Reflections on Pricing Models of Derivatives in DeFi

Hello everyone,

With great interest, I read one of the latest articles released on the official Blog regarding the various pricing models of derivatives in DeFi, and I wanted to share some personal reflections on this topic.
The article discusses three main models: Oracle-based, Hybrid, and Virtual AMM (vAMM). Each of these has its advantages and disadvantages, and I think it is important to discuss them together to better understand which could be the future of the sector.

  • Oracle-based Model

This model is certainly the simplest to implement and highly scalable. However, as pointed out in the article, one of the major problems is the security of the oracles on which a Dex relies, which we must remember are third-party sources. It is true that with the developments undertaken by entities like Chainlink (which MetalSwap itself relies on), the risks are increasingly mitigated, but if an oracle is compromised, the entire system can be manipulated, leading to significant losses. Therefore, I personally think this should not be overlooked.

  • Hybrid Model:

The hybrid model combines centralized and decentralized elements, which can offer good speed and a smooth user experience. However, this approach entails risks of centralization and regulatory issues. I wonder if this model can truly maintain a balance between efficiency and decentralization. What do you think? Is it sustainable in the long term?

  • Virtual AMM (vAMM):

Here is the model that fascinates me the most. The vAMM, introduced by the Perpetual Protocol, uses virtual resources to simulate a classic AMM. This system is completely decentralized and offers a high level of security and transparency. However, it is also the slowest and most expensive in terms of execution. I believe that one of the main critical points is precisely the slowness and high costs, which could discourage users accustomed to fast and cheap transactions. On the other hand, the decentralization and transparency offered by the vAMM are a great advantage, as they reduce the risks of manipulation and increase user trust.

Furthermore, I believe that the vAMM model offers new strategic possibilities. The intrinsic security of the system and its total transparency can pave the way for innovative and more complex trading strategies, which could attract experienced traders looking for new opportunities. I think there is a lot of potential in this model, although there are still significant challenges to overcome.

In summary, each model has its own challenges and opportunities. Personally, I believe that the virtual AMM model has great potential, but it needs significant improvements to be competitive, even in terms of user experience. It would be interesting to know what you think and how you see the future of derivatives in DeFi. How could MetalSwap take advantage of these different models to offer better products?

I look forward to your opinions and suggestions!

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If I’m not wrong, the vAMM was used by Perpetual Protocol in its v2 version.

This was a very unique model at the time, and I think it could still be very competitive today with small improvements in terms of liquidity management. But, I don’t think that the vAMM could be adopted by the MetalSwap hedging contracts anyway.

Maybe, as discussed in some recent forum posts, an oracle-based solution could be an improvement for MetalSwap, especially if we want to list different RWA assets.

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Very interesting topic

There is a lot to discuss, and I believe that the future of DeFi should be focused on the vAMM sector. We see many financial derivative projects that, to maintain an efficient product, rely on centralized technologies like order books and markets that are difficult to implement on public blockchains.

The effort that needs to be made in DeFi is to have AMMs that are suitable for specific use cases where people can also passively deposit their liquidity and earn fees. Unfortunately, a significant part of DeFi is moving towards having centralized market making, which I believe is a failure of DeFi.

MetalSwap has already implemented Hedging Contracts with a decentralized market, and I think we should proceed and optimize in that direction. In general, DeFi needs to evolve AMMs to increasingly tend towards the efficiency of centralized systems, even though we know very well that it will never be fully achieved, as the cost of decentralization will always remain

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