top of us to generate much more diversified products. Yeah. For example, in MCDEX V3, we actually has varied, two assets, is pretty good base asset for others smart contrast. The first one is the LP token, and the second one is a perpetual position. Yeah. For example we had been talking with Barnbridge, which is, they are [inaudible] trenching risk. So for our LP, as I mentioned, the LP suffers from both the market making risk and market making profit, which average user they can now evaluate. They're hard to evaluate what is a market making risks and profit. So by collaboration with Barnbridge so we can change the risks of an LP that if an LP is preferred lower risk, then they can go to the, maybe the senior change. And if they are preferred a higher base, they can go to a junior change. This kind of composability can widen the participants often becoming an LP on MCDEX and boost another basically another product here. So yeah, there are lots of like interesting product can generate from those base assets. For example, our second asset is a perpetual position and we are also working with some other project teams. One thing that we have mentioned is the copy trading. Some copy trading product can build based of MCDEX so that they can provide these kinds of services and products to a wider user. So there are lots of things can now be achieved by the centralized exchanges. And I think that we need to fully utilize the uniqueness and advantage of a DEX, so that we could gradually in the long-term like win over the centralized exchanges trading volume, which is pretty huge. Yeah. 

Bobby Ong [00:23:48]:
Yeah. I think you brought up some interesting points about how DeFi's compostable and the centralized exchanges are not compostable. So these things that you mentioned, I didn't realize that if you open up a perpetual position on MCDEX that you get a token and that can be used for a lot of things. Even as collateral token actually, it might be interesting to be used. Is that a NFT or is that kind of ERC-20 for any perpetual position? 

Jean Miao [00:24:09]:
So for now our LP token is an ERC-20 and for the perpetual positions we are trying to figure it out. We are hoping that it could be an ERC-20, but I think we don't have like a tech solution yet. We are working on this parts right now. 

Bobby Ong [00:24:25]: 
Cool. And do you think that DeFi derivative platforms will overtake centralized derivative platforms in terms of volume, like in the future? 

Jean Miao [00:24:34]:
Yeah, in a longterm. I am 100% of that. Yeah, because I think because I am taking up the operations side, I have been talking with lots of traders since day one. And that's a question I keep thinking about. Right now, like most traders has realized that in centralized exchanges, their real counterparty is the centralized exchange itself, instead of another individual, you know. I realized more and more traders have realized this part. So the one up their game. So DEX is their choices. 

Bobby Ong [00:25:09]: 
I never knew the centralized derivative exchanges were the other counterparty for all these futures platforms. I always thought it was some other market maker that was kind of independent, but I guess exchange could be a market maker itself. 

Jean Miao [00:25:20]:
Yeah, in a centralized exchanges mechanism actually, centralized exchanges themselves is a counterparty and more and more traders. Because, you know, like if there's lots of like flash crash. 

Bobby Ong [00:25:31]:
Yeah. It's just BitMEX is notorious for such things. And talking about flash crash, like these things couldn't happen, wouldn't happen on MCDEX or it's hard to happen, for example?

Jean Miao [00:25:40]:
Yeah. So this is something that when we are designing the AMM, VMM algorithm, something that we are trying to avoid. So we have been testing the, in the real environment market for like about five months. As you know, like in the past several months there, the market is quite volatile, right? So during the volatility of the past several months, our AMM for now is working at our expectations. So for now we are quite confident because we have been testing for several months. So we are kind of confidence about the maturities of the work of the AMM. So yeah, we have quite confident about this part.

Bobby Ong [00:26:21]:
That was good. For our final question, right, I kind of asked a lot of questions today on MCDEX and we've kind of gone through so many things. What's kind of exciting that's going to come about from MCDEX in the second half of this year?

Jean Miao [00:26:31]:
Yeah, yeah, think the biggest milestone could be the official launch of our V3 that was being like working for it for quite a long time. And besides the launch, we will all like focus on, as I mentioned to expand our ecosystem by collaborating with several other projects and meanwhile, we are also considering to kick up our own incubator program. Because we have many ideas that some products can build on top of us, but because we don't have enough developers to implement those ideas. With the launch, we'll also kick off incubator programs so that we could work with more and more talents to implement our ideas to make it come true.

Bobby Ong [00:27:18]:
That sounds very interesting. Thank you very much for taking the time to explain everything about MCDEX to all of us here at CoinGecko Podcast, Jean.

Jean Miao [00:27:26]:
Thank you. Thank you, Bobby. 

Bobby Ong [00:27:27]:
All right. That wraps up the show. Thank you for listening to the CoinGecko podcast with Bobby. If you like our show and want to know more, check out podcast.coingecko.com or please leave us a review on iTunes. If you have any feedback, do drop us an email at hello@coingecko.com. Join us for more next week. See ya. 

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