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Building Solana's Largest Perps DEX | Cindy Leow & Chris Heaney

By Lightspeed

Published on 2024-04-19

Explore how Drift Protocol is revolutionizing DeFi on Solana with innovative perpetuals trading, governance models, and ecosystem growth strategies.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!

The Rise of Solana DeFi

The Solana DeFi ecosystem has experienced remarkable growth over the past six months, with Drift Protocol at the forefront of this expansion. Cindy Leow, co-founder of Drift, highlights the significant momentum gained in the ecosystem, noting that Solana has now eclipsed Ethereum in DEX volume. This surge in activity can be attributed to several factors, including the implementation of points programs by various protocols to incentivize liquidity provision, trading, deposits, and staking.

These gamified incentive programs have breathed new life into the Solana DeFi landscape, attracting both retail traders and market makers. The increase in Total Value Locked (TVL) across the board is a testament to the growing confidence in Solana-based DeFi protocols. While the rising price of SOL has undoubtedly contributed to this growth, Cindy emphasizes that even as market volatility has decreased, participant engagement within the Solana DeFi ecosystem remains strong.

Drift's Approach to Points Programs

Drift Protocol has taken a thoughtful approach to implementing its points program, distinguishing itself from other projects in the crypto space. Chris Heaney, another key figure at Drift, explains that their points program was designed with clear objectives and a finite timeframe. Unlike some ambiguous or farming-oriented programs, Drift's initiative was structured to achieve specific outcomes, particularly in boosting liquidity across the platform.

The time-limited nature of the program (set for three months) created a sense of urgency for both market makers and retail traders. Market makers were incentivized to quickly develop and deploy their bots to provide liquidity, while retail traders recognized the window of opportunity for participation. This strategy aimed not just at short-term metric boosts but at fostering long-term retention of users.

Cindy elaborates on the careful design process behind their points program: "The reason that we took very long to design a points program that could target the kind of outcomes that we wanted, which is higher liquidity across the board, was because we wanted to make sure that the product was actually in a good place for people to come back from a retention perspective."

Challenges in Bootstrapping Liquidity on Solana

One of the notable challenges in the Solana ecosystem, particularly for perpetuals DEXes like Drift, has been attracting and maintaining robust market maker liquidity. This issue is partly attributed to the technical complexities of integrating with Solana's infrastructure, especially for market makers new to the ecosystem.

Cindy explains, "Solana infrastructure is actually very difficult to onboard if you're completely new to building apps and building interfaces with Solana." Unlike centralized exchanges that often use a single server order book hosted on AWS, Solana-based DEXes typically operate fully on-chain. This requires market makers to integrate new SDKs and adapt to a different stack, including nuances in transaction sending that can be daunting for those without prior Solana experience.

To address these challenges, Drift has developed innovative solutions such as market maker vaults. These vaults allow users to deposit funds that are then used for market making on their behalf, abstracting away the complexities of running a market-making bot and providing returns to depositors.

Navigating Solana's Transaction Issues

Recent transaction issues on the Solana network have posed challenges for DeFi protocols, including Drift. Chris Heaney discusses how these issues have affected their operations and the steps taken to mitigate the impact. He notes that while there were days where up to 80% of transactions were failing to land on the Drift UI, the team quickly implemented improvements to address the situation.

These improvements included leaning into stake-weighted Quality of Service (QoS), lowering compute units, and setting smarter priority fees. Chris emphasizes that these challenges have actually accelerated the development of both Drift's tech stack and Solana's overall infrastructure.

Regarding potential Layer 2 solutions, Chris expresses a cautious perspective: "I think it's just still very early there. I don't think people probably appreciate how hard it is to actually get something working on any like short time frame." While acknowledging the potential benefits of L2 solutions, such as faster confirmation times and easier integration for market makers, the Drift team remains focused on maximizing L1 performance where their product is already built and operational.

