Three Minutes to Understand the New Player in Layer 2 Derivative Protocols: Bess Protocol

The DeFi ecosystem has gradually improved, and at present, MakerDAO has played a good role as a decentralized central bank; aggregation mining protocols like Yearn can effectively enhance capital utilization; insurance projects like Nexus Mutual can improve fund security, while DEXs like Uniswap have effectively taken on the token exchange services. However, the landscape of decentralized derivatives trading, an important component of the DeFi ecosystem, remains uncertain.

Currently, the DeFi derivatives market is in a relatively early stage, and known decentralized derivatives trading platforms mainly fall into three categories: one is futures trading platforms like dYdX, Kine, and Injective; another is options protocols like Opyn and Hegic; the third category is synthetic asset protocols like Synthetix and Mirror.

The strong speculative nature of the cryptocurrency market means that market participants will not simply be satisfied with spot trading. The derivatives market is expected to experience explosive growth in the future, and Bess Protocol is a new star project emerging on Layer 2 in response to this trend.

Why is Bess Protocol trustworthy?

Bess Protocol is a Layer 2 decentralized derivatives trading protocol based on Rollup scaling chains, intended to be built on Ethereum as a composite decentralized exchange (DEX), using a decentralized custody model for asset trading, providing products including futures, options, and related derivatives. The following points will interpret the trustworthiness of Bess from the technical underlying support:

Categorized Ledger Order Book

Unlike centralized derivatives exchanges, any major trade and asset on Bess Protocol is owned by the users themselves, with no intermediaries operating or misappropriating user assets.

All changes in transaction status and order completion are recorded in a ledger. This allows for the verification of the balance, source, and validity of each transaction. Operating independently on another side chain, the core transaction status remains in its own ledger, which can also be seen as an independent zero-knowledge proof of Bess.

Bess's ledger has six types of entries: origin entries, deposit entries, withdrawal entries, exit entries, and two types of transaction entries. The initial state, also known as Origin, is a special entry system that records a universal zero balance. The lists of deposit and withdrawal entries are stored in different smart contracts.
The state transitions of each account have sufficient data to prove the correctness of the transaction process and the details under various transaction statuses. The table shows the transaction status category of depositing asset Z1, exchanging 0.05 of it for 0.02 of asset Z2, and finally withdrawing and exiting to account A1.

The updates of this set of transaction data states will uniquely have signatures from all parties and dual signatures from operators, continuously replicated in the network according to demand.

The new state replaces the old state upon completion of replication, meaning that the balance of State 2: (A1; Z2) is completed through the update of State 6, achieving asset consumption interaction and balance transfer. Further transactions between the same assets will update the existing balance to the new state.

Accurate Estimation of Option Prices Under Volatility Impact

Currently, many digital currency options markets are still not well-developed, and calculating the market's implied volatility from option prices is challenging. Due to the lack of historical volatility data provided by oracles, the Bess protocol uses historical option rates obtained from authoritative oracles like Chainlink and calculates it independently.

Compared to the option rate data collected by centralized exchanges, the data organization provided by Chainlink is currently limited due to technical constraints. To ensure that option volatility does not lag behind expected prices due to a series of non-technical reasons, Bess extracts a portion of the linked data to implement a volatility estimator, avoiding small errors that could affect the volatility estimation process.

Blue Line: Volatility samples calculated from hourly USD/ETH rates collected from Binance over a certain period. Red Line: Estimated model based on unevenly spaced data collected from Chainlink.

The formula also indicates that if any option rate data can be obtained at the same time intervals, this volatility estimation will have certain reference value. However, in actual trading, prices in each interval will not exhibit theoretical constant values and will fluctuate unevenly.

Therefore, to achieve a more accurate effective option model estimation, Bess will generate a weighted average of squared differences, where the weighted average is marked as a function of time for each data point. Thus, such an effective volatility estimation model has reference value and can include certain risk resistance attributes.

On-chain Trading Based on Layer2

Due to the interactions on-chain, blockchains can easily enforce constraints on the exchanges themselves.

Most of the heavy lifting is done through the network and publishing block trades. Early decentralized trading models can fully operate on-chain, as they have smart contracts with order books or token reserves that can interact with users. Trading can be freely conducted within the blockchain network, and users have active control over their own assets.

Although current trading costs and speeds have increased due to gas situations, the technological development of Layer2 will make the trading process more convenient and faster. Users can also manage and handle their assets securely in their wallets, experiencing a more intuitive trading feel through interactions between chains.

