Vega — Project Analysis

In August 2020, I was fortunate enough to gain access to Vega’s private Testnet — a fully decentralised derivatives network running on Vega protocol. Since then, I’ve closely monitored the development progress and continued my conversations with the team.

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When you look at the financial systems today, they fall into two categories: retail products and investment banking/capital markets. The latter has been monopolised by institutions and middle-men, who’ve set up a system that some may argue it benefits themselves primarily and doesn’t allow for much innovation, freedom or flexibility. Barney Mannerings, Vega’s founder and CEO, says “we know that markets don’t need to function this way, and we’re going to prove it”. In August 2020, I was fortunate enough to gain access to Vega’s private Testnet — a fully decentralised derivatives network running on Vega protocol. Since then, I’ve closely monitored the development progress and continued my conversations with the team.

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The founders

Barney Mannerings and Ramsey Khoury met a few years ago and connected over a shared ideological desire to use technology to increase fairness, openness and transparency, and create conditions for the world of innovation that leaves no one behind.

Barney Mannerings’ educational background is in technology (Bachelor of Science in Computer Science from Lancaster University) and he spent over a decade working in financial services (six years at Accenture as a manager in Capital Markets and five years at Capco as Principal Consultant). During that time he worked on electronic trading platforms and algorithms, OTC products and trading processes, derivatives, FX, bonds/fixed income, equities and consumer banking. He’s experienced in building front office trading and risk systems for large exchanges. In 2016 Barney co-founded Pik (a journalism monetising platform) and while he was running that company he met Ramsey Khoury at a crypto event.

Ramsey Khoury has a wealth of blockchain industry experience. His professional background is in design (he attended Parsons School of Design) and in 2000 he founded Head London — an award-winning design agency acquired in 2016 by Zone. In 2017, he co-founded Chainspace — a smart contract platform. The University of London funded project was very development-focused (it never released a white paper or a token). In November 2018, an industry expert Andre Cronje stated in his Chainspace Code Review that the code produced by the team was “amazing, probably the best I have seen yet. It’s elegant, it’s simplistic, and it has had a lot of hard work put into it”. In February 2019, it was reported that the Chainspace team had been acquired by Facebook to work on the Libra project.

The team

A lot of the team had known each other for quite a while before Vega. Many of them worked together in previous businesses that Ramsey or Barney founded, and some of them have been friends since university.

Tamlyn Rudolph (MS in Financial Mathematics) was introduced to the project during the beginnings of Vega by Ramsey and works across a broad range of business activities including protocol design, strategy, fundraising and partnerships. She has spent most of her career trading large-scale derivatives on volatile commodities via exchange and OTC markets (as an energy trader for companies like Origin Energy or Ignition Energy). I had the pleasure of meeting Tamlyn during my Vega Console pre-public beta onboarding, and she is a key member of the team.

David Siska (MSc in Mathematics) — his expertise lies in mathematical finance, and he is a University of Edinburgh lecturer and quantitative analyst, which made him the perfect addition to the Vega team (he’s the co-author of Vega’s white paper). David designed Vega’s risk model to support fully automated margin trading and execution in a safe and decentralised way.

Klaus Kursawe — Klaus is Vega’s blockchain researcher and old school cryptography, he started working on Byzantine Fault tolerant protocols in 1998 and designed the first practical protocols for fully asynchronous ordering. He is a hardcore researcher with around 50 peer-reviewed papers and book chapters. He is currently working on how to achieve ordering fairness in blockchains. (see Wendy). He has worked with Vega for 1.5 years

Dave Hrycyszyn As an advisor, he helped with the strategic, technical and security aspects of distributed ledger development. He knows Ramsey from Chainspace which they co-founded together (Dave was the CEO) and he was one of the employees acquired by Facebook to work on the Libra project (he was a technical program manager at Libra). Dave is also a founder and CTO of NYM, a company that focuses on building the next generation of privacy infrastructure for blockchain.

Rebecca Simmonds — she’s head of business operations and partnerships at Vega. She was introduced to the business through Ramsey, and she was a managing director of Head London (which Ramsey founded and that was later bought by Zone). At Vega, she is looking after the operations, marketing and partnerships within the business. I had the pleasure of meeting Rebecca during the Vega Console onboarding. She is a key, founding member of the team, and I’ve stayed in touch with her throughout my research.

Edd Hannay — he’s head of engineering at Vega, and previously worked at 7digital as an engineering team lead and Ticketmaster as an engineer. In 2016, he co-founded Pik with Barney, which is a journalism monetising platform (still in private beta). Edd leads the full-stack engineering team at Vega and steers the development of the protocol from a technical perspective

Presently, the team consists of roughly 21 employees (including founders and advisors) that are primarily UK-based and working in a distributed environment.

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Over 80% of the team is engineering, design and research-focused, so the team is heavily engineering-oriented and tech-savvy, which is ideal for the current development stage of the company.

Funding

Vega raised more than $5M in a strategic seed round. The round was led by Pantera Capital, whose mission to facilitate the transition to more inclusive capital markets is aligned with Vega’s.

