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Drift: Can This Solana DEX Compete With Binance? | Cindy Leow, Chris Heaney

By Lightspeed

Published on 2023-08-14

Discover how Drift is building the future of decentralized finance on Solana, offering a unique liquidity trifecta and aiming to compete with centralized exchanges like Binance.

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

Introduction to Drift: Solana's Perpetual Swaps Exchange

Drift is making waves in the Solana ecosystem as a pioneering perpetual swaps exchange. Founded in 2021, Drift has quickly established itself as one of the earliest and most innovative projects on Solana. The platform offers users the ability to trade perpetual futures contracts with leverage, all while enjoying the speed and low fees characteristic of the Solana blockchain.

Cindy Leow, the founder of Drift, explains the core concept: "Drift is a perpetual swaps exchange built on Solana, which might sound like mumbo jumbo to a lot of you. So it's basically a way to get leverage on chain while trading futures products." This simple yet powerful description encapsulates the essence of what makes Drift unique in the decentralized finance (DeFi) space.

The Advantages of Perpetual Swaps

Perpetual swaps, often referred to as "perps," have gained immense popularity in the crypto trading world. Chris Heaney, the lead engineer at Drift, elaborates on why perps have become so prevalent: "A Perp is a form of derivative where basically you can trade the price of some asset. In the traditional world, people trade derivatives for things like commodities, like corn or oil, etc."

The key advantage of perpetual swaps in the crypto context is their ability to offer synthetic exposure to various assets. This means traders can speculate on the price movements of different cryptocurrencies without actually owning the underlying assets. Heaney points out, "Instead of going to each blockchain and buying the asset on this blockchain, having to bridge all over the place, you can actually all do it in one spot."

This feature is particularly valuable in the fragmented world of cryptocurrencies, where assets exist on different blockchains. By using perps on Drift, a trader on Solana can gain exposure to the price movements of Ethereum or Bitcoin without the need to bridge assets between chains, thus avoiding the associated risks and complexities.

Drift's Liquidity Trifecta: A Game-Changing Approach

One of the most innovative aspects of Drift is its unique approach to liquidity provision. Cindy Leow introduces the concept of the "liquidity trifecta," a three-layered system designed to ensure deep liquidity and competitive pricing for users.

  1. Virtual AMM: The first layer is a virtual Automated Market Maker (AMM) backed by liquidity provider positions. This allows anyone to deposit funds into the AMM and trade against other users.

  2. On-Chain Order Book: The second layer is a fully on-chain order book, maintained by a network of keepers who match orders when they see a cross in the book.

  3. Just-in-Time Auction: The third and most complex layer is a just-in-time auction system. When a user places a market order, it goes through a Dutch auction process, allowing market makers to compete to fill the order at the best possible price within a short timeframe.

This innovative approach to liquidity provision sets Drift apart from other DeFi protocols. As Leow explains, "The combination of all of this allows for a very diverse, different types of liquidity on the system. You sort of have like top of the book liquidity by active makers, passive liquidity by the AMM liquidity providers, and then really quick, good fills by the just-in-time auction."

The Virtual AMM: A Unique Liquidity Solution

The concept of a virtual AMM is particularly intriguing and deserves a closer look. Chris Heaney explains, "The reason it's called a virtual AMM is because perps are synthetic or virtual. So versus like a normal AMM where you deposit in like the spot token, like SOL or USDC, actually all the positions in perps are synthetic or virtual."

This virtual nature of the AMM offers several advantages. Firstly, it's easier to bootstrap liquidity for a virtual AMM compared to a traditional spot AMM. Secondly, the fees generated from trading are reinvested into the protocol, continuously improving liquidity and user experience. Heaney enthuses, "This is like one of the reasons we're really excited about virtual AMM is because the protocol itself, the fees that it takes are being reinvested into it to create a basically better marketplace and eventually UX for traders."

Drift's User-Centric Approach

Drift's success isn't just about its technical innovations. The team has put a strong emphasis on user experience, which has contributed to their impressive daily active user (DAU) numbers. Cindy Leow proudly states, "We're now the largest Solana Perplex backed by the folks like multi-coin and poly chain jump, where we've got one of the highest DAUs in all of DeFi actually."

The team's focus on user experience is evident in their approach to product design. Leow explains, "We really take the time to peel it back from a product standpoint and make it super easy for anyone to take these positions without necessarily understanding how wallets might work or how transaction approvals might work."

