Understanding Vertex: A Comprehensive Overview

Key Insights

• Vertex Protocol is a DEX that offers spot trading, perpetual contracts, and money markets.
• Initially launched on Arbitrum, it has since expanded to Blast and Mantle, unifying rates and trading experiences across multiple blockchains.
• The recent launch of Vertex Edge provides a synchronous order book, reducing fragmented liquidity and allowing transactions to settle directly on the base L1 chain.

Introduction

Perpetual futures are arguably crypto’s stickiest innovation. Perp DEXs are the most capital-efficient instruments in crypto and generate the most revenue by market cap. These platforms facilitate over $5 billion in daily trading volumes. However, Perp DEXs are becoming commoditized, as competition increases and product differentiation decreases.

Vertex is a decentralized exchange (DEX) built on Arbitrum that combines spot trading, perpetuals, and a money market into a single vertically integrated platform. It features a hybrid model of a central limit order book (CLOB) and an automated market maker (AMM), enhancing liquidity as positions from LP markets are integrated into the order book. As a non-custodial platform, Vertex ensures that users always maintain control over their assets. The protocol is distinguished by its low-latency trading capabilities and efficient liquidity utilization across a diverse range of DeFi assets. This efficiency is bolstered by an offchain sequencer architecture, which mitigates MEV on Ethereum L1 and supports exceptionally fast trading speeds. Vertex launched Edge in 2024, which aims to consolidate liquidity cross-chain into the application’s order book.

Vertex's main value proposition is bundling three of the most sought-after DeFi services — AMM, perpetual DEX, and money market — into a single DEX. This integration allows users to engage with different financial primitives within one interface.

Background

History

Vertex was founded in 2022 by Darius Tabatabai and Alwin Peng. Darius Tabatabai brings extensive trading expertise to Vertex, having previously held roles at CrossTower, JST Capital, and Merrill Lynch. Alwin Peng was the youngest person ever hired by Jump Trading, launching his career straight out of high school. Before Vertex, he developed RandomEarth, a popular NFT marketplace on Terra, in 2022. Together, they established Vertex in the summer of that year, combining their strengths in trading and technology.

Vertex went live on Arbitrum in Spring 2023, although it had originally targeted Terra for its launch. In February, Vertex announced Vertex Edge, a synchronous order book liquidity layer. Edge functions conceptually as a virtual market maker between exchange venues on different blockchain networks, initially focusing on Blast and Arbitrum. Its launch emphasizes the creation of a passive liquidity layer that integrates all connected chains into the application’s order book. Its native token, VRTX, launched in November 2023 and has since built up a fully diluted valuation of $178 million as of writing.

Vertex has successfully completed multiple funding rounds, attracting significant investment from various backers. In April 2022, Vertex announced an $8.5 million seed round led by Hack VC and Dexterity Capital, with additional participation from prominent investors such as Jane Street Capital, Hudson River Training, JST Capital, HTX, GSR, Collab+Currency, and Big Brain Holdings. A subsequent strategic investment was announced in June 2023, led by Wintermute. Although the specific funding amount was not disclosed, this investment aims to enhance liquidity on the Vertex Protocol Exchange.

Technology

Vertex features a hybrid order book AMM design that integrates a fully onchain trading exchange and risk engine at the application level, supplemented by an offchain sequencer. This includes spot, perpetual, and money market trading on the onchain platform, while the sequencer serves as a high-performance order book. This hybrid system leverages the strengths of both models to enhance performance, offer flexible liquidity options, and support a diverse range of DEX capabilities.

Vertex utilizes a xy=k algorithm for its integrated AMM and plans to introduce leveraged LPs to enhance liquidity further, especially alongside the virtual AMM for perps. This architecture places the AMM's passive liquidity alongside the bids and asks on Vertex's order book, effectively serving as an additional market maker. It not only seeds markets with more passive liquidity but also integrates the flexibility of limit orders. The onchain AMM enables LPs to pool assets passively, earn trading fees, and support long-tail DeFi assets, particularly benefiting less liquid tokens.

