Vaults in Perpetual Futures Protocols
1. Summary
Vaults are pools of capital that provide liquidity for perpetual futures protocols. They allow passive investors to earn yield by depositing funds that are managed by professional market makers or automated strategies.
For our protocol, vaults serve two key purposes:
- Bootstrap liquidity - Initial capital to start the protocol
- Delegate to professionals - Let trading desks and quant firms manage liquidity at scale
We plan to launch two vaults initially:
- Market Making Vault - Provides liquidity to the order book
- Liquidation Vault - Capital for executing liquidations
2. What Are Vaults?
A vault is a smart contract that:
- Accepts deposits from liquidity providers
- Deploys capital into a specific strategy
- Distributes profits back to depositors
Positive outcomes increase the share price. Negative outcomes decrease the share price.
3. Why Vaults Matter for Our Protocol
| Reason | Explanation |
|---|---|
| Bootstrap liquidity | We don't have enough capital to seed the order book ourselves |
| Attract capital | Vaults make it easy for anyone to provide liquidity |
| Delegate to experts | Professional trading desks are better at market making than us |
| Scale faster | Multiple vaults and managers can provide deeper liquidity |
| Reduce our burden | We don't want to manage liquidity long-term |
4. Vault Types for Our Protocol
4.1 Market Making Vault
Purpose: Provide liquidity to the order book by placing bids and asks.
How it works:
- Vault deposits funds into the protocol
- Strategy places limit orders on both sides of the book
- Profits distributed to vault depositors
Risk: Inventory risk if price moves against positions
4.2 Liquidation Vault
Purpose: Provide capital for executing liquidations when positions go below margin.
How it works:
- Monitors positions at risk
- Executes liquidation trades
- Earns liquidation fees/bonuses
- Profits distributed to vault depositors
Risk: Lower risk, but requires fast execution
5. Vaults Across DEXs
| DEX | Vault Type | How It Works |
|---|---|---|
| Hyperliquid | Hyperliquidity Provider (HLP) | Single vault for market making and liquidations. Anyone can deposit. |
| Strike V2 | User Vaults + Protocol Vaults | Users can create their own vaults. Protocol vaults managed by admins. |
| Drift | Liquidity Vaults | Market making vaults managed by bots. |
Key Takeaways from Existing Vaults
| Insight | Implication for Us |
|---|---|
| Hyperliquid's HLP is simple and successful | Start with a single vault if possible |
| Strike allows user-created vaults | Consider allowing external managers later |
| Most vaults are market making focused | Market making is the primary use case |
| Liquidation vaults are less common | Opportunity to differentiate |
6. Single Vault vs Multiple Vaults
| Approach | Pros | Cons |
|---|---|---|
| Single vault | Simpler to manage, one strategy, less fragmentation | Less flexibility, single point of failure |
| Two vaults (MM + Liquidation) | Clear separation of strategies, better risk management | More complex, requires more capital |
8. Why We Shouldn't Manage Vaults Long-Term
| Reason | Explanation |
|---|---|
| Not our expertise | We're building infrastructure, not trading |
| Trading desks are better | Professional firms have better strategies and execution |
| Scalability | We can't scale liquidity management ourselves |
| Focus | Our focus should be on protocol development |