Drift v2 Roadmap & Planned Features
Drift v1 launched in November 2021 and brought to market an iterative innovation of the virtual automated market maker (vAMM) pioneered by Perpetual Protocol.
The automated market maker of Drift v1 — the dynamic automated market maker (DAMM) — introduced curve re-pegging and adjustable liquidity to provide users with guaranteed liquidity, less slippage and a better trading experience.
In under 6 months, Drift v1 saw rapid success with more than 15,000 cumulative users and over $10 billion in trading volume.
Today, we’re excited to introduce our vision for the next iteration of on-chain perpetual swaps: Drift v2.
Drift v2’s goals are:
- Deeper liquidity for traders
- Smarter market maker
- Greater protocol collateralisation
In the following, we'll share in-depth explanations of these improvements and highlight how these will make Drift v2 an even more liquid and robust on-chain perpetual exchange.
We'd like to emphasise that Drift v2 is a work in progress and invite any and all feedback from our community.
Deeper Liquidity for Traders
In order to create an even more liquid and robust on-chain perpetual exchange, we started by crafting the following innovations:
- Just-In-Time (JIT) liquidity mechanism
- Passive liquidity pool
JIT (Just-in-Time) Liquidity Mechanism
To supplement the DAMM’s liquidity, we’re working on a novel mechanism: Just-in-Time (JIT) liquidity.
The JIT mechanism provides an opportunity for makers to step in and fill taker orders before the order is filled against the DAMM. This greatly expands the liquidity available, as orders of any size — regardless of the DAMM — can be fulfilled by external makers.
Consequently, takers can be efficiently matched with makers, achieving:
- Better pricing
- Lower slippage
- Last-mile liquidity on the DAMM
- Improved long-short balance on the DAMM
This mechanism will also benefit market makers, as they will be able to access trader flow before it’s filled against the DAMM.
How it works:
1. Users place their orders on Drift, which are first routed through the JIT liquidity pool. The JIT liquidity pool has an expiry interval of 5 seconds, which changes the price that users are filled at by makers within a set price range.
- At t=0, the maker price range starts at the best possible price that takers could get filled at (the DAMM bid) and ends at t=5 (the DAMM price).
2. Makers are alerted whenever users open orders. They can then provide maker quotes using this formula [(DAMM_bid * (X-t) + DAMM_est_entry * t)/X)] to fulfil the orders.
- Makers are incentivised to quote early within the time interval to ensure a fill.
3. If there is not enough maker liquidity for a particular order, the remaining open order will be filed by the DAMM at the estimated entry price for the remaining order size at t=5.
To make this easier to grasp, please refer to the diagram below:
Makers can then close their position against the DAMM, or via the JIT pool.
If you wish to integrate with Drift or want to know more about the JIT liquidity mechanism — please reach out to a team member or open a Partnership Ticket in our Discord.
Passive Liquidity Pool
Individual markets on Drift v2 will have LP fee pools for external LPs to stake their USDC.
The LP fee pool adds to the liquidity available in the market. External LPs add to spot liquidity and take on the net position of the DAMM.
Upon staking, external LPs will partially take over the total LP shares of the pool, proportional to the total (virtual + spot) liquidity in the pool.
As a reward, external LPs will earn trading fees, funding rates and borrow rates, which comes from users who want to withdraw their positive PNL when there’s a collateral deficit in the collateral vault.
Simultaneously, trading on the market is still supported by the virtual liquidity of the DAMM.
The net positions of external LPs help to increase the collateralisation of the DAMM. These positions can be hedged on other decentralised exchanges to return a delta neutral position that only earns fees.
As a result, the system is one where individual LPs contribute to collateralising the DAMM, but the DAMM isn’t entirely dependent on LPs (unlike Perpetual Protocol v2).
Smarter Market Maker
Oracle & Volatility Based Pricing
Drift v2 will employ an oracle-based pricing mechanism and feature a smarter market making mechanism.
This allows the DAMM to rebalance its peg, base spreads, and market reserves to ensure the long-short balance stays within a set range.
More specifically, Drift v2’s DAMM will adjust the peg of the curve based on the oracle price (the live price) and adjust base market spreads based on volatility, inventory skew, recent buy/sell pressure and oracle price/confidence.
Drift v2’s formulaic adjustments will essentially calculate a required spread in the DAMM at inception price in order to ensure that the exchange is able to fund the cost of pre-pegs across a large price range, which is a function of oracle price and the implied volatility (IV) of the market.
A by-product of setting the spreads in a way that takes into account the DAMM’s net position is that funding will usually be in favour of the DAMM’s net position.
As a result, agents (such as arbitrageurs or passive liquidity providers) would be incentivised to continue balancing out the net position to collect funding.
This should keep funding rates tightly in line with the actual positioning of the market, i.e. if there are more notional longs than shorts, funding should be in favour of the shorts.
What is more crucial is that these improvements achieve a better long-short open interest balance, ensuring that the exchange can pay out winners and losers symmetrically — regardless of price action.
In the figures below you can gain some insights into the health of the system given various strategies:
- Figure A shows how the net base asset amount and fees collected by the protocol change with different strategies for parametrisation.
- Figure B shows how the spreads, exhibited by the movement of the bid curve and the ask curve, change in relation to the mark price.
- Figure C shows the outcome of changing the spreads dynamically — final fees collected minus distributions from curve operations — which then determines the health of the market and whether or not there is a shortfall at the closure of markets.
Greater Protocol Collateralisation
Drift v2 plans to support cross collateral deposits.
While the exact assets are still to be determined, the goal of cross collateral is to enable users to deposit assets other than USDC into the pool. This might include assets like SOL, BTC, ETH and USDT.
On Drift v2, cross collateral deposits may also be supported for passive LPs, which would increase protocol collateralisation through diverse assets supporting the underlying perpetuals market.
Implementing cross collateral will also enable borrowing and lending of assets. For instance, a user could deposit SOL and use it as collateral to borrow USDC.
Users, as well as passive LPs, would be able to earn yield on their deposits.
Simulation Bounty Competition
An open-sourced agent-based simulation framework has already been built to model out different pre-pegging and spread adjustment strategies in Drift v2.
Simulations can be run with instructions here, showing results for the DAMM’s slippage and terminal condition i.e. health of markets.
Over the next few days, we will be announcing the launch of a data simulation competition based on the framework mentioned above.
Large cash prizes will be available. More information will be released this week.
Drift v2 constitutes a huge milestone. With this iteration, we aim to:
- achieve deeper liquidity for traders to execute larger trades with less slippage; and
- enhance protocol solvency (by bolstering the long-short balance) and improve collateralisation
More importantly, Drift v2 will significantly improve the trading experience of our community.
The launch date for v2 is currently slated for late August / early September.
Having said that, both the launch date and the technical designs mentioned are subject to change.
Further updates, information, and documentation will be released over the coming weeks.
We’re committed to creating value for the community and invite you to continue to rigorously discuss and review our updates and the roadmap towards Drift v2.
Disclaimer: This release is strictly for informational purposes only and doesn’t constitute financial advice or a solicitation to buy or sell any assets or to make any financial decisions. Please be careful and do your own research.