The Vertex sequencer complements the AMM by providing an offchain central-limit order book, bolstering liquidity as LP markets populate it. Vertex provides an HFT-friendly API to plug into the order book. The AMM layer helps function as a backstop in the case of downtime or maintenance, allowing users to trade solely against the AMM without requiring the order book. According to Vertex’s website, the sequencer’s order-matching execution speeds are between 5 and 15 milliseconds with a theoretical TPS of 15,000. With Vertex Edge, users can immediately access over 50 spot and perpetual markets, which are accessible on Arbitrum, Blast, and Mantle.

Vertex on Arbitrum

In March 2023, Vertex launched on Arbitrum and began beta testing spot and derivatives trading with select institutional traders.

Users can immediately start earning ARB rewards by trading on Vertex. These incentives, totaling 1.5 million ARB, are sourced from Vertex’s STIP-Bridge proposal to the Arbitrum DAO. The rewards program runs for 12 weeks, from June 24 to September 16, with the first rewards claimed on the Vertex app's Rewards Page on July 3, 2024.

Blitz on Blast

Blitz is the onchain implementation of Vertex's smart contracts on the Blast L2 network. It shares the backend architecture with Vertex on Arbitrum but features design adjustments and user interface changes.

The Blitz app was launched on Blast in February 2024. Users will have access to the combined liquidity of the Blitz order book and the resting (maker) order book liquidity of the Vertex app on Arbitrum. With this setup, Blitz users can trade against a unified cross-chain liquidity source, all within the Blitz app interface.

Vertex on Mantle

Vertex launched on Mantle in June 2024. By trading on Mantle, users can earn VRTX and MNT rewards. To encourage early use, 1 million MNT will be available in the coming weeks, primarily distributed based on trading activity in perpetual and spot markets. The more maker and taker activities a user completes on Mantle, the higher the VRTX rewards they can earn.

Constant Product & AMM Risk Engine

Vertex’s integrated AMM, operating on an xy=k algorithm, functions primarily in "Slo-Mo Mode." This offers a more deliberate, slower-paced trading method directly onchain through the AMM.

The AMM's pooled liquidity combines the bids and asks on the Vertex order book, acting as a market maker via smart contracts instead of an API. The sequencer integrates AMM liquidity with automated traders, providing users with a unified source of liquidity for trading.

Source: Vertex Documents

This sequencer gives Vertex Protocol unique liquidity advantages. For example, it can ensure proper liquidity to clear trades and allow markets to combine passive liquidity with flexible limit orders, benefiting illiquid and liquid assets. Additionally, users can choose to trade directly onchain without using the sequencer.

Sequencer

The Vertex sequencer is a specialized parallel EVM implementation of an offchain order book and trading engine built in Rust. It functions as an independent offchain node, with future plans for decentralization through Vertex governance. It achieves average order-matching execution speeds of 5-15 milliseconds and could support 15,000 transactions per second (TPS), comparable to centralized exchanges. This order book works alongside the Vertex AMM, which offers a low-latency central-limit order book (CLOB) for traders. Liquidity is further enhanced by pairwise LPs from the AMM contributing to the order book.

Source: Vertex Documents

The sequencer protects Vertex traders from validator MEV by preventing transaction ordering and front-running. While the sequencer is offchain, it does not have custody over any user assets managed by smart contracts on the underlying chain. Additionally, the sequencer cannot censor transactions, halt trading, or block withdrawals. Matched orders aggregate at the sequencer level but still settle locally onchain to the user's origin chain. A trade can match between a user on Blast and a user on Arbitrum, with settlement occurring on both chains simultaneously.

