MonteCarlo Dex (MCDEX) launches decentralized Ethereum perpetual futures contract

Perpetual futures contracts are one of the most popular investment vehicles in crypto. BitMEX has several derivative products and consistently generates more than US$1B in daily volume, while the successful launch of Bitcoin (BTC) perpetual futures contracts on dYdX temporarily made the DEX’s trading volume the highest in Decentralized finance (DeFi).

Decentralized finance or DeFi is, in turn, one of the fastest-growing sectors in the crypto-asset ecosystem and refers to the interconnected web of financial service-oriented crypto assets, smart contracts, protocols, and decentralized applications built on the Ethereum platform blockchain.

While Bitcoin (BTC) enabled individuals to make financial transactions with other individuals without the need for a financial intermediary, the Ethereum blockchain added another layer of programmability through the use of smart contracts. It allows for permissionless borrowing and lending services and opens up funding opportunities to a more internet-based global audience.

“What differentiates MCDEX is that it is the first of its kind to introduce an Automated Market Maker to provide on-chain liquidity to its perpetual contracts,” says Jie Luu founder of MCDEX “Competitors such as dYdX still rely on off-chain funding rates, and therefore are less decentralized.”

Liu says the MCDEX on-chain Automated Market Maker (AMM) is fully decentralized. The AMM is used to derive the funding rates and this in-turn balances out long or short orders to ensure that perpetual futures contract prices stay close to the index price. The exchange uses Chainlink’s ETH/USD Price Reference Contract on the Ethereum mainnet as its index price feed. Brave New Coin is a Chainlink node operator.

However, the platform offers an off-chain orderbook for “liquidity sensitive” traders. “On-chain trading is not the best for many traders who are used to centralized trading software,” Liu said in an interview with Decrypt media. “Therefore we are adding off-chain order books, which naturally have lower slippage, better liquidity, and ultimately a better trading experience.”

The MCDEX Perpetual contract also offers margin trading, by using a funding mechanism that keeps prices anchored to the index. Leverage in a perpetual swap contract changes the amount of funding a trader gives or receives by adding a multiplier to it, in the case of MCDEX, up to 10 times.

Normally in margin trading, a third party, like an exchange or brokerage, lends assets to a trader so that they may be able to trade with borrowed funds. Perpetual swaps remove the third party. With these contracts, traders fund each other in a peer-to-peer system.

Short and long traders pay or receive a funding rate to each other. A price is set when a trader opens a position. If the trader is long and the price moves in their favor they receive funding from short traders. If the trader is short and the price moves against them then they must fund the other side of the market. Contracts close when either a trader exits their position or they can no longer afford to pay their funding rate requirements.

MCDEX also plans to issue a native token, called MCB, to allow users to participate in platform governance. The token will be available to key stakeholders on the platform including traders, liquidity providers, and DeFi developers. MCB will be issued as a way to capture “platform value” and will be offered as a reward to contributors willing to provide liquidity to the platform.

MCDEX is also planning to introduce structured funds, which any users will be able to deposit funds into. Funds can be automated or human-managed. These structured funds are also tied into the native token. MCB tokens will be distributed to the funds based on their net asset value at a fixed amount per day. Fund managers will even receive a cut of the MCB they earn for fundholders.

Beyond launching an ETH perpetual, MCDEX is one of few China-based DeFi projects. As DeFi is increasingly drawing the attention of DeFi users, it’s only a matter of time before they start building a regional ecosystem, MCDEX founder Liu Jie said.