MCDEX: The New Kid on Perp Street

OCT 12, 2021 • 4 Min Read

Ashwath Balakrishnan

Disclosure: Delphi Ventures and members of our team are invested in MCB, xDEFI, and Off-Chain Labs (Arbitrum). This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

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Market Update

Crypto is having a slow day as BTC finds it difficult to climb above $58K. BTC is still well above the trend break we outlined last week, so there isn’t too much to worry about for now. But considering BTC is leading the market at the moment, a downturn could turn ugly for all of crypto.

The New Kid on Perp Street
  • MCDEX is an on-chain platform to trade futures and derivatives. The project launched on mainnet alongside Arbitrum on Aug. 31, and followed through with a deployment to BSC on Sep 28. Over $1B of volume has been traded on MCDEX since it launched.
  • Incentive programs on both Arbitrum and BSC attracted traders to the platform. However, as Arbitrum incentives got depleted, volume fell dramatically. We could be seeing a similar trend with MCDEX on BSC, as the incentive program ends in two days, but the DEX is still doing over $50M of daily volume. While this highlights the importance of incentives to bootstrap a new product, it’s worth noting that fresh incentives are coming to BSC.

Volume Breakdown by Asset
  • As expected, MCDEX’s volume on Arbitrum was primarily ETH, but BSC traders traded more notional volume on the ETH perp than traders on Arbitrum.
  • ETH has been relatively quiet compared to BTC as of late, which may have stung trading volume as incentives on Arbitrum wore down. However, Arbitrum’s gas cap is the primary reason for muted incentives. With a gas cap, MCDEX cannot rapidly process liquidations in the way a healthy crypto derivatives market requires. Once the gas cap is lifted, MCDEX will deploy new incentives on Arbitrum.

  • There’s been a fair amount of volume for BTC perps as well. Activity here looks stickier than ETH, as evidenced by the slower decline in volumes from the peak.
  • So far, there are only BTC, ETH, and BNB perpetuals on MCDEX. New pools have to be bootstrapped by external parties, known as operators, who need a slight degree of technical know-how as they have to set up the pool’s price feed.
  • However, MCDEX governance recently sanctioned a USD-ETH perpetual on BSC. This would allow users to use ETH as collateral to either long or short ETH, which opens the door to basis trades when funding rates are positive (i.e. deposit collateral, open 1x short, earn funding with no price risk).

Funding Rates and Liquidity
  • One of the organic incentives on MCDEX arises from funding arbitrage (i.e. can users pay less funding using MCDEX over an established derivatives CEX).
  • For BTC perpetuals, funding rates on Arbitrum have been consistently lower than Binance. But liquidity on Arbitrum is fairly dry. At the time of writing, MCDEX on Arbitrum can issue 11.5 BTC worth of longs for 0.14% slippage. At that same slippage level, MCDEX on BSC can issue 167 BTC worth of longs.

  • On ETH perpetuals, funding rates on Arbitrum have started to run up while the cost of entering a long position on BSC is lower than Binance. At 0.1% slippage, traders can enter up to 3,000 ETH worth of longs on the BSC deployment, where liquidity is competitive and funding rates are lower.

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