Global and Local Markets
Last updated
Last updated
The epicenter of Spicenet is a differentiated market structure, allowing it to list markets on crypto's wildest imaginations, be it futures on hyperliquid points, CEX funding rates, or a futures market for a prediction market! However, allowing users to trade markets on any asset would require special configuration and market structure, designed from the ground-up to support trading of whatever.
Introducing Global and Local markets -- two polar opposite market structures designed to facilitate trading of two polar opposite crypto asset classes, i.e the bluechips and the exotics(alternatives). As traders and market makers, we have observed the stark inefficiencies of trying to use a global exchange and settlement venue for all crypto asset classes. The top asset classes, the blue-chips, like BTC, ETH and SOL work well in a global venue, like an orderbook, because their markets are quite developed on centralised exchanges, with deep liquidity and density of volume and OI, making it quite easy to facilitate trading of these assets on-chain. However, for more exotic assets where markets for these assets are quite nascent, with thin liquidity and low participation density, it becomes hard to facilitate trading of these types of assets on-chain.
Global and Local markets solve specifically for this need -- to create deep liquidity for any and every type of asset. Let's understand how each of these market structures work.
Global markets refer to a global exchange and settlement mechanism where participants trade and settle against each other on a global and lit venue. A global market brings all participants together in a unified market structure. Spicenet leverages an orderbook mechanism as a global trading and settlement venue. When a user trades on a global market, they are often trading against the global aggregated liquidity available to be traded at that point of time. In other words, global markets aggregate the liquidity available for an asset at a point of time, allowing users to trade against that liquidity.
However, global markets are only suitable for specific asset classes. If a user is wanting to trade more than the liquidity available at a specific tick, they incur slippage. Meaning that global markets are only suitable for assets with deep liquidity and participation density, i.e higher concentration of market makers and liquidity providers, sustaining volume and OI, are all good indicators of a well-developed market structure for a specific asset. Unfortunately, in crypto, many assets do not have this luxury, except the blue-chip assets. Moreover, impact of user orders on a global market are multiplexed. For example, if a user gets liquidated, the impact of the user's portfolio being offloaded is borne by the entire market. This may even cause cascading liquidations where one initial liquidation prompts multiple follow-up liquidations, till a majority of OI is wiped out. These events are mostly prevalent in low-liquidity/exotic assets where market structure is still nascent. This is where local markets come in.
Local markets can be equated to the intent/RFQ layer of Spicenet, where a user trades against a specified counterparty, provided that the counterparty satisfies the user intent, or provides a competitive/acceptable quote to the user. Local markets on Spicenet are designed to function as "settlement pools" between a user and a counterparty, that settle assets upon qualification of certain conditions. Because a local market is only limited to a single user and a counterparty, effects of sudden market volatility are minimal. For example, if a user A gets liquidated on his $BTC local market position, other $BTC local markets of other users are completely unaffected. This is a crucial, yet elegant feature where although users may trade the same asset, they would be trading it on different markets, or "settlement pools", thereby avoiding events such as cascading liquidations.
Who would be the counterparty traders in a local market? Counterparty trades in a local market can be of 3 types
RFQ market maker
Solver
DAO-owned LGV.
Let's understand how each of the above liquidity provider functions. RFQ market makers are typically liquidity providers that manage their own inventory, and upon user request, respond back with an acceptible quote, and if both parties are in agreement, the order is satisfied, and assets are settled. Solvers are typically arbitrageurs that only maintain inventory for a short period of time, and in the longer horizon maintain either a no inventory position or a hedged book. DAO-owned Liquidity Generation Vaults(LGVs) are special LP vaults created and controlled by the Spicenet DAO. The Spicenet DAO, upon passing of a proposal, can create specialized Liquidity Vaults deploying liquidity across a range of markets(depending on strategy). Liquidity in these vaults can be seeded by the DAO(depending on the proposal), and/or the community(depending on the proposal). Users can select the counterparty they would love to trade with, and can even allow more than one counterparty to fill their order.