This user-centric approach allows Drift to cater to a wide range of users, from sophisticated traders who want to provide liquidity and leverage it, to newcomers who just want to make simple spot trades or take modest leveraged positions.

Building Bridges: Expanding Drift's Reach

One of Drift's key strategies for growth is building bridges to attract users from centralized exchanges to DeFi. This includes both metaphorical bridges in terms of user experience and literal bridges for asset transfers.

Cindy Leow reveals an exciting upcoming feature: "Something that we're going to be launching very soon is an integration with MetaMask Snaps that allows users who have MetaMask to actually connect to Drift and bridge their funds over directly." This integration could potentially open up Drift to millions of MetaMask users, significantly expanding its user base.

The Vision for Drift's Future

When asked about their vision for Drift in the next five years, both Cindy and Chris paint an ambitious picture. Leow envisions Drift as the backbone of a robust ecosystem: "We want to encourage people using Drift's backend to build products on top of that, that will then scale the usage of Drift as a backend to millions of users."

Chris Heaney adds a biological metaphor to this vision, comparing Drift to a living organism: "I think of Drift as like the OG builders and the OG community members are trying to bootstrap almost like a living thing... And I think the most successful protocols actually end up being like that where there's a lot of participants. There's no single point of failure. And it's sustainable and it can keep going."

This vision of Drift as a sustainable, evolving ecosystem aligns with the broader goals of DeFi to create financial systems that are more open, transparent, and resilient than traditional finance.

Why Build on Solana?

The decision to build Drift on Solana was driven by several factors. When the project started in mid-2021, Solana offered a live mainnet and a growing developer ecosystem. More importantly, as Cindy Leow points out, "Developers in Solana at the time were willing to push the boundary with them with rust, the backend stuff that hasn't really been tried in DeFi before."

Chris Heaney offers an intriguing perspective on why Solana might be considered more decentralized than other blockchains: "The more things that you have to put off chain, because the core chain is really expensive and slow, the more like single points of failure you introduce." He argues that Solana's powerful core layer allows more functionality to remain on-chain, reducing potential points of failure and increasing overall decentralization.

The Importance of On-Chain Activity

The Drift team strongly believes in the importance of keeping as much activity on-chain as possible. Chris Heaney explains, "The point of having things on chain is that the underlying network is permissionless and adaptive. So if one validator goes down, there are other validators that step in, and you can't just take the thing down."

This philosophy extends to Drift's approach to building their protocol. By leveraging Solana's capabilities, they've been able to create a system where all crucial operations, including their innovative liquidity trifecta, operate fully on-chain. This not only increases transparency but also enhances the security and resilience of the protocol.

Drift's Approach to Distribution

In the competitive world of DeFi, having a great product is only half the battle. Distribution - getting the product into the hands of users - is equally crucial. Drift has a multi-faceted approach to this challenge.

Cindy Leow emphasizes the importance of being visible where crypto users congregate: "Twitter is the best platform for that as well, Twitter telegram because most of crypto attention spans sort of like exists within the form of a tweet, right? So I think we would like to be quite front and center within the Twitter universe."

The team is also exploring integrations with wallets and other DeFi protocols as distribution channels. Leow mentions their success with Backpack: "We built a leaderboard feature and XNFT on Backpack and we found that that was a funnel for a lot of more like NFT focused traders to actually come in and start using it via Backpack."

Attracting Liquidity to Drift

A crucial aspect of running a successful decentralized exchange is attracting and maintaining liquidity. Drift's liquidity trifecta is designed not just to provide deep liquidity, but also to create a competitive environment that ensures the best possible prices for users.

Chris Heaney explains, "It's all designed for these different liquidity sources to be competitive such that the taker gets the best price. But also there's a lot of different ways for liquidity to be provided." This approach allows liquidity providers with different skills and preferences to participate in ways that suit them best, from passive AMM liquidity provision to active market making.

Drift's Vision for DeFi

Both Cindy and Chris express ambitious visions for Drift and DeFi as a whole. Cindy boldly states, "People shouldn't be talking about Binance in five years. Everyone should be turning on chain." This vision of Drift competing with major centralized exchanges like Binance underscores the team's belief in the potential of decentralized finance.

Chris Heaney adds depth to this vision, describing Drift as a stepping stone towards a more open and transparent financial system: "I think the bet on DeFi is that by making it open and transparent and having devs write all the rules, it'll be cheaper in the long run, it'll be safer."

