Vega Protocol: Disrupting Defi With Trading Derivatives

Marcel Deer
By Marcel Deer
Head and shoulders photo of Michelle Meyer
Edited by Michelle Meyer

Published September 15, 2022.

Vega Protocol's Logo and name displayed against a black background.

Traditional financial systems have always been dependent on central authorities, intermediaries, and third-party service providers. Therefore, financial products and services have remained at the mercy of organizations and providers with infrastructures to create, execute, and secure financial contracts.

This has resulted in high barriers to entry, slow processes, and a lack of transparency. Today, the financial industry is a mix of both manually-intensive and technology-intensive processes. Needless to say, the industry is ripe for change and disruption. Concurrent with the decentralized finance (DeFi) boom of recent years, it was only a matter of time before a completely decentralized trading platform emerged.

This is where Vega protocol comes in—a decentralized derivatives trading platform designed to enable the creation, execution, and settlement of derivative contracts in a trustless, permissionless, and transparent manner.

What Is the Vega Protocol?

In simple terms, Vega attracts and allocates market-making resources in a decentralized system, making financial products available to the general public on a more level playing field. Through Vega, everyone can have access to markets that were previously only available to a select few. Additionally, these same markets and products can be created without needing approval from a central authority, which is made possible through a derivatives scaling layer specifically for Web3 applications.

Founded in 2018, Vega aims to provide a decentralized infrastructure for financial products and services that's both robust and scalable. In doing so, it hopes to create an ecosystem where anyone can securely and non-custodially trade derivative products using margin.

Features of the Vega Protocol

Vega is a custom-built, proof-of-stake (PoS) blockchain with built-in liquidity incentives. This translates into both traders and market-makers being paired across any financial instrument, thereby solving the challenge of attracting and allocating resources for market-making.

The protocol’s network architecture is optimized for speed, particularly because trading systems require low latency and high throughput. With Vega’s consensus layer, native order books can be supported adequately and orders priced correctly. Vega boasts of 1 second block time and instant finality, with the ability to process thousands of transactions per block.

The protocol's PoS bridge connects it with all major blockchains for collateral, which means that collateral can be posted in any cryptocurrency, including Bitcoin (BTC), Ether (ETH), and stablecoins.

Vega is currently in a restricted mainnet, which was launched in November of 2021.

How Does the Vega Protocol Work?

Because market creation on the protocol is fully decentralized, community safeguards are in place to ensure the quality and viability of these markets. To list a new market on the platform, it must first pass a governance vote and have enough liquidity from market makers.

Vega's markets are provably fair, which means that since everything is carried out openly on a blockchain, all activity is visible and everyone adheres to the same regulations. Vega uses decentralized ledger technology and an industry-grade API and trading user interface.

The protocol utilizes a variant of the Tendermint consensus algorithm, which is a Byzantine-Fault-Tolerant (BFT) PoS algorithm. Under this system, validators are responsible for maintaining network security and ensuring that all transactions are processed in a timely manner.

VEGA Token

Vega's native token is called VEGA, and it's used for staking and governance. As a fully decentralized network, protocol decisions are made by the community, with VEGA token holders having voting rights.

The VEGA token can be used for several purposes, including delegating to a validator, suggesting market proposals and voting on them, or suggesting and voting on governance changes that will help influence the network's overall direction.

Vega allows token holders to stake and delegate their tokens even while locked, allowing for a more inclusive and decentralized governance model.

As for fees, users are only charged upon successful execution of a trade. It's currently free to submit, amend, or cancel limit orders. Trading fees collected are given to validators, token holders, and liquidity providers as a way of rewarding them for helping keep the network running smoothly.

What's Next?

Vega’s promising features and robust architecture make it a disruptor in the world of decentralized finance. The protocol has the potential to democratize access to financial products and services as well as provide much-needed infrastructure for the industry.

The team behind Vega is experienced and well-funded, with a clear vision for the project. While the platform is still in its early stages, it has great potential to grow and become a leading player in the space.

That being said, the Vega Fairground testnet is currently a safe venue for users to play around with the platform's features. The testnet presently offers access to the Vega Console app and the protocol's decentralized APIs. Interested users can also try Vega's permissionless market creation and order book liquidity mining.