The first futures exchange with zero fees, Digitex Futures, fueled by its own native DGTX token has revealed an innovative liquidation system that will benefit its most active traders.
In line with the market trends
Digitex is following the overall market requirement that makes futures exchanges implement methods for liquidating positions.
These methods help ensure they are able to fulfill the operational duties of the exchange even in the event of highly leveraged traders getting blown out in volatile markets.
BitMEX has long used a dedicated Insurance Fund to address unfilled liquidation orders before they are taken over by its automated system that de-leverages trades. Every day, the fund adds several tens of thousands of XBT, native BitMEX tokens.
Adam Todd, CEO and Founder of Digitex Futures believes that there’s no need for exchanges to allow their Insurance Funds to simply grow and grow “ad infinitum.”
Through the new proposal by the exchange, DGTX tokens distributed into the insurance fund from force closure of positions will be reallocated to its automated market makers to lose money. This will create highly liquid markets since more traders will come on board to target and win the market maker token losses.
“It’s innovative, it’s new, and it’s another reason to pull traders to Digitex and not other exchanges,” he said.
The essence of the new model
The liquidation engine from Digitex will intervene and force close traders with insufficient balances to keep their positions open. Since this type of scenario is a huge risk vector for the exchange, there must be a penalty for when this happens.
This takes shape in the form of a fine which is allocated to the Digitex Insurance Fund - which is similar to the one created by BitMEX.
However, unlike BitMEX which lets its fund grow and grow, the Digitex fund will reallocate tokens generated from penalties back to the automatic market makers, to deliberately lose them and bring in more liquidity to the market.
By combining Digitex’s liquidation engine, the market makers, and the insurance fund, the exchange would guarantee its liabilities and create a more liquid market at the same time.
This approach will make market makers lose money which will help the exchange increase its liquidity. According to Todd, such markets will attract significantly more traders - definitely a plus - as it will allow the platform to create a market with a high level of activity.
“The fact the market makers are losing money as well, is a bonus. It gives traders the chance to win the tokens market makers are losing,” he added.
Increasing liquidity, helping active traders
Here’s what the Digitex CEO says about the new system:
“We would start off with a large insurance fund of 100 million DGTX (which is 10% of the DGTX supply originally allocated to the market makers). Then, as the fund goes above that and the liquidation engine starts registering an excess of tokens, instead of burning them or letting them build up over time, we give them to the market makers to lose.”
As previously stated, the Digitex Insurance Fund will not grow like BitMEX’s fund, and it will always remain at the level of 100 million DGTX. In case it goes below this mark, the platform would simply make the necessary changes to the market maker losses in order to get it back to the specified level.
“We are giving the tokens back to the active short-term scalping traders that never come into contact with the liquidation engine. They can trade full time, and in a way that will target what the market makers are doing, short-term scalping style, no fees to worry about,” Todd said.
Wrapping it up
Traders love active, liquid markets, and adding a way to make a market more liquid can only be beneficial for the platform.
It will be interesting to see the community’s reaction and feedback to this proposal and whether it goes into action. Digitex has 1.5 million people on its waiting list who are anxious to try the new platform and who will already provide abundant liquidity once it launches.
Adding an additional way to make markets even more active could be another element to separate this exchange from the rest.