NESTFi, a new trading paradigm of DeFi
Background of NestFi
In early 2022, the NEST team started exploring decentralized derivative protocols and launched a new project called FORT based on the NEST oracle. FORT is a decentralized derivatives trading platform based on the infinite liquidity model (ILM), which includes perpetual futures and options. After the Terra incident in March and the deterioration of the macro environment, NESTDAO proposed a proposal to merge NEST and FORT. At the protocol level, the code of the two projects was integrated and refactored. In terms of operation, the NEST team integrated the resources of the two projects and merged the Twitter and Telegram communities into one. In theory, just as Bitcoin built a new monetary network paradigm and Ethereum built a new asset network paradigm, the NEST team believes that the infinite liquidity model constructed by NEST is actually a new trading network paradigm. This will be the most important paradigm revolution after Ethereum. The new NEST white paper defines NEST as the infrastructure of blockchain, providing financial assets with any risk-return structure for all project parties and buyers.
2023 Development: “Martingale Network”
NEST is about to launch a heavyweight “Martingale Network,” a new generation of infrastructure paradigm after Ethereum. NEST will use smart contracts as the only seller in on-chain financial transactions while allowing buyers to transfer risk exposure and hedge against it. The risk that cannot be hedged will be shared by all traders, thus fundamentally solving the problem of insufficient liquidity for risk-hedging assets. NEST has defined a new trading paradigm, which comes from the concept of a stochastic process: martingale trading is a trading paradigm based on a stochastic process (martingale). A martingale is a stochastic process that satisfies Xt = E(Xt + s | Xt), where Xt represents a random value at time t, and s is the time difference between the cash flows flowing in and out of the transaction. Martingale trading is carried out under martingale information flow, which is considered to produce fair results. In this trading mode, the trader pays Xt at time t and receives Xt + s at time t + s.
The decentralized martingale trading network based on digital currencies uses NEST token trading as the underlying asset for on-chain digital assets. All traders directly trade with an infinite liquidity maker (ILM), which is the NEST contract itself. The purchased digital assets enter the contract (destroyed), and the settled digital assets are immediately issued through the contract. R3PO believes that the perpetual futures trading platform NESTFi based on the martingale trading network has the potential to represent a new paradigm for NEST’s development.
According to Defilama’s statistics, NESTFi currently ranks sixth in decentralized derivatives, second only to Gains Network and ApolloX (from Oracle).
Can NESTFi solve DeFi industry pain points?(https://nestfi.org/)
- The most critical or painful point of on-chain applications is liquidity. To solve the liquidity problem, DeFi has tried traditional order book and AMM models, but these models are not ideal solutions and cannot include all financial services in the same protocol and share the same liquidity, resulting in waste of resources and low efficiency.
- The risk-matching mechanism is imperfect. Regardless of AMM or funding pool, the method of solving liquidity problems sacrifices the flexibility of sellers: sellers need to fix their trading strategies and bear external market fluctuations. Once the price is favorable to the seller, buyers may choose to exit the transaction. Once there is arbitrage, buyers will flock to it, and the entire process has no choice but to rely on mining subsidies and commission or interest rate balance under the law of large numbers.
- Inefficient use of capital: While LP design temporarily alleviates the scarcity of on-chain liquidity, it creates long-term problems. Firstly, a large amount of funds is occupied, resulting in resource waste. Despite having a significant TVL, only a small number of trades are supported on-chain, and most of the TVL comes for liquidity mining. Secondly, core variables such as price and interest rate are related to the pool’s size, making it easy to arbitrage and challenging to conduct trades and loans when the pool’s size is insufficient. Furthermore, the TVL of different products cannot be shared, leading to the so-called combination lines that are only superficially combined, rather than sharing liquidity.
Overall, NESTFi’s martingale network has the following differences from other decentralized perpetual contracts and centralized exchanges:
- Infinite supply: As long as one holds NEST, there is no need to worry about trading difficulties due to a lack of market liquidity. Any trade based on martingale information can be satisfied, so its supply is not limited by the counterparty’s scale.
- Convenient copy trading: NEST’s decentralized exchange copy trading function is more advantageous than centralized exchanges. Users can directly click the copy trading link to almost open a position with one click.
- No LP costs, shared risks: All NEST holders jointly bear the risks and rewards of NEST supply reduction and increase. Traders directly trade with the protocol, which is a characteristic of blockchain and distributed networks. In traditional market networks, risk management mainly relies on market makers’ hedging, which often has a high cost.
Future development roadmap
- Expand U-denominated trading: When NEST liquidity becomes larger, NEST/USD oracle can be introduced, so that the underlying assets of the trading pairs can be changed from X NEST to X USD-denominated NEST, which can meet the needs of many users who want to hedge based on fiat currency.
- Explore the possibility of multiple trading pairs: In addition to NEST as the native value unit of the martingale network, we can also introduce PUSD, PETH, PBTC, and other USD/ETH/BTC-equivalent assets as the value units of martingale exchange, which will expand the application of the entire network.
- Expand other application scenarios besides perpetual contract DEX: Some basic design games based on randomness such as lottery, prop synthesis, and gambling games can directly use the martingale function provided by NEST to solve deterministic mathematical relations, probability relations, and random martingale functions. In other words, they can directly use NEST as the counterparty for trading, and assets are priced in NEST, expanding more usage scenarios and consumption paths for NEST.