November 8, 2023

Horizon Futures: A Sneak Peek

As we approach the testnet Futures Exchange launch, we’re excited to unveil the inner workings of the system and, most importantly, how it’s going to impact your trading experience. This is the first of several articles where we’ll delve deep into the 4 key elements that drive the features and experience of Perpetual Futures DEXs.

Introducing Horizon Futures

Horizon Futures are decentralized perpetual swap contracts that enable traders to take on long or short positions with leverage without the need to own the underlying assets. These contracts have no expiration date. Unlike centralized futures exchanges, where the exchange maintains custody of assets and where traders trade against the exchange itself, Horizon Futures involves trading against the liquidity provided by the HZN community and self-custody is maintained.

What are the key elements for Decentralized Perpetual Futures Exchanges to give traders the best trading experience?

The success and adoption of Horizon Futures rely on four essential elements:

1. Liquidity, which facilitates improved accessibility and volume potential

2. Fees/Price impact, ensuring cost-effectiveness for traders.

3. Funding Rates, maintaining price stability by keeping the contract’s price in line with the underlying asset.

4. Oracles, providing accurate data for precise contract settlements and reducing the risk of manipulation.

Liquidity: Essential for Horizon Perps Futures

Liquidity is the lifeblood of any decentralized exchange (DEX). To be successful, a DEX must attract traders, volume and maintain deep liquidity pools. For decentralized exchanges that offer perpetual contracts like Horizon Perps Futures, liquidity for zUSD and other zAssets are particularly vital.

Two Key Aspects of Liquidity for Horizon Perps Futures:

1. Global zAsset Market Liquidity

Horizon Futures allow traders to speculate on asset prices without expiration dates, giving them the flexibility to enter and exit positions without encountering slippage caused by low liquidity. Having a stable and liquid zAsset market is essential to the trader experience and conducive to the business model of generating fees to support the protocol and its stakers.

HZN stakers play a pivotal role in providing liquidity and stability to the global zAsset market by using their HZN tokens as collateral to mint new zAssets in the form of the stablecoin zUSD. The stakers actively manage their debt against the global debt pool on a weekly basis, and receive trading fees and HZN rewards in return.

Traders using Horizon Futures also interact with the global zAsset market supported by HZN stakers by the profits or losses they incur. When traders profit, the global zAsset market grows (new zUSD is minted), and HZN stakers’ debt increases, requiring them to manage it in relation to the new global zAsset market size. Conversely, if traders incur losses, the global zAsset market contracts (zUSD is burned), reducing the debt burden of HZN stakers and allowing them to mint more zUSD and subsequently increase their rewards.

The Futures smart contract factors the real underlying assets’ open market liquidity, and volatility in relation to the global zAsset market cap in order to set proper limits on maximum open interest (total size of all open trades allowed in the market), funding rates, and maximum leverage for each asset. These factors will prevent exploits between the open market and Horizon Futures and ensure a more balanced market skew (longs vs shorts) while protecting the HZN stakers who back the system.

2. On/Off Ramp Liquidity

To ensure a seamless trading experience on Horizon Futures, having sufficient on/off ramp liquidity is crucial. This liquidity enables traders to initiate or conclude their trades and is the first step in obtaining zAssets from the open market.

Traders have three primary methods for acquiring assets:

- Swapping between USDC/zUSD or BNB/zBNB on Wombat Exchange:

Wombat Exchange offers competitive swap fees, currently set at just 0.01%. Additionally, the presence of their specialized algorithm helps maintain a balanced pool, resulting in low slippage. Yield can be earned by providing liquidity on Wombat Exchange, detailed instructions on becoming a liquidity provider can be found in this how-to guide.

- Wrappers/zAsset Loans (will be released after the launch of perp futures):

With Horizon Protocol wrappers, traders will have the option to wrap their crypto directly into their zAsset counterpart (i.e. USDC to zUSD) at a 1:1 ratio and no slippage. This will be the most capital efficient way to acquire zAssets.

With Horizon Protocol loans, traders can also choose to leverage their crypto collateral by borrowing zAssets against them. All zAssets created through wappers and loans contribute to the global zAsset market, but are separately backed from the zAssets backed by HZN. More information about loans and wrappers will be shared in the near future.

- Stake HZN and mint your own zUSD:
By acquiring HZN and staking it directly into the protocol, you can mint/borrow your own zUSD, and earn a part of the trading fees generated by the exchange as well as a portion of the HZN generated by the token’s monetary policy. zUSD minted by staking HZN is highly overcollateralized to ensure collateralization security of the zAsset market, and is not the most collateral efficient way to get zUSD, but it comes with a no-impermanent loss, high-yield return by leveraging HZN.

Stay tuned for the upcoming articles about Fees/Price impact, Funding Rates and Oracles!

Horizon Protocol’s Smart Contract V2 is now live on the testnet, introducing enhanced security, stability, and functionality. Explore the revamped UI, faster trades, and automated debt forgiveness features. View the latest changes here.

Horizon Protocol is a DeFi platform that facilitates the on-chain trading of synthetic assets that represent the real economy. Horizon Protocol seeks to provide exposure to real-world assets risk/return profiles via smart contracts on the blockchain.