Trading Vaults

Trading vaults are PepperDEX's effort to encourage the active development of trading strategies executed on the exchange. They can be thought of as AMM pools but purpose-designed for active management and custom strategies. Experienced traders can create a vault, gather deposits, and run strategies using that capital. Although the actual strategy may or may not be on-chain, all trades executed, orders placed, funding paid, and received will be recorded on-chain and displayed on the concerned UI. What types of strategies can be run via this system? Any strategy! From market making to SOL-LST arbitrage and even liquidations! Below are some important features of a trading vault.

Vault Creation

Anyone connected to PepperDEX and has a TRG (see TRG for more) can create a trading vault of their own. And, to ensure skin in the game and accountability, the share of the vault owner in the total vault must always be at a minimum of 10%. This means that the person creating a vault is the vault leader/fund manager and a micro depositor. If there is a huge deposit into a vault that dips the vault leader's balance below 10%, only up to that amount, which keeps the vault leader's share in the vault at 10%, would be accepted, and the rest would be canceled. Similarly, if the vault leader tries to withdraw capital from the vault they created, which puts their share of the vault below 10%, the withdrawal would not be allowed.

Vault Management

Trading vaults are fully permissionless, meaning that vault leaders/fund managers are free to use these funds in any form of trading activities, with no restriction from the protocol side. This means that a vault leader can run market-making, directional, liquidator, or any strategy he wishes to do.

Protocol-enforced constraints

PepperDEX enforces certain constraints to promote user fund safety and protocol health. Some of the constraints adopted by the protocol are basic checks on withdrawable amounts by a depositor, prevention against malicious interests of the vault creator, and maximal withdrawal ability of the user that deposited some amount of capital into the vault. For example, the protocol ensures that any withdrawal request made by a depositor can withdraw up to the amount deposited initially and adopts various liquidity-sourcing strategies. It also ensures that any malicious intentions of the vault leader, such as stealing depositors' funds, are safely mitigated.

Trading

Initially, vault leaders will be able to access the funds from their vault via UI only. The team is also making progress on adding support for algorithmic trading, as that is the medium that serves a lot of trading activity, be it liquidations or high-frequency market making.

Dissolution of a vault

A trader may choose to dissolve/end their trading vault irrespective of the reasons. In such a scenario, the trader would first have to close all their open positions, orders, and any trading mechanism that consumes margin. When done, they would have to withdraw the free margin in the linked trading account, a.k.a TRG, to the vault smart contract. Proceeding that, they could close the vault using UI features and return all of the users' principal amount +/- any return owed. Note that this would lead to the vault becoming dysfunctional, as well as the TRG.

PnL Distribution

Vault leaders, while creating their vault, can choose the performance fee they charge should the vault return any profits to depositors. Thus, whenever a profitable withdrawal is made for a depositor, 10% of the notional profit is deducted at the source and allocated to the vault leader.

How does actual PnL distribution between depositors work? When depositors try to withdraw their funds, they get back their full principal and any profit made or loss incurred. In a scenario wherein the vault returned a profit, the total withdrawable amount would be more than the principal. In case the vault returned a loss, the total withdrawable amount would be less than the principal. PnL distributed to each depositor depends largely on the pro-rata share of their depositor at the time of the withdrawal. This mechanism is ubiquitous between scenarios, whether the vault returns a profit or a loss. If a depositor held a significant share of the vault and the vault returned a profit, they would likely receive an equal share. However, if the vault returned a loss, they would most likely receive an equal share of the loss.

PepperDEX currently supports two types of trading vaults: protocol-operated and trader-operated.

Protocol-run Vaults

These are trading vaults operated and maintained by the PepperDEX. On a broader basis, these vaults execute complex yet necessary strategies such as market-making and liquidations. Both of the said strategies are discussed in-depth in in-house market maker. Any PnL generated from these vaults comes directly from the alpha generated by the protocol while conducting these trading activities. In market-making, alpha comes from the market-making profit, while in liquidations, alpha comes from the collateral reward obtained by liquidating accounts (and sometimes even favorable slippage!).

Trader-run Vaults

Trader-run vaults are an extension of protocol-run vaults. One can think of them as a permissionless version of protocol-run vaults, where anyone can create their own vault, attract deposits purely based on their strategy and performance (PnL), and trade on PepperDEX with deposited funds..

Everything is permissionless, starting from vault creation, deposits, vault management, and using the funds to trade. In short, users can become the fund manager they have always wanted to become, but on a micro level. However, the protocol enforces some minimum constraints in order to prevent the theft of funds by the vault creator/depositors (withdrawing excess of what they deposited + profit or loss).