The Circuit Vaults: Innovative Liquidity Solution

One of Drift's innovative solutions to address liquidity challenges is the Circuit Vaults. These vaults, which have seen explosive growth in Q1, allow users to deposit capital into a shared pool that acts as liquidity for the platform. Cindy explains the mechanics and benefits of these vaults:

"How the circuit vaults work is that users can deposit capital into a shared vault that acts as a way that enables a third party to trade on behalf of a shared pool of assets. The circuit vaults delegate trading access to a market making entity while the assets actually stay in custody of the user."

This approach offers several advantages:

  1. It keeps user funds in their custody while allowing professional market makers to trade on their behalf.
  2. It runs a combination of market making strategies, including basis arbitrage and funding rate capture.
  3. It helps keep prices aligned with oracle prices, especially during periods of high volatility or network congestion.

The success of the Circuit Vaults is evident in their recent milestone of reaching $100 million in TVL. This innovative approach to liquidity provision has not only benefited Drift but has also contributed to the overall health of the Solana DeFi ecosystem.

Drift's Governance Token and Decentralization Efforts

In a significant move towards community ownership and decentralization, Drift recently announced the launch of its governance token. Cindy emphasizes that the primary goal of this token is not just financial but to empower users to actively participate in the protocol's governance:

"The goal with launching the Drift Token was really to kickstart the fully community own decentralization aspect. You know, I think a lot of people think about it token from a financial perspective, but one important perspective that's often missed is that you want the users to ultimately own and govern the parameters of the protocol."

The governance model implemented by Drift is multi-faceted:

  1. Standard realms governance: This follows the one-token, one-vote model, which is battle-tested on Solana and used for parameter selection and upgrade authority.

  2. Futarchy: Drift is experimenting with conditional prediction markets for governance, particularly for allocating resources and capital. This innovative approach aims to address the collective action problem often seen in traditional DAO voting systems.

Chris elaborates on the Futarchy model: "We think Futarchy is a better model for that. So we're experimenting with that being kind of our like venture based model for doing new initiatives and new grants." This approach leverages the Meta DAO team's Futarchy-as-a-service platform, showcasing the power of composability and open-source development in the Solana ecosystem.

The Future of Drift and Solana DeFi

Looking ahead, both Cindy and Chris share their visions for Drift's future and the broader Solana DeFi landscape. Cindy envisions Drift evolving beyond just an app to become a layer for broader ecosystem development:

"I think it would be really cool if we just saw this massive ecosystem of drift projects built on top of drifts as an exchange, where each one of them is driving different sources of revenue, different sources of yield back to the underlying exchange."

This vision includes the development of various front-ends, mobile apps, and innovative products that can quickly adapt to emerging trends in the crypto space. Cindy aspires for Drift to continue eating into centralized exchange market share and potentially surpass the volume of the largest centralized exchanges.

Chris's vision aligns with this ecosystem approach, drawing parallels to Solana's thriving developer community: "I think I would love if drift starts to look more like Solana in the sense of it has this flourishing like dev ecosystem. You have all these people building on top. It's very distributed."

Addressing DeFi's Biggest Challenges

When asked about the most significant problems in DeFi today, both Cindy and Chris offer insightful perspectives:

Cindy points out the insular nature of the current DeFi community: "I think it's still a very insulated community in a way. And I'm actually excited for DeFi protocols that integrate more outside of DeFi, sort of like CDFi plays or integrate with assets that are native to your chain."

Chris highlights the issue of short-term thinking in the space: "I would say probably just like short time, like time perspectives are like everyone's very just like trying to make it this cycle. And I think that limits the perspective people have."

Both agree that addressing these challenges and fostering a more long-term, inclusive approach to DeFi development is crucial for the sustained growth and relevance of the ecosystem.

Technical Challenges and Oracle Reliability

One of the critical technical challenges faced by DeFi protocols, especially during periods of network congestion, is the reliability of oracle data. Chris discusses the issues with the current push-based oracle systems and the move towards poll-based solutions:

"Right now is all the oracles are push based, which means like the Oracle providers need to land transactions to update the data versus poll basis. Adapt will basically pull the Oracle data in when they need to use it."

This push-based system has led to instances of stale oracle data, sometimes lasting for minutes, which can significantly impact trading and liquidation processes. To mitigate these risks, Drift implements oracle staleness guards, carefully balancing between safety and user experience.

