RFQ Architecture: An Alternative Choice for Market-Level Market Makers Late Perp DEX

Variational: act as the counterparty for the entire contract market

Variational does not produce liquidity, it is just a mover of liquidity.

After a lengthy introduction to the past of Hyperliquid, the capital operations surrounding $USDH and DAT/ETF related to $HYPE will be completed later.

Binance's aftermath public relations are becoming increasingly adept, OK has taken the lead in conducting internal cleanups, Hyperliquid continues to rise, and even though 1011 may gradually eliminate a few market makers or YBS project parties, it is still difficult to harm these mainstream platforms. Even secondary and tertiary CEX/DEXs like Lighter or Matcha are showing resilience far exceeding that of previous crisis moments.

Image description: HL's revenue share. Image source: @RyanWatkins_HL's rise has become unstoppable after Aster and 1011, unless it self-collapses or is shut down by regulation. Binance finds it difficult to take down HL like it did with FTX.

The trading landscape of cryptocurrencies has become solidified, what should the latecomer Perp DEX do?

Market-Level Market Maker: OLP Covers Everything

The idea of Variational is to link all liquidity together. Variational predicts that the future will not be dominated by a single entity; even if one does dominate, there will still be the presence of third-party market makers.

We mentioned earlier that both Binance and HL claim to have an open attitude towards market makers, even stating that HL's HLP accounts for only 1% of the trading volume.

This principle is not complicated; it's like how Qualcomm had to sell its telecommunications business to be accepted by the entire industry, Visa/Mastercard will not start their own banks, and Stripe's Tempo will probably not issue stablecoins.

Only with sufficient neutrality will all market participants actively accept it.

If Hyperliquid's Builder Codes are the frontend of liquidity, then Variational's OLP is the counterparty for all market makers.

Strictly speaking, Variational is not a traditional Perp DEX. On one hand, it has a high degree of centralization. Under the RFQ framework, users actively request prices, and the only market maker, OLP, provides quotes. The order details are pre-fabricated by Variational, and the final matching price is also determined by OLP. Note

CLOB addresses the slippage issue in AMM, reappearing under the RFQ mechanism in Variational, but limit orders can be set to compensate for this flaw.

But the benefits also come along, as each order from the user must have a counterparty to take it, ensuring absolute balance between long and short positions in the market. Furthermore, each order is insured through the OLP contract, with profits and losses originating from the same source, unrelated to others.

Moreover, OLP is the only market maker on Variational, meaning there are no third-party market makers; any user needs to trade with OLP, and this measure is to ensure the minimum granularity balance in the market.

The advantage of doing this is that during extreme liquidations, your profits are only accountable for the losses of the counterpart of the order, and you do not need to be responsible for the losses of other orders, in order to minimize the liquidation amount on Variational.

However, this does not prevent the spread of liquidation in the overall market, which is not contradictory to the above. Please note that OLP is the only counterparty for users on Variational, but OLP does not only provide market making on Variational.

Image Description: OLP Operating Mechanism Image Source: @variational_io In addition to the commonly used user deposits for earning profits and being responsible for clearing, the biggest difference between OLP and HLP is that OLP will hedge on the DEX/CEX in the market.

For example, if Alice opens a long position in OLP and cannot find a corresponding short position to match it, OLP will directly open a corresponding short position in BN/HL to achieve its own balance.

So Variational is not like a Perp DEX, but more like market-level market makers such as WinterMute, where what is open is not liquidity, but access for market makers.

For HLP, users' deposits need to earn market-making profits, but HLP cannot excessively monopolize market traffic, otherwise ordinary users and market makers will flee.

However, OLP is the only market maker, and users must either deposit OLP or become its counterpart, naturally excluding the participation of market makers.

In 1011, market makers couple their positions on Binance and on-chain. When a crisis arises, multiple market makers can create a cascading effect, causing the market crisis to spread infinitely. OLP goes against this trend by closing and liquidating positions according to predetermined conditions.

For Binance and HL, OLP would be a better choice for market makers, as it would at least reduce the likelihood of “running away” during a crisis. OLP is unique on Variational, but for other exchanges, it is a major client.

Keep in mind that the position of OLP is an absolutely balanced P2P model, and each user's position is only accountable to the counterparty.

Loss rebate is customer acquisition cost

How to participate and achieve stable profits during the intense competition of Perp DEX.

Variational aims at allowing third-party market makers to exist in BN/HL, and retail investors are unable to compete against market makers and super platforms. OLP acts as an open market maker, and if users want to earn passive income from Perp DEX, they can participate in OLP without trading.

But! Is that really the case?

Image Description: Endless Involution Image Source: @TurboFlow_xyz Lighter's loss rebate has not stopped, and a new transformed AMM mechanism TurboFlow Perp exchange has introduced zero trading fees/no slippage, and the model where the exchange only shares profits when users make a profit.

The loss rebate of 1011 is very systematic, but the loss subsidy from Variational has become normalized, which is also a direct incentive for its attention from the market after the major liquidation.

In a sense, the Lighter loss subsidy, Binance's $200 million compensation fund, the Tongzhou plan, and the potential Hyperliquid S3 trading points are all customer acquisition strategies.

However, the loss subsidy has already indicated that the cost of this customer acquisition channel has reached the edge of marginal benefits. If the project party is not profitable but still needs to acquire customers, it indicates a danger.

Variational is normalizing this kind of danger and treating it as a daily customer acquisition method.

OLP is not only the唯一做市商 but also a counterparty that does not charge fees. OLP's profit comes from the market-making spread, which means “BN/HL is too powerful and will prioritize liquidating user positions, but OLP uses a black box to ensure retail rights.”

Yes, the market-making mechanism of OLP remains opaque, and OLP is still controlled by the project party. Retail investors do not need to believe that OLP will not intentionally cause them to incur losses because OLP will subsidize the losses.

OLP will satisfy the interests of OLP depositors while maintaining a neutral market-making strategy

In addition, OLP is the counterparty for all traders, which can to some extent control the interference of whales in the market. Situations similar to the hijacking of HLP arbitrage are less likely to occur because the openness of OLP is lower, and in extreme cases, it can directly close whale positions.

Image description: Variational loss subsidy peaked at 1011.

Image source: @variational_io

However, it should be noted that the current trading volume of Variational is still quite small compared to HL/BN, and whether its market-making volume can increase while ensuring subsidy capability needs market verification.

Conclusion

The end of the decentralized era.

Before Variational, the liquidity in the market was underground and decentralized, but Variational brings retail power into the mix, countering market makers and large trading platforms.

• User Perspective: OLP controls the intensity of liquidation, but essentially cannot resist the overall changes in the market, at most providing some peace of mind.
• From the project's perspective: Absorb user deposits to hedge positions in BN/HL, relying on free and APR to increase its own trading volume.
• BN/HL Perspective: Increase institutional-level market makers, and can serve as a bridging channel to utilize the overall market liquidity.

However, the level of black box in Variational is too strong, and retail investors are still powerless to fight back. This may be the helplessness of retail investors in this era. The U.S. capital represented by Coinbase has already taken the lead in institutionalization, following in the footsteps of the U.S. stock market.

The on-chain and Asian markets are the only remaining retail markets, and it is uncertain whether they will give rise to a Frankenstein or a new cyberpunk concept.