If you ever wanted to own a casino, the Monte Carlo cryptocurrency folks may have engineered a solution for you. Their decentralized, censorship-resistant solution is not located in beautiful Monaco but the code of the peer-to-peer nodes of the Ethereum Network.
To be precise, they engineered a decentralized exchange with moderately unreasonable amounts of leverage and not a bonafide casino. That said, for a cryptocurrency price speculator, the difference is negligible. The exchange ups the stakes for those gambling on cryptocurrency prices.
Let’s overview the main product and touch briefly on how easy it is to own a part of the profits of this cryptocurrency casino.
Published: December 16th, 2020
Liu Jie and his friends launched a decentralized platform that allows users to speculate on the price of cryptocurrencies with 10X leverage. No big deal, right? dYdX already did that.
What’s cool about the Monte Carlo Decentralized Exchange (or MCDEX) is that it allows anyone to profit from the miscalculations (or incorrect prognostications) of its users. That’s because MCDEX speculators trade against an automatic market maker (or AMM).
Democratized ownership has finally come to the world of cryptocurrency derivatives.
Cryptocurrency Derivatives
MCDEX is a cryptocurrency derivatives Swiss Army Knife. While there are many facets to MCDEX, their perpetual futures product receives the most attention.
Perpetual futures (or perpetuals) are contracts that are bought or sold depending on your opinion of the future. Buying contracts (or going long) means that you are bullish and benefit from increasing prices. Selling contracts (or going short) means that you are bearish and benefit from decreasing prices.
Perpetuals differ from other derivatives like options and traditional futures contracts in one crucial dimension: They never expire.
This is not absolutely true though. You’ll lose your bet if the market moves massively against your position for an extended period of time because MCDEX kinda messes with your position every 8 hours. This fake expiry rolls your position into the next 8-hour period after a debit or credit transaction that is called a funding payment.
Oracles & Funding Payments
The funding payment is a transfer of funds to your counterparties if you bet on prices going up and the MCDEX perpetual price exceeds the real price on regular asset exchange somewhere else. MCDEX gets this real price from an oracle.
Blockchains need oracles because they only know about data on the blockchain. The oracle provides data from the real world. MCDEX uses Chainlink’s decentralized oracle network.
Suppose you are bullish. You establish a position on MCDEX and are praying for a price increase. Based on the data provided by the Chainlink oracle, MCDEX will charge your position a funding fee.
More precisely, if you are bullish on ether (or ETH) and the ETH perpetual futures contract’s price exceeds the real price of ETH (“the underlying asset”), your position is debited an amount owed to one (or more) of your counterparties. Your counterparties, who hold an opposing view of the price of ETH, will see their positions credited the funding fee that you were forced to pay.
The reverse is also true. Suppose you are bearish. You established a position on MCDEX and are dreaming of a price decrease to bring you sudden wealth. If you shorted ETH perpetuals and the MCDEX price is below the oracle’s price of ETH, your position would be debited the funding fee.
Price Differences
BitMex invented this funding fee business. It’s been effective in keeping the price of the perpetual tethered to the underlying asset for years. It’ll no doubt do the same for MCDEX, but it’s important to know that the perpetual and the underlying asset won’t necessarily have the same price.
In some ways, trading perpetuals on MCDEX is like trading 8-hour futures contracts. That means the price you see on MCDEX might differ from the price of the asset (ETH, LINK, COMP, LEND, or SNX) you are speculating on. That’s because when you trade on MCDEX, you are trading futures contracts, not the actual asset.
Delivery Unnecessary
Traditionally, futures contracts were used by commodity traders to allow farmers (for example) to hedge prices on seasonal crops (like wheat). The buyer of a wheat contract would take delivery of the commodity when the contracts expire. Lured by leverage, speculators would participate along the way, but offset their positions before expiry because they had no interest in taking delivery of the underlying asset.
Perpetuals trading is futures trading on steroids. Perpetuals are solely speculative financial instruments because the concept of delivery is thrown out the door. MCDEX ensures that speculators never have to worry about delivery thanks to inverse contracts. [1]
Inverse Contracts
Profits and losses are settled in terms of the underlying cryptocurrency in inverse contracts. It’s kinda like owning wheat, wagering that the price of wheat goes up in dollar terms, but capturing those dollar gains in wheat (not dollars). You end up with more wheat if you wagered correctly.
Farmers have no use for inverse contracts, but über bullish speculators do.
The inverse contracts allow those already long to stay long. This bias toward the underlying asset is very attractive to speculators that believe the price of their beloved ETH (for example) is going to appreciate and want to accumulate more ETH.
Trading Fees
Speculation is a risky business, but collecting a share of the trading fees that the MCDEX platform collects is not. Trading fee accrual allows AMM liquidity providers to own the casino and profit from this sordid, price-prognosticating affair.
Liquidity providers receive 0.3% of MCDEX trading fees. This is exactly the way Uniswap does it, but there are a couple of differences: The first difference is that you provide long and short positions in equal quantities. The second difference is that you need to constantly maintain that risk-neutral balance.
The platform provides an interface to make it easy to maintain this balance. There is also the following video explanation that explains the process.
Good luck trying to read and understand the English documentation. Certainly, the original Chinese version must be less tedious. [2]
Version 3
MCDEX will launch the third release of their platform shortly. It’s called Mai Protocol V3. They released the white paper this week and it underscores their commitment to democratizing derivatives and the long tail of cryptocurrency assets.
Casino Financing
MCDEX needs community financing and this is measured by total value locked (or TVL). Without TVL, MCDEX is a casino with nothing to offer. It would be a casino with bright, fancy lights and nothing to gamble on.
The world of decentralized finance is frothing with activity and there are so many platforms fighting for liquidity. MCDEX will need to rollup its sleeves and go to battle. Like all other exchanges, it needs liquidity to provide any value to society.
It will take some serious marketing (and genuine word-of-mouth activity) to bootstrap AMM liquidity on MCDEX. Hopefully, this article encourages everyone to support yet another project that cares about democratizing finance from the get-go. [3]
This article is not investment advice. It is informational only. Please do your own research. Trading derivatives is risky and providing liquidity to the MCDEX AMM has unique financial risks.
[1] I received feedback from Jean Miao, the COO of MCDEX, after publishing this piece and she wanted to make it clear that traditional futures contracts (or vanilla contracts) also can have non-physical delivery when they are cash settled.
[2] If time permits, I will do a deep dive into how the AMM works next.
[3] Wishing the MCDEX team the best in their endeavor!
