What is Vertex Protocol?

Vertex Protocol launched on Arbitrum mainnet in April 2023, offering users an automated market maker (AMM) based DEX, utilizing a hybrid orderbook. Nearly a whole year after the collapse of FTX, the flock from CeFi to DeFi has shown no signs of slowing down, and Vertex aims to provide more CEX-based traders with a new home on-chain.

Since its full release, Vertex has been steadily growing throughout the year and has recently seen a large uptick in usage in the month of November. Key metrics, including daily active users and total TVL, have been on the rise alongside Layer 2 usage in general.

DeFi users are not short of options when it comes to Layer 2 DEXs, and strong, consistent performance is needed in order for newer competitors to set themselves apart from the herd. While the technicality of the protocol can prove daunting for those new to DeFi, Vertex’s usage statistics seem to indicate good user retention and steady growth.

What Is Vertex Protocol?

Vertex is a Hybrid-Orderbook AMM DEX, with a trading engine that bundles spot, perpetual derivatives, and an embedded money market.

The hybrid orderbook consists of an off-chain orderbook paired with its on-chain AMM. On-chain execution speeds are at the mercy of the underlying chain, and so by sequencing off-chain, Vertex is able to perform order matching at a much higher speed due to the low latency. High execution speed is an absolute necessity for any modern DEX wishing to compete with centralized derivatives platforms. Via Vertex’s hybrid orderbook, users can often expect CEX comparable order matching latency of 15ms to 30ms.

The liquidity pools of the on-chain AMM populate this orderbook, which delivers the underlying liquidity that supports the DEX. The deeper and more efficient the liquidity provided is, the lower the spread on buy and sell orders becomes, which reduces overall slippage within the protocol. Having a low spread guarantees users’ order fills are accurate, while the off-chain sequencing guarantees quick execution. This hybrid functionality aims to close the gap between the performance of CEX platforms and the integrity of LP based DEX platforms.

Features Within Vertex

The Vertex product suite offers a wide range of trading products, including spot, perpetuals, and its embedded money market.

In the first 6 months of its launch, Vertex has primarily catered to derivatives traders, with over $11.4B in total perpetuals volume, compared to $1.29B in total spot volume, enabled by its cross-margin functionality.

Perpetual & Spot Volume On Vertex. Source: Vertex Protocol

The embedded money market feature allows for assets to be used as collateral across the platform, and also remain readily available for borrowing for leveraged spot positions. By auto-borrowing assets against existing margin positions, users can trade with larger size more efficiently.

All leverage within Vertex functions with unified cross-margin, which allows users to spread out their capital more efficiently throughout the protocol. As with any leveraged offering in DeFi, risk management must be adhered to, but especially when utilizing cross-margin, as it allows for the same collateral to be spread amongst multiple positions. While this is excellent for diversifying on a low budget, it can also result in undercollateralized positions that could face liquidation amid market volatility.

Growth and Incentives

Since its mainnet launch, Vertex has seen steady growth in overall usage and user retention. In the month of November specifically, there has been a spike likely due to the Arbitrum DAO’s STIP, or Short-Term Incentives Program.

Daily active user count has grown from less than 100 in the first few months after launch, to over 500 daily active users throughout the month of November. Over this same time period platform liquidity and total TVL have also risen, with the TVL now sitting at $20.9m.

Daily Active Users. Source: Dune Analytics

Consistent growth is always a welcomed sign in a volatile industry such as DeFi, and the increased attention due to Arbitrum’s STIP is surely exciting for Vertex users. Following Vertex’s approval within the Arbitrum DAO, up to 3M $ARB tokens (3.24M $USD at the time of writing) have been allocated as trading incentives for Vertex users.

Since its inception, Vertex’s monthly revenue has been steadily increasing, with November poised to continue the trend. In the first week of November alone, Vertex’s revenue is equivalent to its entire month of August. Given the current ARB incentives, traders are likely to continue the increased usage.

Monthly Fees and Revenue. Source: DeFiLlama

The Future of Vertex Protocol

In addition to the STIP, the Vertex team has an exciting Q4 lined up. Throughout the rest of the year, Vertex users can expect a new Liquidity Bootstrapping Auction (LBA) from November 13th to November 20th, Chainlink integrations, and other new features.

While the protocol’s size and volume are certainly smaller than some other Arbitrum-based derivatives platforms such as GMX, its speed and performance offer another option for users looking to move off of centralized exchanges, and onto secure decentralized counterparts.

As market activity picks up steam, on-chain volumes are expected to follow suit. While the lion's share of derivatives activity remains on centralized exchanges, DeFi native protocols such as Vertex are looking to offer users a smooth transition from CeFi to DeFi.