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Vega Protocol: A Deep Dive on the Crypto Derivative Platform

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All activity in crypto trading is based upon opportunity costs and incentives. When it comes to building decentralized derivatives platforms, few have achieved a delicate balance of incentives to sustain this type of environment. Vega Protocol is the latest platform attempting to solve this complex issue.

What is Vega?

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To put it simply, Vega Protocol is an automated permissionless network for creating and trading crypto derivatives. By completely automating the procedures for creating and managing markets, as well as exchanging and settling financial products between participants, Vega opens and decentralizes markets.

Achieving this requires thoughtfully designed systems of economic incentives and rewards. Therefore, Vega employs an innovative market-driven liquidity incentivization scheme. This works to address the challenge of attracting and allocating resources for market making.

Traditionally, derivatives and similar products are traded exclusively on centralized exchanges, which typically operate from central organizations that restrict trading access to relatively limited participant groups. As a result, some people describe traditional exchanges as a black box due to a lack of transparency and visibility into the inner workings of these exchanges.

This framework presents several issues. These include the involvement of rent-seeking intermediaries that increase costs, as well as the existence of organizations that control access to the market.

A decentralized platform for financial products offers an alternative by enabling trading on a more equitable basis. It opens up access to everyone. This inclusive approach ensures that markets are accessible to all participants, fostering a more democratic and transparent trading environment.

How does Vega Protocol work?

Vega protocol attempts to address many of the issues associated with traditional derivatives exchanges and the building of decentralized derivatives exchanges. The protocol relies on many core primitives, which are as follows.

Vega blockchain

Vega Protocol Architecture: Vega Protocol
Vega Protocol Architecture: Vega Protocol

The protocol is purpose-built to support all sorts of trading at an institutional level. It is actually a suite of layers (e.g., APIs, applications, blockchain, etc.) that creates a stack with a consensus layer (i.e., blockchain) at the foundation. Rather than relying on another blockchain, Vega operates its own proof-of-stake blockchain optimized for performance, scalability, and flexibility.

The blockchain leverages the CometBFT (fka Tendermint) consensus layer — the same as the Cosmos network. This enables a rapid block time of one second and facilitates a transaction processing capacity of 1000–4000 transactions per second (tps) with room to improve performance further in future releases.

The application layer — often called the trading core — is responsible for processing incoming transactions received from the consensus layer. This, together with the consensus layer, forms the core Vega Node software. This runs and secures the network and maintains and verifies the chain’s state. These nodes all process the same set of transactions as determined by the proof of stake consensus algorithm. They each maintain in memory the market specifications, governance data, order book state, and all balances and positions on the network, driven by the deterministic application of each transaction in order to the previous state.  

Data nodes on Vega

Lastly, in order to provide APIs familiar to users of any centralized exchange, the Vega stack includes the Data Node. Anyone can run a data node, which connects to a Vega Node and has the job of indexing, enriching, and serving data from the Vega chain via a set of APIs. Clients access data from the network through these APIs, and users can either run their own Data Node for maximum safety and robustness or connect to one or more public nodes from a list such as the one maintained on the Vega GitHub. Developers can build their own user interfaces, trading bots, and more for users to connect to Vega.

Validators and governance

As mentioned earlier, Vega operates on a delegated proof-of-stake blockchain, where validator nodes play a crucial role in running the Vega network. Validators are required to stake VEGA.

The Vega network can make decisions on-chain thanks to governance, where token holders can submit proposals that other token holders can vote to accept or reject. Vega supports on-chain proposals for creating and changing markets, assets, and network parameters.

VEGA is an ERC20 token that serves as the native currency of the Vega blockchain. The max supply is 64,999,723. Moreover, users can delegate or stake VEGA to earn yield or governance privileges.

The protocol chooses consensus validators based on their validator scores. The highest-scoring validators become consensus validators. The validator scores play a crucial role in determining which validators participate in the consensus process and contribute to maintaining the integrity and security of the network.

Will Vega be fully governed by DAOs over time?

While there are no formal talks of a DAO for the Vega protocol, the roadmap does involve community governance through on-chain voting, staking, and nominations.

Governance will oversee the implementation of assets, the creation of markets, protocol parameters, as well as other decisions that do not directly affect markets.


Vega is specifically designed for efficient and fast trading and settlement processes. However, Vega does not host or store the traded assets itself. Instead, it interacts with various digital coins, tokens, and other assets that are already held on established blockchains.

Vega allows users to propose any ERC-20 tokens as collateral for trading purposes. The intention is to support all significant digital assets over time.

This is likely to happen through the integration of new chains; and the integration of tech such as IBC that allows for multi-chain cross-chain assets and transactions. In essence, Vega aims to support a broader range of assets and settlement options, enabling more diverse and flexible trading opportunities in the future.

Trading on Vega Protocol

While evergreen end users may find subtle differences in the trading experience on Vega, they will find that the “sausage is made” radically differently from other platforms. This is even more apparent for users who want to take advantage of the incentivization model.


Vega’s protocol handles end-to-end trading, including pre-trade, trade, post-trade and settlement functions in a completely automated way. It utilizes a “CEX-style” yet fully decentralized limit order book, traditionally called CLOBs.

Unlike centralized marketplaces, the Vega network code runs on nodes distributed across the globe. In the Vega ecosystem, these nodes act as recipients of orders, either through a trading terminal or API.

They utilize Vega’s consensus mechanism to validate and group these orders into transaction blocks. Once validators confirm blocks, the order matching engine processes the blocks, which also operate on each node.