Vertex Edge

Vertex Edge is a synchronous order book liquidity product designed to unify cross-chain liquidity across different blockchains. As a virtual market maker, Edge facilitates the interaction between exchange venues on different chains. It operates by splitting the state of the sequencer across supported chains, simultaneously receiving and replicating inbound orders from each chain. Both sides of the trade are filled, and Edge takes the opposite side of each trade. This approach reduces risk by automatically hedging and rebalancing liquidity on the backend between chains. Edge only mirrors passive liquidity.

Passive liquidity, such as maker orders, is mirrored across the Vertex instances on different base layers, while taker orders are processed independently by each Vertex instance. This matching across chains happens simultaneously, further enhancing the efficiency of trades. Orders from one chain are matched with liquidity pooled from multiple chains, facilitating cross-chain liquidity without fragmenting it.

A Vertex Edge instance, such as the one on Blast, aggregates liquidity at the sequencer level, providing a unified order book that displays combined liquidity from all connected chains. Trade settlement still occurs on the originating chain. The Edge interface shares the same UI kit and backend as the primary Vertex platform, ensuring a seamless user experience across different instances. This system enables Vertex to offer synchronized trading solutions across diverse blockchain environments, expanding the accessibility and utility of its trading platform.

Synchronous Order Book

Due to independent chain operations, DEX order books are typically fragmented across different chains, with inefficiencies and liquidity issues. To address this, Vertex Edge creates a unified multichain future. It consolidates fragmented liquidity across chains into a single, combined order book on one layer. This liquidity is aggregated at the Vertex sequencer level and settled on the original base layer of each cross-chain Vertex instance. Vertex Edge acts like a network of highways, connecting isolated liquidity pools into a unified liquidity system.

Synchronizing liquidity in this order book across multiple chains removes barriers. It eliminates fragmented liquidity pools and allows users to trade against unified cross-chain liquidity on a single DEX interface.

The Edge Triangle

Through synchronous access to a unified cross-chain order book, Vertex Edge further enhances several features of the Vertex DEX, including spot, perps, and money markets.

Spot Trading

For most DEXs, transferring native assets across blockchains typically requires a third-party bridge. However, Vertex Edge operates as its own bridge, allowing transactions between various blockchain networks to directly access the traded asset's underlying layer. For example, suppose a user submits a long-market order on Blitz. In that case, the Vertex Edge sequencer would find the best liquidity for an order by checking orders from Vertex instances (e.g., Arbitrum, Blast, or Mantle). If the best offer is from a user with a short-market order position on Arbitrum, Vertex Edge would send the long-matched order to the sequencer for settlement on Blast while also sending the short order to be settled on Arbitrum. To improve the user experience even more, all spot assets on Vertex are quoted in USDC.

The Vertex Edge sequencer then takes equal opposing positions on each chain, meaning it will be short on Blast and long on Arbitrum. The sequencer only balances resting liquidity (maker orders) across different base layers. Active liquidity (taker orders) is submitted directly to the sequencer’s unified liquidity layer, Edge, without being mirrored across instances.

Source: Vertex Documents

Over time, Vertex Edge will continuously build spot positions and perpetuals on local chains while aggregating and settling liquidity between chains on the backend. However, the cross-chain spot feature is slated to go live in H2 2024, so order marches are only viable for perpetual trades.

Perpetuals

Cross-chain liquidity for perpetuals maximizes market efficiency, offering capital-efficient trading opportunities across different ecosystems.

Vertex Edge optimizes liquidity fragmentation and provides unified funding rates across all blockchains by improving trading efficiency. This past month, Vertex reduced minimum order sizes for perpetuals by approximately 50-75%. This achievement is particularly relevant because of Vertex’s taker fees, which are calculated by multiplying the minimum order size, maker price, and fee rate. Through this maintenance update, Vertex Edge lowered the barrier to entry, encouraging smaller trades across markets.

Vertex Edge offers consistent fees and rates for spot and leveraged perpetual trading, enabling predictable and seamless transactions across multiple blockchains. Traders can adopt long or short positions on the perpetual trading floor, utilizing up to 10x leverage. All of Vertex's perpetual products use USDC.e as primary collateral.

