🤖Price Discovery
Last updated
Last updated
Oracle-based DeFi protocols inherently lack price discovery and scalability. To price assets, they create an index that aggregates and averages the price of other exchanges; there is no unique mark price. The benefit is that unique structures such as zero-impact exchanges can be built, but such a design is also exposed to oracle price manipulation, as seen in the case of GMX’s AVAX market hack. Furthermore, this structure limits the protocol's scalability, as malicious actors can open positions and force an artificial arbitrage opportunity by manipulating the oracle's price feed. For this reason, such protocols can only offer the most liquid assets or limit open interest significantly to avoid price manipulation. Therefore, although it satiates a specific demand (zero-impact trades) of perp trades, the scalability is greatly limited.
In contrast, Aark Digital introduces price discovery similar to CEX: index price and funding fees are used to determine the skew of the market, while the mark price is the current price on Aark. Thus, Aark Digital has its unique mark price. The upside of this is that the protocol has scalability. Even if index prices are to be manipulated, funding fees will adjust immediately to reduce the spread between the index and mark price. Because there is a unique mark price on Aark, the price at which the assets are traded remains the same despite the changes in index price. This also guarantees the stability of Aark's liquidity pool from price manipulation.
Further, price discovery allows for arbitrage opportunities. It is well known that arbitrageurs and market makers create roughly over half of the volume on current exchanges, including DEX and CEX. Arbitrageurs and market makers are crucial because they provide liquidity for better execution prices. Liquidity is the foundation of finance, especially DeFi, as seen in the massive DeFi rally of 2020 and the advent of the concept of liquidity tokenization. Thus, while most oracle-based DEXs peg the index price to the underlying exchanges and eliminate all arbitrage opportunities, Aark Digital has the advantage of providing arbitrage opportunities and significantly scaling liquidity for traders.
Nonetheless, Aark Digital is still a peer-to-pool perpetual DEX and does not have its order book. To simulate an execution price, Aark Digital takes into account the skewness of open interest and depth factor as follows:
Where skewness is
Thus, when the market is long skewed, meaning that it has more long OI than short OI, price discovery happens above the index price, or in other words, the mark price is higher than the index price, and vice versa.
In this case, the funding fee would be positive, longs paying shorts, incentivizing more shorts to open positions. Such trades will be made by traders looking to sell at a higher price or earn funding fees from short positions. This effectively brings the Mark Price down closer to the index, stabilizing the price and balancing the OI closer to 50:50 so that the pool is less directionally exposed.
