As Solana’s decentralized finance (DeFi) teeters in the rubble of FTX, a long-absent player from its crypto derivatives trading scene is poised to re-enter it. Drift, a Solana-based perpetual swap trading protocol that processed billions of dollars in volume during the 2021–2022 bull run before crashing during the Terra crash, will launch its second revamped version on Friday. Drift’s multicore-backed version 2 has bigger ambitions than just derivatives: it aims to be a one-stop crypto exchange for all types of transactions that DeFi can offer. Many of these services are currently in short supply in the Solana ecosystem, making Drift’s return a potential bright spot. The relaunch will test whether Drift’s expanded offerings can overcome the doldrums currently weighing on all of Solana’s DeFi, where the decentralized exchange’s (DEX) trading volume has fallen 96% in a single month, the worst of any major chain, in response to the end of FTX.
But it also measures whether the remaining traders are willing to trust Drift explicitly. The protocol only escaped most of the bear market because it was one of the first to fail. Drift hopes he does. Encouraged by the “patient” venture capitalists who bailed him out of his first crisis and convinced that his novel liquidation technology, the process he uses to liquidate people who need margin automatically, is better than the protocol’s team of more than 20 people are now going for the renewal, said co-founder Cindy Leow. At the heart of the revamp is a relatively complex method of keeping trades (buying, selling, and liquidating collateral from leveraged users whose bets are failing) going.
The key has always been to limit slippage, or the difference between the expected price of a trade and what you get. Large orders can fail badly during market volatility and when large sell-offs are likely.
Drift’s redesigned execution mechanism should reduce slippage for large transactions, Leow said. Rather than relying solely on market maker companies (like centralized exchanges) or “automated market makers” (AMMs, DeFi’s code-based trading engines) to complete buys and sells, v2 sends transactions through three layers of liquidity to find the best price buys and sells. v2 sends transactions through three layers of liquidity to find the best price. In the first step, called the “just-in-time auction,” market makers compete to fill orders. If they pass a transaction, the Drift AMM accepts it. Meanwhile, the protocol’s order book is reset to complete trades when the price is right.
This “Liquidity Trifecta” is much more complex than Drift’s original setup, which was essentially an AMM that processed all liquidations. But the original settlement’s construction failed. Drift v1 imploded during the Terra-induced market crash in May. A proverbial “run on the bank” by heavily leveraged merchants has cannibalized millions of dollars in user collateral.
Drift secured $15 million in emergency funding to help pay its users, Leow said. She declined to specify the terms or who provided them but said Drift’s investors were involved. Although the developers on the team quickly fixed the bug, the log hung offline until November, when mainnet testing for v2 started. Torpedoing Drift at the start of the industry’s devastation in 2022 may have protected it from much of the chaos that has plagued other DeFi protocols. The reboot comes shortly after the collapse of FTX and the removal of a number of exploits from well-known protocols like Mango Markets and Solid.
“When we saw the attacks, we had to wait a little longer,” Leow said, adding that the developers spent more time testing the protocol and also adding features. Drift v2 is positioned to capitalize on the lack of competition. Supporting spot trading, borrowing and lending, and participation in asset pools in addition to perpetual trading swap its original focus. “Obviously, it’s not good for her to be down. “We like being in an ecosystem,” Leow said of the competitors.
“When we were building this, the motivation for us to build Borrows and make it a forever log wasn’t that it was the only living thing”. Platform selection may pose a more existential threat than drift competition. Solana DeFi was hit hardest last month by the dissolution of Sam Bankman-Fried’s empire, specifically the death of Alameda Research, a key market maker and one of Drift’s venture backers. The entire ecosystem, including Drift, is now poorly liquid. In Drift v2, “you can’t just get a 5-digit position market order like in GMX,” said a v2 beta user, referring to the popular arbitrage-based DEX.
One reason is low liquidity. Leow said Drift would eventually go to retailers as long as the technology can handle the heat. At least for now, that means Drift will stay with Solana.