As the platform expands, new money market opportunities will also arise, further enhancing the overall trading experience.

Money Markets

Regarding money markets onchain, prevalent friction points include high transaction fees, slow transfer times, and the complexity of third-party bridges.

Vertex Edge allows users to store collateral on multiple blockchains without third-party bridges, reducing fees and friction while increasing collateral opportunities and liquidity between chains.

Additionally, Vertex Edge offers a single USDC deposit interest rate across all blockchains, allowing capital to flow freely between ecosystems. This promotes efficient capital use, providing cheap loans for active traders and optimized yields for passive investors.

By maintaining a consistent interest rate for a given money market pool, Vertex can promote cross-chain spot trading. As such, traders can access assets across different ecosystems without bridging stablecoins. Without this, tokens remain confined to their native ecosystems, hindering synergistic liquidity across multiple chains.

Advantages of Vertex Edge

Base Layer Support

Due to onchain scaling challenges with trading engines on L1 and L2 networks, many DEXs are choosing the app chain model. App chains are specialized environments tailored to optimize specific applications and enable asset transfers between the app chain and the base layer, such as Arbitrum.

For Vertex, general-purpose L1s aim to foster the growth of native apps and build a community with shared values. This approach creates a solid foundation for anything built on the protocol layer. Relying on an app chain for operations diverts economic and community-building activities from your main blockchain.

Vertex aims to minimize app chains by only incentivizing native chains and encourage users to support the local blockchain. This ensures onchain trading activity is always settled on the supported base layer, creating a native DEX and positively impacting blockspace demand and liquidity like any other dApp on that chain.

Audit History

Vertex maintains a continuous partnership with its auditing firm, OtterSec. Before the mainnet launch, OtterSec conducted a comprehensive audit of Vertex contracts. It continues to offer auditing services and feedback on the Vertex codebase.

Tokenomics

VRTX Token

Vertex’s token VRTX is used for governance and growth initiatives. VRTX currently has a capped supply of 1 billion tokens; around 20% of the total supply has been allocated to the team. The initial trading rewards program launched alongside Vertex on the Arbitrum mainnet in April 2023, allocating 10.0% of the total VRTX worth. Vertex’s token generation event occurred in November 2023. At a circulating supply of 244 million, VRTX’s market cap currently stands at over $29 million.

Distribution

The total supply of VRTX tokens is fixed at 1 billion. Of these, 91.85% will be distributed over more than five years, with the following allocations:

• Founding Team (20.0%): Vests over a timeline that broadly matches 2 to 3 years after Vertex Protocol’s inception on mainnet in April 2023.
• Initial Token Phase (10.0%): Encompasses the first seven Epochs of the Vertex Trade & Earn rewards program, which ran from April 2023 to November 8, 2023. The supply allocation was a one-time distribution of VRTX, available as trading rewards for early users.
• Ongoing Incentives (34.0%): Represents protocol’s emissions as part of the Vertex Trade & Earn Rewards program. The emissions for ongoing incentives will gradually decrease over each monthly emission cycle. Tokens earned during the ongoing incentives phase can be claimed three days after the end of each epoch. Any unclaimed rewards after 30 days will revert to the Protocol Treasury.
• Early Investors (8.8%): Those who participated in the Vertex seed round fundraising of $8.5 million in 2022. Vesting occurs over a timeline that broadly matches 2 to 3 years after inception.
• Initial VRTX Liquidity (1.0%): Consists of 1.0% of the VRTX token supply, which will be unlocked at Genesis and designated as incentives for participants of the Vertex LBA.
• Future Contributors (5.0%): Starting in Year 2, a reserve for future team growth and incentives will vest. Once vested, these tokens will go into the Protocol Treasury for potential use but won't necessarily enter circulation.
• Ecosystem Development (9.0%): VRTX token reserve to support Vertex's long-term ecosystem growth. At Genesis, 1% of the Ecosystem Development's VRTX allocation unlocks (10 million VRTX). The remaining 8% will vest linearly at 2.67% per year from years 1 to 3.
• Advisory (0.5%): Begins vesting in the first year. The VRTX tokens allocated will fund third-party services to enhance further the Vertex Protocol's long-term growth, security, and sustainability. Activities include code audits, bug bounties, and other pertinent services provided by third parties.
• Protocol Treasury (11.7%): Managed by the Foundation, the Treasury will oversee distributions of VRTX tokens held in the Protocol Treasury. Initially, 5% of the total VRTX supply (50 million VRTX) will be available at Genesis, with the remainder vesting linearly from years 1 to 3. The Protocol Treasury serves as a strategic reserve for operational, fundraising, and ongoing expenses, while VRTX tokens within it can also be staked to expand and diversify treasury reserves.