Other backers include Xpring (Ripple), Hashed, NGC Ventures (an investment platform co-founded by former NEO Council members), gumi Cryptos Capital (the blockchain/crypto venture fund launched by gumi Inc., a Japanese mobile game publisher), Rockaway Blockchain (a blockchain fund launched by Rockaway Capital), KR1 (in addition to the investment they also undertook active advisory work for Vega resulting in revenues of £180k in Vega token), Eden Block, Focus Labs, Greenfield One, Monday Capital (a crypto fund built by engineers), RSK Ecosystem Fund (managed by Monday Capital) and a select group of private investors.

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Vega’s VC backers

Vega has built a collaborative relationship with Outlier Ventures through running the “Deconstructing Defi” event (alongside London Blockchain Labs) as part of London Blockchain Week.

The product

The main product is the protocol that aims to change how derivatives trading works in fundamental ways. It’s a purpose-built blockchain with a focus not only on a more performant trading experience but also on market-specific requirements like dynamic liquidity incentives, which go beyond fee rebates and running complex risk models for derivatives. It’s a network that holds collateral/margin, maintains insurance funds, applies risk management and settles trades. The team aims to make it truly open and permissionless.

Vega Console is a stand-alone, web-based client for trading and operating markets on Vega. I have been fortunate enough to gain access to Vega’s private Testnet and use Vega Console since August 2020. Currently, there are three markets running on the testnet: GBP/USD, ETH/BTC and ETH/USD. Vega does not charge gas fees, but rather uses a different fee structure that rewards participants that make Vega’s network possible. The fee for trading is divided between liquidity providers, passive trade parties and infrastructure providers (it is the price taker who pays the fee, and they only see one fee). As far as order limits, there are four order types to choose from: GTC (Good til Cancelled), GTT (Good til Time), IOC (An Immediate or Cancel) and FOK (Fill or Kill). For market orders, you can choose either IOC or FOK. I was not able to deposit any funds into the testnet (I used funds available in the testnet wallet), but on the mainnet, you will have to use the settlement currency of the market you want to trade on. For example, if the market you wish to trade on uses Ethereum as the settlement asset, you’ll have to deposit Ethereum (Vega doesn’t do currency conversion). The deposited funds will be locked into Vega in an Ethereum contract and made available to accounts you registered with the network. Placing orders worked without any glitches for me, and the platform provided a user experience as good as a centralised exchange. Once trades have been made, these can be viewed in the Orders tab, allowing for quick and easy management and cancellation of ongoing orders.

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Vega Console has a professional and clean design aimed at a wide range of traders. Designing UX for a system that is robust and complex can be challenging, and elements on the screen need to be laid out for maximum clarity and efficiency. In my opinion, Vega Console achieves that, and for those looking to customise their workspace, that’s also offered as an option (in fact the workspace customisation options are the best I’ve seen so far on any exchange). The design language of Vega Console takes more inspiration from professional financial instruments, rather than from traditional crypto exchanges. This reflects Vega’s desire to facilitate a wide range of derivative markets (not only crypto products). It’s worth noting that there are still plenty of features in development, which most likely will be included in the public beta release.

In terms of institutional/pro users, it’s worth noting that Vega provides a suite of well documented, high-quality APIs suitable for algorithmic trading (binary streaming APIs, REST APIs and GraphQL APIs that including streaming prices and other data over WebSockets. These are suitable for building trading apps and front ends on Vega network).

Business Model

At the current stage of the development process, the team focuses more on designing a futureproof governance model than a business strategy. They highlight that Vega is an open public blockchain, not unlike Ethereum or Bitcoin (though Vega is proof of stake not proof of work), and it will be open-sourced at some point. So, ultimately its long-term future depends on the success of the network and the value created for everyone in the ecosystem, including those developing the code, as well as people who run nodes and use the protocol itself. In terms of the commercial sustainability of the project, the team is looking at various models, for example, the project could be funded through an on-chain treasury.

Currently, the costs of building Vega are covered by privately raised funding. However, that will eventually give way to a long term sustainable community/ecosystem-based model. In terms of fee revenue, there will never be any form of fees or costs paid directly to Vega. Vega is building a Proof-of-Stake network, and the primary purpose of the Vega token will be in staking, delegating to act as a validator and participating in the governance decisions (e.g. proposing new markets). The upside for the token stakers comes in the form of fees collected from transaction volume (the fees will be collected in the underlying market currency). So, in theory, the value of the token should correlate with the volume of transactions on the network.

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The Liquidity and Market Marker Founding Members

Liquidity is very important when it comes to markets, and Vega sees its Markets and Liquidity Programme as a critical step. The model is intended to reward liquidity providers for incubating and growing healthy markets (estimating that they’ll receive between 50–70% of total fee revenues generated on the platform). The Liquidity and Market Marker program will be rolled out in multiple phases, and the founding members include FRACTAL (Los Angeles), E-Frontier (San Francisco & Tel Aviv), flovtec (Zurich), QCP (Singapore), Hummingbot (San Francisco), Proxima (Sydney) and Luxor (New York).

Regulation

The regulatory compliance frameworks are still being developed at Vega, so the architecture described below could be subject to change.