Chris anticipates a significant improvement in the near future: "I think like three months from now, six months from now, most of the protocols will migrate to poll based oracles, which should really alleviate this pain point."

Liquidation Processes and Risk Management

The reliability of oracle data directly impacts the liquidation processes of protocols like Drift. Chris explains how Drift handles potential discrepancies between on-chain and off-chain prices:

"The way Drift handles this is basically there's an insurance fund where if there's bankruptcies, it's on the insurance fund to like pay out for those bankruptcies. With the goal of being like any insurance, like you're clipping enough yield over time that if you do have a drawdown, like you're you'll have made enough to make it okay."

This approach has proven effective, with the insurance fund successfully covering any losses and generating significant revenue from liquidations. Over the past seven days, Drift has processed approximately $70 million worth of liquidations, generating around $1 million in liquidation revenue with only about $200,000 in bankruptcies.

Expanding Beyond Perpetuals

While Drift has established itself as a leader in the perpetuals market on Solana, the team is also considering expansion into other DeFi products. Cindy hints at potential ventures beyond perpetuals:

"We do think it makes a lot of sense to venture outside of perps given that we have this very, very user base that don't just click buttons all day. Sort of like perps is the beginning of the funnel brings people in because they maybe want to trade like one particular asset that they want to they want to take leverage on."

Some areas of interest include:

  1. Yield-generating products
  2. Spot trading with innovations like just-in-time liquidity
  3. Integration with real-world assets and CeFi plays

This expansion strategy aligns with Drift's vision of becoming a comprehensive DeFi ecosystem, serving a wide range of user needs and use cases.

The Power of Solana's Shared Ecosystem

One of the key advantages Drift enjoys by being built on Solana is the shared ecosystem and developer community. Chris emphasizes the benefits of this co-location:

"There's such a density it's kind of like, I mean the blockchains are city analogies kind of a trope, but like there is something about the density of applications and how easy it is to bounce around that's super powerful."

This shared ecosystem facilitates easier user acquisition, developer collaboration, and overall growth. The team believes that despite some challenges, being part of this thriving community outweighs the potential benefits of having a dedicated blockchain or Layer 2 solution.

Conclusion: Drift's Role in Shaping Solana's DeFi Future

As Drift continues to evolve and expand its offerings, it's clear that the protocol is playing a pivotal role in shaping the future of DeFi on Solana. With innovative approaches to liquidity provision, governance, and ecosystem development, Drift is not just building a perpetuals DEX but fostering a comprehensive DeFi ecosystem.

The team's focus on long-term sustainability, user retention, and community engagement sets a strong foundation for future growth. As Solana's DeFi landscape continues to mature, protocols like Drift will be instrumental in driving innovation, attracting new users, and ultimately realizing the full potential of decentralized finance.

With its current success and forward-thinking strategies, Drift is well-positioned to continue its trajectory towards becoming one of the largest and most influential DeFi protocols not just on Solana, but in the entire crypto space.

Facts + Figures

  • Drift Protocol has reached approximately $22 billion in cumulative trading volume.
  • Solana DeFi volume has eclipsed Ethereum DEX volume in recent months.
  • Drift's points program was designed to run for a three-month timeframe.
  • Up to 80% of transactions were failing on the Drift UI during peak Solana network congestion.
  • Circuit Vaults, Drift's innovative liquidity solution, has reached $100 million in Total Value Locked (TVL).
  • Over the last seven days, there have been approximately $70 million worth of liquidations on Drift.
  • Liquidations on Drift have generated around $1 million in revenue with only about $200,000 in bankruptcies.
  • Drift is implementing a three-branch governance model, including standard realms governance and Futarchy.
  • The Drift governance token aims to empower users to govern protocol parameters.
  • Drift is considering expansion beyond perpetuals into other DeFi products and services.
  • The protocol is leveraging Solana's shared ecosystem to facilitate growth and user acquisition.
  • Drift anticipates a shift from push-based to poll-based oracles in the next 3-6 months to improve data reliability.
  • The team emphasizes the importance of long-term thinking in DeFi development.
  • Drift's vision includes becoming a layer for broader ecosystem development on Solana.
  • The protocol aims to surpass centralized exchanges in trading volume in the future.

