Trading in cryptocurrencies and their derivatives have ballooned in the recent past. Many trading platforms have emerged. However, the volatility of cryptocurrencies affects the price of derivatives and pose a significant risk to traders.
The risks in trade in derivatives are diverse; The main risk is the fluctuation in the value of the underlying asset, which ultimately affects the price of the derivative; There is also a risk arising from a possible breach of contract and violation of regulations.
Since the market of derivatives faces such challenges, MCDEX has come up with a solution to problems by the use of Mai protocol, which is based on the ethereum blockchain. For us to understand how MCDEX solves these problems, let’s look at the aims and features of MCDEX.
What is MCDEX?
MCDEX is a decentralised trading platform for cryptocurrency derivatives. It is based in China. MCDEX is the first cryptocurrency trading exchange that has added perpetual markets on its platform.
MCDEX is built on the ethereum blockchain and uses its hybrid model to enable trade in perpetual contracts up to 10X leverage, without expiration. The Mai Protocol reduce challenges faced by traders by letting them carry out only the core processes of buying and selling of the decentralised contracts.
By enabling traders to focus on buying and selling of perpetual contracts, the Mai Protocol streamlines the trading process, making it easy for new clients. The uniqueness of MCDEX arises from its combination of perpetual contracts with off-chain/on-chain hybrid model called Automated Market Maker (AMM), responsible for generating the funding rate.
Thus the main function of the AMM is to provide online liquidity and to enhance complete decentralisation of the platform.
As noted above, the mission of MCDEX is to make an investment in DeFi secure and easy when using their main product, the perpetual contracts. Security is enhanced by equity and liquidity mining, which is one of the main functions of AMM. On the other hand, the streamlining of processes in the Mai protocol to only buying and selling makes the platform easy to use.
How does Mai protocol operate?
The primary purpose of the Mai Protocol is to calculate the funding rate. As you are aware, the goal of the funding rate is to balance the long and short orders when there is high demand. It deviates from moving the order book directly on-chain to calculate the funding rate. This is because moving the order book directly on-chain is inefficient and increases the cost of placing and cancelling orders. This could also lead to less liquidity.
To achieve that purpose, MCDEX uses the Automated Market Maker (AMM) to calculate the funding rate. The advantage of the AMM is that it provides market-making services based on the present market conditions. This is because the Mai Protocol interacts directly with the Market Protocol. The AMM also builds a minting pool, removing redundancy in minting and redeeming operations. However, if the pool is insufficient, it enables the Market protocol to carry out the minting or redeeming operations.
The AMM is the gateway for perpetual trading contracts for other smart contracts. This has enabled many traders to swap different cryptocurrency derivatives. Using an off-chain order book has resulted in speed exchanging of derivatives and perpetual contracts, as it is the entry point of many users in trading activities.
The trader gives the order book authority through a signature, agreeing to the set condition. Once the condition is met, the order book initiates a call for a perpetual contract. As soon as the transaction is carried out, the entry prices are determined, resulting in the calculation of the actual price, which is the difference between the market price and the entry price.
Liquidity and equity mining
The main process that makes trading secure using the Mai Protocol is liquidity and equity mining. Liquidity mining is a crucial feature of the perpetual contract. As you may know, liquidity is increased by the accumulation of the collateral asset, such as ETH or wBTC in the pool. In return, the MCDEX rewards liquidity providers or miners with its native token called MCB.
Therefore, the MCB acts an incentive for the liquidity providers to keep their collateral assets in the pool. It is this rewarding of liquidity providers with MCB, which is called equity mining.
The good thing is that anyone can add liquidity to AMM’s liquidity pool by sending collateral tokens to the pool. However, there are also times when liquidity should be removed to maintain the 10 X leverage. This avoids sudden swings in prices of derivatives. Liquidity is removed when token holders redeem their share tokens. In other words, the collateral tokens are removed from the pool.
The role of MCB
As discussed above, the MCB is the native token of MCDEX. It is mainly used as an incentive for liquidity providers. The holders of the MCB get their share of profit, generated from transaction fees. Second, the MCB is also essential in taking off the risk of liquidation of the platform. This is so because from time to time, MCDEX will sell the tokens to raise finance.
Third, the MCB is used in the governance of MCDEX. MCB token holders have governance rights of MCDEX as they are involved in making decisions through a voting process.
The Mai Exchange is the hub of transactions, as it handles the matching and cancellation of orders. It is the one that enables the exchange of various perpetual contracts.
We have discussed the AMM as being at the centre of the Mai Protocol as it reduces the exposure to impermanent loss. We have also noted that ETH is the primary collateral underlying perpetual contracts. Also, we realised that liquidity and equity mining creates stability in the trading of crypto derivatives in MCDEX.
With all these features, MCDEX becomes one of the most preferred trading platforms for derivatives and futures.