Vigoss Protocol
This section of the whitepaper describes the mathematics behind the platform
Working Principle
Example:
Virtual Activation Automated Market Maker (VAMM)
Vigoss also uses the constant product equation x*y=k created by Uniswap Protocol to determine the current transaction price. On this basis, the team proposes the VAMM (Virtual Automated Market Maker) algorithm.
The market is automatically set, and the price changes strictly by following the constant product equation x*y=k
The protocol requires liquidity and liquidity providers, and traders’ funds are stored in the margin pool (Vault)
Users can matchmake transactions without counterparty trading. Only when there is a position to buy or sell, the transaction price will change. At the same time, the profit of a transaction is approximately equal to the loss of another transaction or liquidity provider
Risk Control
Because of the use of leverage trading, even in the presence of VAMM, the user's margin is stored in a margin pool, thus, the user still has the risk of liquidation. Therefore, we set up the following mechanisms to reduce the occurrence of potential risks to increase the cost of malicious operations, such as flash-loan attacks.
Funding Payment
Virtual market making, by nature, will cause the price in the contract to deviate from the external market price. We have designed the following methods to encourage the contract price to return to the external market price, in order to balance the transaction volume of both parties in the long-short transaction.
1 . Chainlink’s decentralized oracle will feed the spot price every 60 minutes. Based on the oracle’s price feeds. Every 60 minutes, a funding payment occurs where traders with open long or short positions will pay each other. When the contract price is higher than the spot price, longs will pay shorts; and vice-versa. The funding payments depend on the contract price, spot price differences, and user position sizes to incentivize traders taking the unattractive market stance.
(Note: In the early stage of the project, when the number of traders is limited, Vigoss uses traders and robots to hedge funds and arbitrage fees in order to ensure steady growth.)
2 . Vigoss Protocol incentivizes arbitrageurs. Arbitrageurs can buy and sell assets in other agreements when the price deviates, and meanwhile go long or short reversely on Vigoss, to return to alleviate the price difference.
The main purpose of the Funding Payment is to maintain a Vigoss trading pair close to its external market price.
If the funding ratio is positive, the long pay the shorts; If the funding ratio is negative, the short pay the longs. The external price is fed by Chainlink, and funding fees are settled for every 30 minutes. Because of the existence of funding payments, a long profit player would like to close the contract before liquidating the funding payment to avoid paying the funding payment to the short side. Meanwhile, the arbitrageur will buy short at this time in order to receive the income of the funding fee.
Risk Pool
Vigoss will charge a defined percentage of transaction fees. In the early stage of the project, 80% of the transaction fees will be distributed into the risk pool and 20% will be allocated to staking users.
The risk pool is used to pay for unilateral market conditions (the percentage of long/short users is much higher than the other party), and one party gets too much profit which causes the payment problem in the contract. The project needs risk funds to resist this risk.
In the early stages of the project, the team will use professional traders and trading procedures to actively hedge arbitrage, and accumulate risk funds. Meanwhile, in the early stage of the project, 80% of the handling fee will be distributed into the risk fund pool to speed up the accumulation of the risk fund pool.
Circuit Breakers
Large, short-term fluctuations in the market may cause panic selling in all markets, including the perpetual vertical. To prevent malicious attackers from taking advantage of the gap in capital fees to attack trading prices, Vigoss has introduced circuit breakers. If the current trading price and the moving average exceed the threshold of ±8% within 30 minutes, the market will be automatically closed for 5 minutes. Smart contracts automatically control the triggering of circuit breakers and the reopening of markets. Vigoss’ solution has two advantages. First, it gives the market a cooling-off period so that traders can fully absorb market information. Second, investors can add margin during the circuit breaker period to control the risk of liquidation.
Notice: during the market circuit-breaking period, the funding payments will not be triggered.
Oracle price settlement
Vigoss uses marked prices to prevent forced liquidation caused by market operations or insufficient liquidity. Hence, when the position maintenance margin is less than 6.25%, the liquidator will be able to perform forced liquidation, also called margin call.
Example:
The current unit price of ETH/USD is 100, and the user provides 10,000USD as a margin to use 5 times leverage. Meanwhile, the user's position is 50,000USD while the margin rate is 20%. When ETH/USD drops below 86.25, the margin rate is 6.25% at this time, which meets the minimum maintenance margin ratio, which means the user's position can be liquidated as a margin call.
We adopt an open liquidation strategy for the Vigoss contract, and any liquidator can compulsorily liquidate trader positions while meeting the minimum maintenance margin ratio. When the forced liquidation is triggered, the trader's contract will be canceled. As an incentive, the liquidator can get 1.25% of the remaining nominal position, and the remaining margin will be stored in the LP fund pool.
Under normal market conditions, Vigoss will use the market price in the smart contract for liquidation. When the price in the contract differs from the price of the oracle-fed by more than 10%, the liquidation price will be based on the prediction machine price to protect traders.
When a margin call occurs, the loss of the position is replenished by the LP fund pool in priority.
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