Investment recommendation -
Overall, this derivative DEX sector is worth investing in according to its mass growth potential ($31B potential market cap) in the future and would add extra value to the existing CEX-based ecosystem. By referring to the growth of GMX and its related ecosystem on Arbitrum, the investment would be a holistic investment into the derivative DEX ecosystem.
Rage Trade is based on GMX protocol and is part of the Arbitrum DeFi ecosystem. The DeFi ecosystem boost on Arbitrum has brought huge user traffic recently and would be a good reference for ecosystem building from a layer1/layer2 chain perspective. The investment might start with products similar to GMX built on the chain and expand its related ecosystem. Rage Trade-alike products would be a good investment target to attract LPs, accumulate liquidity, and flourish the whole ecosystem.
As of the end of 2022, perpetual derivatives have a market cap of $3890B, and perpetual DEX only accounts for 0.8%. The recent collapse on FTX has weakened the confidence in CEX of both retail and institutional investors, and we’ve seen the user activity on DEX leader Uniswap explosively grow. Derivative DEX is in a very early stage. The market leader GMX and dYdX TVL are $529M and $391M, respectively, whereas Uniswap and Binance have $3.89b TVL and 71.97b TVL, respectively. There is massive potential in the sector to be exploited.
In the DEX sector, different types of mechanisms exist in the market. The most famous one is AMM (Auto Market Maker), and the leader in this sector is Uniswap. Another popular one is order book, represented by dYdX, which is more similar to CEX and the traditional market-making mechanism. For traders, liquidity depth and gas fees are primary factors when considering a DEX. Order-book solution compromise decentralization with liquidity. Currently, most AMM-related derivatives exchanges are struggling to provide better liquidity. Game theory model exchange such as GMX has risks of huge losses for its GLP when it’s a one-sided market. Rage Trade has an innovative mechanism to solve the liquidity issue:
Omni-chain recycled liquidity and 80-20 vaults
Rage Trade re-use ETH+USD liquidity across chains and protocols (AMMs, Money Market and Derivatives). This allows Rage to gather liquidity across chains to its ETH perp pool along with its 80-20 Vaults methods.
The 80-20 vaults is a threshold for liquidity provided in Rage Trade. 80% of the TVL stored lives in a yield-generating service (Curve, GMX, Sushi etc), and 20% of TVL provides concentrated liquidity on Rage Trade. The team has things considered in its operations. The rage team rebalances PnL to maximize capital efficiency. To avoid the imbalance of vETH and vUSDC held by concentrated liquidity position, the update range operation maintains a balanced amount. Besides, to manage the risks of perp position of more than 20% due to a large price move, the reset liquidity operation closes the vault.
Rage applies the Uni v3 vAMM(Virtual Automated Market Maker) which is designed for derivative. The vAMM pool holds virtual tokens that are a synthetic representation of underlying tokens in the spot market.
Rage Trade also designed two Delta Neutral Vault products to help GLPs earn more profits by shorting on Aave and Uniswap to minimize exposure. The two products are the risk-off vault and Risk-on Vault. The Risk-on Vault returns are at around 25% as of Oct 2022, higher than -13% of GLP.
Rage also has a Forward guidance method to keep funding rates in line with CEXs. This includes on-chain traditional calculation, Chainlink Oracle feeds and manual update via a governance vote (worst-case scenario).
With these innovative mechanisms, Rage maximizes the LP’s earnings and capital efficiency with 80-20 vaults and Delts Neutral Vault products. It also mitigates the risk through its operations and 80-20 vaults to separate the 80% of risks.
We analyzed some of its key metrics performances in recent days. Since it’s a relatively new product, we don’t have much data to track now.
TVL
From its GLP vaults launch last year's end, the TVL kept at around $15M consistently. Since it’s an early project, we recommend racking the TVL for a longer time.
Basic stats as of 2/9/2023 -
Unique traders: 27,841
Unique LPs: 15,951
Total LP fees: 73,296
TVL in Risk-off Vault and Risk-on vault: 7,014,689 (~7M)
Compared to GMX, it has 85,480 unique traders and four times Rage Trade. GLP AUM is 493.5M and its TVL is 511.216M. Rage Trade still has a long way to go, but it has grown fast, considering its short live time. GLP fees of GMX are at around 7M, which is 100x of Rage at the current stage.
Rewards from its two vaults. The risk-off GLP rewards have been accumulated over time. Besides, the Risk-Off Vault cumulative returns are positive and show steady growth over time. The team also posted the two Vaults performances on their Twitter weekly to track the performance. We expect this to be attractive to LPs who hope to have more methods to earn returns and are worried about the high uncertainty in GMX.
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Rage Trade currently collects fees via its operations and mechanism -
On the operation side, it charges 10% of yield generated from 80-20 yield fee, 0.05% of position size for protocol, and 0.1 %*position size for LP. It also charges fees when the insurance fund pays for liquidations. From the Dune analytics data, the protocol fees have reached 36,648 as of 2/9/2023. The protocol could maintain its operations via the existing business model. We could continue to observe its liquidation/insurance and any other potential losses the protocol might suffer.
Team - from Github, it has three developers listed. One developer named 0xDosa has also contributed to GMX and Strategy development, which indicates that he’s quite familiar with the ecosystem. It also charges fees for liquidation.
Community:
As a DEX, the community plays a vital role in governance. The community decides the protocol parameter, including collateral and fee setting, protocol actions, and Vault Parameters. The protocol source is open-source and allows various DeFi projects to be built based on it. The dev teams show high support its community-owned vision.
Currently, the Discord channel has more than 20k users and daily active users 2k+. Twitter has over 30K followers, and each post has 50-100 likes + 5-10 comments, and 0-50 retweets. The community keeps active after launching