Vega is creating a protocol and software that implements it, but they won’t be running the trading platform themselves. That will be done in a decentralised way by all the people who download the software, choose to run nodes, create markets and trade together. In that sense, Vega is more like bitcoin or Ethereum than an exchange, as they are not planning to offer any derivatives products themselves. Anyone in the world will be able to run and node (Vega is now ready to have running nodes on serval operating systems: Linux, MaxOSX and Windows) and propose a new market on the Vega network.

People and organisations that use Vega to trade or market will be creating, buying, and selling products between themselves. Depending on where they’re based, and what they’re doing, they will often need to abide by local regulations. Vega doesn’t think this is going to change, and they are in the process of designing tools (the constrained order book technology) that will allow people to achieve and prove compliance with various regulations. This will be rolled out gradually though and it will not be implemented through Vega’s engine (most likely it will be a transparent system of signatures and public keys that will enable regulatory complaint market participation).

Product/Market Fit

Finding a product-market fit is crucial for the success of any startup (the vast majority of startups will never find it). It’s the keystone of startup success: making something that many people want. In most markets, there are needs that many people don’t realise exist (if it was obvious then everyone would be addressing it). Sometimes though, that need is less hidden, but there are obstacles that prevent startups from addressing it. Legal frameworks and technological/systemic constraints protected capital markets from disruption for the past few centuries. Vega attempts to remove the middle man and put the network in the control of the participants and as a result of that massively reduce the costs of accessing the markets (this is particularly beneficial for smaller/medium size entities). Secondly, Vega hopes to reduce the cost and the speed of creating new markets (by eliminating bureaucratic, regulatory and systemic hurdles), which usually takes months and costs hundreds of thousands of dollars. With a protocol like Vega, you could deploy a proposal for new markets within days/hours.

Vega isn’t particularly focusing on providing a competitive service to other crypto derivatives services. Instead, they are targeting the entire world of derivatives (and even more potential markets that people might create on the Vega network). The Office of the Comptroller of the Currency (OCC) estimates that banks have exposure to more than $200 trillion notional worth of derivatives (the global derivatives market is worth over $500 trillion).

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Source: World Money January 2019

When it comes to crypto markets, Vega’s product/market fit is based on:

  • offering decentralised, professional-grade tools to retail and professional traders (decentralised products often suffer from bad UI/UX or limited functionality).
  • growing crypto derivatives sector (the bitcoin derivatives market is growing faster than spot market, suggesting rising institutionalization in the space).
  • growing decentralised finance sector: Since January 2020, the total transaction volume on decentralised exchanges has surged by 57% month on month. Decentralised derivatives/margin trading is still a small piece of the DeFi landscape though, and it’s an area of tremendous growth opportunity.
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Source: Dune Analytics

The two most important challenges that every startup will face are finding a product/market fit (most startups will never find it) and building a world-class team. These are the two aspects of Vega which in my opinion are the strongest sides of their project. The team has experience in developing the derivatives markets, as well as in building successful crypto startups. They are using emerging technology (blockchain) to massively reduce the costs of accessing and building the markets.

Although Vega is not ready to share their entire business model at this stage, it is important to remember that it’s a lot harder to build a product that a lot of users want, than it is to figure out how to make money on that product. What is clear though, is that they are looking to open-source the project and Vega’s Proof-of-Stake protocol will facilitate the creation of leveraged financial products (and it will reward liquidity providers through a trading fee distribution model).

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Decentralisation may pose challenges for financial regulatory and supervisory frameworks, particularly those that focus on centralised financial institutions. As emerging technologies drive new business and service models, governments will have to create, modify and enforce regulations (to protect citizens and ensure fair markets while letting innovation and businesses flourish). It is impossible to predict with certainty the future scope or degree of decentralisation in the financial system and how/if the regulatory framework will affect Vega (Vega is fully decentralised. From order entry and matching through to settlement, nothing happens on a central server).

Building a fully decentralised platform adds overall complexity which makes the development time longer but it also increases the project’s risk profile (for example if you’re working on a project that runs on an established network like Ethereum you don’t need to worry too much about the security of that network). Vega develops a new purpose-built blockchain and that comes with complex risks. When it comes to emergency updates, these are also harder to implement in a decentralized setting (you can’t just stop the server and run an update). To mitigate these risks Vega plans for a slow and controlled rollout — a guarded launch (this could come in a form of transaction size restrictions and gradual implementation of new features).

In terms of competition, on the surface, Vega will be competing with legacy systems (the differentiating factor is that it operates as a decentralised network) and projects in the emerging decentralised crypto derivatives landscape. Currently, Vega is not focusing on beating its potential rivals though, instead, they are concentrating on building a global, open-source network. The most successful companies don’t just enter existing markets, they create new markets (for example, Airbnb created a new market for renting homes). Instead of looking within the accepted boundaries of existing markets, they look across time, from the value a market delivers today, to the value it might deliver tomorrow. In this way, Vega can actively shape their future and lay claim to new market space.

To find out more about Vega you can join their discord here or Vega Trading Community-led Telegram group here.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary. This is free content. The author has not received financial compensation for writing this post.

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Crypto Researcher

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