The State of DeFi: Challenges and Opportunities

When asked about the current state of DeFi, both Cindy and Chris acknowledge that there's still much work to be done. Chris Heaney candidly admits, "I definitely am not happy with the state of DeFi. I think the current versions of it are basically just like warmups for the future where you have a financial system that's open and transparent."

Cindy Leow points out a specific challenge that DeFi has faced: over-incentivization. She argues, "A lot of the initial growth was driven by over incentivization to a point where a lot of the equity value of like governance tokens in DeFi has been saturated." This approach, while effective for short-term growth, can lead to unsustainable protocols in the long run.

Tokenomics and Sustainable Growth

The discussion touches on the contentious topic of tokenomics in the Solana ecosystem. Chris Heaney offers a nuanced view on the subject: "I think when you do a token, I think a token used well can create a network effect. But when you do it, you need to land the network effect. Otherwise it goes, it dies."

Cindy Leow emphasizes the importance of aligning token distribution with value creation: "The people who use and champion and have skin in the game the most, those are the ones that the token should be distributed to." This philosophy aims to create a more sustainable and engaged community around the protocol.

Building in Crypto: Motivations and Challenges

When asked why they choose to build in crypto, both Cindy and Chris offer compelling personal motivations. Cindy cites her experiences with the inefficiencies of traditional finance, particularly in cross-border transactions: "Sending money from Malaysia, where I'm from, to the US is still a huge hassle, right? And like takes like three, four days to clear."

Chris Heaney emphasizes the openness and accessibility of the crypto space: "When I stumbled upon crypto and I just saw how open and transparent it was and like basically there are no gatekeepers, I was like, wow, this is amazing. Like anyone can just come in here, read the source code, pick it up, learn how all of finance works from like first principles."

Regulatory Challenges and Global Approach

Building a DeFi protocol comes with its share of regulatory challenges, particularly for teams based in the United States. Drift has adopted a globally decentralized approach to navigate these waters. Cindy Leow explains, "We're a globally decentralized team. We don't really have an HQ anywhere per se. People can sort of build and live wherever they want to be."

Chris Heaney adds an optimistic note, arguing that true adherence to DeFi principles should not conflict with regulations: "If you really buy into the principles of DeFi and do it the right way, you're not doing anything wrong or illegal... I think the US will come around, especially if the more good builders that live up to the principles of DeFi."

The Future of DeFi and Drift's Role

As the conversation wraps up, both Cindy and Chris express their vision for the future of DeFi and Drift's role in it. They see Drift not just as a platform for trading perpetual swaps, but as a foundational piece of infrastructure for the next generation of decentralized finance.

Cindy Leow envisions Drift as a catalyst for bringing DeFi to millions of users: "We want to raise the glass ceiling for DeFi, yes, and we want to build like kind of the pipelines to get there." This ambitious goal speaks to the team's belief in the transformative potential of decentralized finance.

Chris Heaney adds a long-term perspective, seeing Drift as part of a larger movement towards a more open and efficient financial system: "I want to live in the world where the financial system is secured by like great code written by like amazing devs." This vision of a programmatic, transparent financial system underpins the team's dedication to building Drift.

In conclusion, Drift represents a bold step forward in the evolution of decentralized finance on Solana. By combining innovative liquidity mechanisms, a user-centric approach, and a vision for sustainable growth, Drift is positioning itself not just as a competitor to centralized exchanges, but as a cornerstone of the future financial system. As the DeFi landscape continues to evolve, projects like Drift will play a crucial role in shaping the future of finance, making it more open, efficient, and accessible to users around the world.

Facts + Figures

  • Drift is a perpetual swaps exchange built on Solana, founded in 2021.
  • Drift offers about 15 markets, allowing users to bet on the price of assets like SOL, BTC, and ETH.
  • Drift is now the largest Solana Perplex, backed by investors like multi-coin and poly chain jump.
  • Drift has one of the highest daily active user (DAU) counts in all of DeFi.
  • Drift's liquidity trifecta consists of a virtual AMM, an on-chain order book, and a just-in-time auction system.
  • Fees generated from trading on Drift are reinvested into the protocol to improve liquidity and user experience.
  • Drift is planning to launch an integration with MetaMask Snaps, potentially opening up access to millions of MetaMask users.
  • The team behind Drift is globally decentralized, without a specific headquarters.
  • Drift aims to compete with centralized exchanges like Binance in the future.
  • The project started building on Solana in May-June 2021, when Solana's mainnet was live and had a growing developer ecosystem.
  • Drift has integrations with other Solana projects like Jupiter for order routing and benefits from liquidity provided by protocols like Wormhole.
  • The team emphasizes the importance of on-chain activity for security and decentralization.
  • Drift's approach to tokenomics focuses on rewarding users who contribute value to the protocol.
  • The project aims to abstract away complexities like wallet management and transaction approvals to make DeFi more accessible to average users.