Questions Answered

What is Drift Protocol?

Drift Protocol is one of the largest perpetuals DEXes built on Solana. It offers decentralized perpetual futures trading with innovative features like just-in-time liquidity and market maker vaults. The protocol aims to provide a permissionless and unruggable trading platform accessible to anyone in the world without requiring KYC.

How has Solana's DeFi ecosystem grown recently?

Solana's DeFi ecosystem has seen significant growth in the past six months, with DEX volumes now eclipsing Ethereum. This growth is driven by points programs implemented by various protocols, increased liquidity, and rising SOL prices. Even as market volatility has decreased, participation in Solana DeFi remains strong, particularly in areas like meme coins and liquidity provision.

What challenges do market makers face when integrating with Solana-based DEXes?

Market makers face technical challenges when integrating with Solana-based DEXes due to the complexity of Solana's infrastructure. Unlike centralized exchanges that use single-server order books, Solana DEXes operate fully on-chain, requiring market makers to integrate new SDKs and adapt to a different tech stack. This can be particularly daunting for those without prior experience in the Solana ecosystem.

How does Drift's governance token work?

Drift's governance token is designed to empower users to actively participate in the protocol's governance. It follows a multi-pronged approach, including standard realms governance (one-token, one-vote) for parameter selection and upgrade authority, and an experimental Futarchy model using conditional prediction markets for resource allocation and capital deployment decisions. This structure aims to create a more effective and community-driven governance system.

What are Circuit Vaults and how do they work?

Circuit Vaults are an innovative liquidity solution developed by Drift. They allow users to deposit capital into a shared vault that enables third-party market makers to trade on behalf of the pooled assets. The user's funds remain in their custody while professional market makers execute trading strategies. This approach helps maintain price alignment with oracle prices and provides returns to depositors without requiring them to run their own market-making bots.

How does Drift handle liquidations during periods of oracle data unreliability?

Drift implements oracle staleness guards to manage the risk of unreliable oracle data. The protocol has an insurance fund to cover potential bankruptcies resulting from delayed liquidations due to stale oracle data. The insurance fund accumulates yield over time to offset any drawdowns. In recent performance, Drift has processed about $70 million in liquidations, generating $1 million in revenue with only $200,000 in bankruptcies, demonstrating the effectiveness of this risk management approach.

What future developments is Drift considering beyond perpetuals trading?

While Drift has established itself as a leader in perpet

uals trading on Solana, the team is exploring expansion into other DeFi products. This includes potential ventures into yield-generating products, spot trading with just-in-time liquidity innovations, and integration with real-world assets and CeFi plays. The goal is to create a comprehensive DeFi ecosystem that serves a wide range of user needs and use cases.

How does being built on Solana benefit Drift compared to having its own blockchain?

Being built on Solana provides Drift with significant advantages due to the shared ecosystem and developer community. This "co-location" effect facilitates easier user acquisition, developer collaboration, and overall growth. The density of applications and ease of integration within the Solana ecosystem outweighs the potential benefits of having a dedicated blockchain or Layer 2 solution, allowing Drift to leverage the existing infrastructure and community to drive its expansion.

What are the main technical challenges Drift faces, and how are they addressing them?

One of the main technical challenges Drift faces is the reliability of oracle data, especially during periods of network congestion. The current push-based oracle systems can lead to stale data, impacting trading and liquidation processes. Drift is addressing this by implementing oracle staleness guards and anticipates a shift to poll-based oracles in the near future, which should significantly improve data reliability and overall protocol performance.

What is Drift's vision for the future of DeFi on Solana?

Drift envisions evolving beyond just a perpetuals trading platform to become a foundational layer for broader ecosystem development on Solana. The team aims to foster a flourishing developer ecosystem around Drift, similar to Solana's vibrant community. Their goal is to create a comprehensive DeFi ecosystem that can rival and potentially surpass centralized exchanges in trading volume and user engagement, while maintaining the principles of decentralization and permissionless access.

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