The engine executes trades based on price and time priority. The consensus algorithm plays a critical role in guaranteeing that all nodes observe an identical sequence of orders.

This process upholds the platform’s integrity, ensuring transparency and enabling the auditability of trading outcomes. Ultimately, the collaborative efforts of nodes, consensus algorithm, and order matching engine enable a secure and reliable trading environment within Vega.


Derivatives trading requires (at least one) settlement asset. The settlement asset serves as the unit of account for changes in the value of the derivative contract.

Assets on Vega serve various purposes, such as margining and settling positions, fee payments, and backing up liquidity commitments to a market. Vega has the potential to facilitate the settlement of markets using a wide range of tokens, coins, and assets.

However, since these assets (e.g., underlying) are not inherently native to the Vega blockchain, a mechanism is necessary to enable the use of at least some of these assets within the Vega ecosystem by depositing them from their native chain, such as Ethereum.

How does Vega approach collateralization compared to other leading derivatives protocols?


Once an asset has been proposed and approved through the governance process, the asset bridge requires updating to accommodate the newly added asset. This update ensures seamless integration and availability of the approved asset within the Vega ecosystem and can be performed by any member of the community. This is a one-off step for each token or coin to make it a supported asset on Vega. At the time of writing USDT, USDC, wETH, and the VEGA token itself have all been added to the bridge and can be used to trade on the Vega mainnet.

Assets used for trading, paying fees, funding rewards, and providing liquidity must be deposited with a bridge contract. They can be withdrawn back into an Ethereum wallet if not used for margin or liquidity commitment.

This differs from other derivatives platforms which may require stablecoins as collateral. On the Vega network, any assets that have been proposed and adopted through governance may be used as collateral.


In contrast to other decentralized exchanges, on Vega, anyone has the opportunity to propose a market based on any underlying. It enables the creation of markets through a decentralized process driven by the community and governed by the Vega ecosystem.

Here’s an overview of how the Vega protocol makes markets:

  1. Proposal: Any participant within the Vega ecosystem can propose the creation of a new market.
  2. Community governance: The Vega community of token holders participates in the governance process. They have the power to review and vote on proposed markets via the fully automated on-chain governance and market creation process.
  3. Voting and approval: Once someone submits a market proposal, the Vega community can vote to approve or reject it. If a proposal receives enough approvals from the community, it moves forward and the market will be automatically created.
  4. Market creation: Once approved, the Vega protocol facilitates the creation of the proposed market. This involves the automated creation of the necessary infrastructure, order book configuration, and trading parameters based on the specifications outlined in the market proposal.

Batched limit orders and automatic orders generated from a liquidity commitment are both used to provide liquidity for a market. Any trader is eligible to receive maker fees when the volume they put on the book is taken by another trader. 

In addition to this maker fee, LPs who put up a bond and make an on-chain commitment to provide liquidity receive additional fee revenue from each trade in the market (even trades they did not participate in), and rewards based on the size and tenure of their commitment and the amount of liquidity they provided.

How does Vega differ from GMX and dYdX?

dydx vs gmx cover

While evergreen end users may find subtle differences in the trading experience on Vega, they will find that the “sausage is made” radically differently from other platforms. This is even more apparent for users who want to take advantage of the incentivization model.

There are a few DApps that offer derivatives as of summer 2023, such as GMX or dYdX. However, Vega differs in its approach to blockchain-based derivatives trading. GMX and dYdX are both DApps, while Vega is an app-chain (i.e., application-specific). Vega stands out both for its community market creation model and open to everyone LP incentives. Unlike other platforms, markets can be created settling in whatever token the community wishes, providing a greater range of options for users.

Vega operates on a purpose-built blockchain, optimized for its own ecosystem and bootstrapped based on other blockchains. In this sense, it acts as a sidechain. In this scenario, Vega approaches collateralization based on bridged assets.

Lastly, Vega utilizes a decentralized CLOB market structure, while GMX uses a “keeper” mechanism. Although dYdX does use an order book, it is off-chain.

Key features and advantages

Derivatives markets inherently involve financial risk. If a market lacks liquidity, it becomes challenging to exit a position. Unlike retail or brokerage platforms that rely on third-party guarantees, Vega operates as a protocol that empowers users to create markets where traders directly participate.

The protocol includes incentives to enhance the possibility of swift position exits. However, it’s important to note that these incentives do not provide an absolute guarantee for immediate position liquidation.

Unlike other platforms, Vega further empowers users by allowing for the creation of community created markets. Moreover, positions can be settled in more than just stablecoins like USDC, which creates more options experience for users.

A new era of decentralized derivatives

Vega Protocol represents a decentralized derivatives platform that embraces the power of blockchain technology and community governance. By offering a platform for creating and trading diverse financial instruments, Vega enables users to participate directly in markets, removing intermediaries.

With its innovative approach to incentivization mechanisms, Vega aims to revolutionize the derivatives landscape. By leveraging a decentralized consensus protocol, Vega empowers participants to shape the platform themselves. As Vega continues to evolve and expand, it holds the potential to reshape the way derivatives are traded, promoting a more inclusive, efficient, and transparent financial ecosystem.

Frequently asked questions

Who are the competitors of Vega protocol?

Where is the Vega protocol headquarters?

How is Vega used?

When was the Vega protocol launched?


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Ryan Glenn
Ryan Glenn is a journalist, writer, and author. Ryan is motivated to educate as many people as possible on the benefits of web3 and cryptocurrency. He has authored “The Best Book...