Questions Answered

What is Drift?

Drift is a perpetual swaps exchange built on the Solana blockchain. It allows users to trade futures contracts with leverage, offering exposure to about 15 different crypto assets. Drift stands out for its innovative "liquidity trifecta" system, which combines a virtual AMM, an on-chain order book, and a just-in-time auction mechanism to provide deep liquidity and competitive pricing for users.

Why did Drift choose to build on Solana?

Drift chose to build on Solana for several reasons. When the project started in mid-2021, Solana offered a live mainnet and a growing developer ecosystem. The team was attracted by Solana's high-performance capabilities, which allow for more on-chain activity compared to other blockchains. They also appreciated that Solana developers were willing to push boundaries and try new approaches in DeFi that hadn't been attempted before on other chains.

How does Drift's liquidity trifecta work?

Drift's liquidity trifecta consists of three layers: a virtual AMM, an on-chain order book, and a just-in-time auction system. The virtual AMM allows anyone to provide liquidity by depositing funds. The on-chain order book is maintained by a network of keepers who match orders. The just-in-time auction system allows market makers to compete to fill orders at the best price within a short timeframe. These three systems work together to provide diverse sources of liquidity and ensure competitive pricing for users.

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

Drift's vision for the future of DeFi is ambitious. They aim to create a robust ecosystem where Drift serves as the backend for numerous applications, potentially scaling to millions of users. The team envisions a world where decentralized exchanges like Drift can compete with and potentially replace centralized exchanges like Binance. They believe in creating a more open, transparent, and efficient financial system secured by high-quality code and governed by democratic principles.

How does Drift approach user experience and accessibility?

Drift puts a strong emphasis on user experience and accessibility. They aim to make their platform easy to use for both sophisticated traders and newcomers to DeFi. This includes abstracting away complex concepts like wallet management and transaction approvals. The team is also working on integrations, such as with MetaMask Snaps, to make it easier for users from other ecosystems to access Drift. Their goal is to create a platform that can be used by anyone, regardless of their level of technical knowledge about blockchain or DeFi.

What are Drift's thoughts on tokenomics and incentives in DeFi?

Drift takes a nuanced approach to tokenomics and incentives. They believe that over-incentivization has been a problem in DeFi, leading to unsustainable growth and diluted token value. Instead, they focus on creating natural incentives within their protocol and rewarding users who contribute real value. They emphasize the importance of aligning token distribution with value creation, aiming to distribute tokens to users who actively use, champion, and have skin in the game in the protocol.

How does Drift handle regulatory challenges?

Drift approaches regulatory challenges by operating as a globally decentralized team without a specific headquarters. Team members can work from wherever they choose. The founders believe that by adhering to true DeFi principles - creating open, transparent, and permissionless systems - they are not doing anything illegal or wrong. They express optimism that regulators, particularly in the US, will come to understand and accept DeFi principles as more builders demonstrate their value and integrity.

What makes Drift's virtual AMM unique?

Drift's virtual AMM is unique because it deals with synthetic or virtual positions rather than spot tokens. This makes it easier to bootstrap liquidity compared to traditional spot AMMs. Additionally, the fees generated from trading in the virtual AMM are reinvested into the protocol, continuously improving liquidity and user experience. This self-improving mechanism is one of the key innovations that sets Drift apart from other DeFi protocols.

How does Drift plan to compete with centralized exchanges?

Drift plans to compete with centralized exchanges by offering a superior user experience combined with the benefits of decentralization. They aim to make their platform as easy to use as centralized exchanges while providing the transparency, security, and ownership that come with decentralized finance. By continuously improving their liquidity mechanisms, expanding their product offerings, and focusing on user experience, they hope to attract users away from centralized platforms. Their integration efforts, such as with MetaMask Snaps, are also part of their strategy to make it easier for users to transition from centralized to decentralized trading.

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