Buyback & Burn Program

The Buyback & Burn initiative utilizes a portion of accumulated protocol revenue from Vertex (e.g., trading fees) to procure VRTX tokens proactively, which are then permanently removed from circulation through burning.

In May 2024, 2 million VRTX tokens staked from the Protocol Treasury began a two-week unstaking process. The 2 million VRTX tokens were transferred to the burn address following this period.

Network Activity

Over the past year, Vertex Protocol has maintained daily active users between 250 and 600, totaling over 28,400 unique users. User activity and token price performance have been correlated, with network activity peaking in late November to early December when VRTX traded at an all-time high (ATH) of $0.52.

By expanding into the Arbitrum, Blast, and Mantle protocols, Vertex Edge has significantly boosted fee revenue, with total netted and taker fees increasing by 129% year to date. However, given the recent reductions in trading fees, Vertex Protocol must achieve higher trading volumes to maintain its current levels.

Vertex Protocol's volume comes primarily from perps, which has a cumulative volume of $90.32 billion as of June 26, compared to $7.68 billion in the spot market. This volume has primarily involved more established cryptocurrencies, with over 70% of Vertex's total volume coming from Bitcoin (BTC) and Ethereum (ETH). As Vertex Protocol expands to more blockchain projects, the diversity of traded assets is likely to increase.

While the platform's volume has steadily increased, users have continued to diversify their activity across Vertex's different platforms. Since Blitz launched on Blast in March 2024, monthly volume on Arbitrum decreased by 26% in June, while volume on Blast increased by 158%. However, volume on Blast decreased by 22.2% in May, coinciding with Vertex's launch on Mantle, which has grown to over 320 unique users.

Roadmap

Over the next year, Vertex will prioritize several initiatives:

• Cross-Chain Integrations: Making Arbitrum more accessible to broaden its user base.
• Isolated Margin Accounts: Introducing isolated margin perpetuals to simplify trading for retail users. This addition meets user requests alongside Vertex's unified cross-margin two system for spot, perpetuals, and embedded money markets, enhancing capital efficiency.
• Mobile Trading App: Develop a mobile app to increase accessibility and attract diverse user groups, including traditional market traders familiar with platforms like Robinhood.
• Smart Contract Accounts: Implementing smart contract accounts to streamline wallet usability by abstracting technical complexities.

Through this, Vertex seeks to maintain the benefits of self-custody, transparency, and autonomy that are fundamental to DeFi, thus creating an unparalleled and user-friendly DEX experience.

Closing Summary

Vertex simplifies multichain DEX operations through Vertex Edge and improves user execution with a synchronous order book liquidity product. Its peer-to-peer borrowing and lending system allows for customized and flexible terms between individual borrowers and lenders. This approach results in unified rates and agreements across multiple blockchain platforms.

By unifying cross-chain liquidity, Vertex Protocol enables DEXs to scale to thousands of transactions per second without relying on app chain settlements. This approach helps general-purpose Layer-1 blockchains avoid becoming commoditized. Instead, L1s can build internally and establish a strong foundation for future developments. Through Vertex’s offerings, DEXs can become more accessible and user-friendly, accelerating the industry's path toward mass adoption.