Innovative Bess Token Mechanism

The Bess token serves as a license for trading on the platform, proportional to the ownership percentage of the token supply, with no protocol protection fees charged in between. Additionally, anyone can add liquidity by depositing collateral through the Bess protocol's AMM and earn considerable market-making rewards.

There are also real-time subsidies for slippage losses through Bess protocol tokens, ensuring user interests. The trading process integrates liquidity from mainstream DEXs and CEXs, providing better trading depth and faster trading response times, with the entire process autonomously completed through on-chain smart contracts.

What Optimizations Have Been Made?

In fact, the DeFi ecosystem has derivatives exchanges like dYdX and Opium; however, these exchanges have issues to varying degrees. For example, dYdX relies on the lending tokens of lenders, and users who want to go long or short must select their desired orders from the order book, but the efficiency of such an operational system is questionable. Additionally, the pricing system and slippage can cause a stampede effect, which is a significant concern.

In DeFi, the role of liquidity providers will be played by users, meaning idle funds will have an outlet, improving the overall capital utilization efficiency of DeFi, but without the high risks associated with composite DeFi that come with high rewards.

On DEX platforms, liquidity is dispersed across different protocols, and insufficient AMM market-making liquidity can lead to significant slippage; most current DEX platforms lack sufficient trading tools, resulting in poor user experience and being unfriendly to institutional investors.

Unlike the aforementioned derivatives exchanges, Bess does not adopt an order-based system but instead takes external quotes, completely solving the slippage issue. It also improves overall liquidity through a liquidity mining reward mechanism, thereby enhancing overall trading efficiency and expanding the derivatives track.

Bess aims to help users regain control over their assets, pursuing various traits such as decentralization, automated market-making, and composability. Compared to centralized exchanges and other DeFi derivatives, Bess features automated market-making, external price feeds, real-time slippage subsidies, and cross-chain transfers.

In the future, it will further implement broker arbitrage model diagrams and launch trading strategy tools. Notably, Bess does not offer high-risk binary options with execution prices set at current market prices.

Team Background with Both Hard and Soft Power

Bess is headquartered in Singapore, and the team consists of senior product managers from globally renowned banks and futures companies, top exchanges, core developers from well-known public chains, and a group of geeks graduated from top universities such as Carnegie Mellon University, Stanford University, and the University of California Berkeley, possessing rich experience in cryptocurrency and traditional financial product development and design.

Token Model Design

Total Token Supply: 10,000,000
Team: 15%, all team tokens locked for 6 months, then 5% released monthly;
Community and Marketing: 10%, these tokens are specifically allocated to individuals and groups developing core tools and infrastructure on Bess Protocol and supporting Bess Protocol through grassroots community building and marketing. Released according to actual promotion conditions.
Foundation Reserve: 10%, all tokens locked for 12 months, linearly unlocked quarterly, completed over 3 years. Bess Protocol is used for project planning and collaboration with external projects.
Private Sale: 10%, 10% of the tokens in the round are released upfront, with the remaining 90% distributed monthly, completed within a year.
Public Sale or IDO: 15%, fully unlocked, no restrictions.
Liquidity Mining: 30%, the remainder is used as liquidity mining rewards, gradually released.
MM and Liquidity Provision: 10%, provided as liquidity in DEXs and CEXs.

Project Progress and Prospects

In the V1 version launched by Bess, users can stake ETH, WBTC, mainstream stablecoins, Bess (the platform token), and other major ERC20 tokens in smart contracts to mint BSDT (the stablecoin within the Bess platform), and then implement trading on the Bess platform using the Rollup Layer2 solution. The funds are secured, locked in smart contracts, and fully transparent.

Next, Bess will enrich its product library from two aspects: one is to increase the blockchain parameter targets of existing derivatives tools, and the other is to build more diverse derivatives tools.

At the same time, Bess will continuously explore pricing models that eliminate oracles and develop derivatives tools tailored to the characteristics of Ethereum 1.0, Ethereum 2.0 (and its transition period).

In the future, Bess will not be limited to cryptocurrencies; any assets, including cryptocurrencies, gold, fiat currencies, etc. (whether crypto or non-crypto), can even trade with leverage of up to 100 times and cross-margining, providing traders with a trading experience similar to CeFi.

Subsequently, a specialized plasma variable designed for trading will be introduced to achieve trustworthy non-custodial trading.

Bess Protocol Contact
Twitter
https://twitter.com/bessprotocol
Medium
https://bessprotocol.medium.com/
Telegram
https://t.me/BessProtocol