Surf Protocol, led by ABCDE, is a permissionless AMM derivative trading protocol that supports the creation and trading of the widest range of crypto assets. To introduce it using a familiar model, Surf is like a contract version of UniSwap, with a key innovation: allowing anyone to provide perpetual contracts for liquidity to any on-chain token without permission. Everyone can create contract pools.

Compared to GMX and dydx, which only have 9 and 37 assets respectively, Surf's advantage lies in its permissionless pool creation, enabling one-click perpetual contract provision for any token. In the future, Surf will have thousands of perpetual contract trading pairs for long-tail assets.

一. Trader Extractable value — 交易者可提取价值

To understand Surf's key innovation, one must understand the role of Trader Extractable Value in the AMM derivative field.

When describing MEV, we often liken the blockchain to a dark forest, as it is filled with various robots and scientists searching for potential profit opportunities in the unconfirmed transaction pool (mempool) through various means, giving rise to MEV - Maximum Extractable Value.

MEV tends to lean towards various arbitrage opportunities in the overall blockchain, such as spot Dex and lending liquidation. In some specific areas, there are more refined concepts.

For example, there is the LVR - Relative Loss Rebalancing for Dex LP reverse cost, which A16Z has published a detailed article about, which will not be elaborated on here.

Another example is the arbitrage space generated by factors such as spot and derivative price differences - we call this Trader Extractable Value (TEV).

In simple terms, the Ava price manipulation that occurred on Avalanche last year is a typical TEV. When the spot price manipulation cost is balanced against the futures friction cost, scientists find it profitable.

You may question whether Avax is relatively easy to manipulate due to its own liquidity, but BTC and ETH cannot be manipulated in the same way.

Yes and no.

Yes, because the depth and consensus of BTC and ETH make it much more difficult to control spot prices, which is why GMX V1 only has BTC and ETH trading pairs on Arb.

No, because GMX's GLP TVL is only a few billion. Imagine if GLP's TVL were tens of billions, in a scenario where Traders profit at the expense of LP, major players would spend a "fortune" to manipulate the prices of BTC and ETH, reenacting the scene that occurred on the AVAX trading pair. As long as the depth of GLP's trading is sufficient, GMX's fixed trading friction cost will definitely lead to spot price manipulation costs in the futures market. With the increase in GLP TVL, the possibility and success rate of TEV also continue to grow, which is why the TVL of this type of AMM is stuck at the "equilibrium" threshold of a few billion dollars.

二. Everyone can open a trading protocol - Surf's solution and innovation

How to incentivize a larger TVL for derivatives and create an innovative trading protocol?

Surf's solution is quite direct. In order to maximize LP incentives, Surf has made a very interesting innovation in the LP mechanism, creating a B2B2C trading protocol. Typically, 70-80% of the trading fees earned by LP go to LP, while 20-30% flow to the protocol itself. Surf has made a very crucial innovation, with 80% of the trading fees going to LP, 10% to the protocol, 5% as a reward to the creator of each pool, and 5% as a reward to the contributor with the largest TVL for each pool.

In this incentive system, LPs will be more proactive in creating trading pairs for non-blue-chip long-tail assets. Additionally, because the contributor with the largest TVL can receive 5% of the entire pool's trading fees, a real game is formed on TVL, encouraging "large and loyal" TVL to continue providing LP, thereby providing traders with a better experience and greater depth.

Furthermore, how to solve the friction cost of futures?

Simply by making the friction cost on the futures side non-fixed and dynamic, similar to introducing pools with different fee rates, like Uniswap V3.

In Surf Protocol, each trade automatically establishes five different pools, each with a unique fee, forming various liquidity pool structures across different assets. In theory, highly liquid assets like BTC are expected to have a large share of liquidity in low-fee pools, while less popular assets like PEPE may have more liquidity in high-fee pools.

For Traders, these pools are transparent, and when placing an order, they will automatically match with the pool with the lowest fee, and once that pool is full, it will automatically move to the next lower fee pool. For LPs, choosing different pools is also a market game, dynamically choosing to earn higher fees and act as Traders before the close. For the overall system, more stable period fees may significantly decrease (more LPs choose low-fee pools), possibly reaching theoretically feasible minimum levels. During extreme market activity, costs may increase, preventing scenarios like GMX Avax trading pair price manipulation continuously depleting GLP.

三. Permissionless - The true meaning of crypto

Those familiar with the early history of cryptocurrency know that the main focus of the early Bitcoin era was actually Permissionless, not Decentralization. Satoshi Nakamoto himself used Permissionless in his white paper and forum posts, rather than Decentralization.

In other words, Decentralization is actually just a form caused by the core of Permissionless.

Uniswap achieved victory in the spot Dex by virtue of its permissionless listing and LP mechanism.

On the derivatives side, while GMX V1 benefited from the innovative invention of GLP, its mechanism also limited the establishment of permissionless trading pairs, with the majority of blue-chip and long-tail asset derivatives still concentrated on Cex, which is why we had GMX V2 some time ago.

We need a more free and healthy on-chain derivative financial mechanism, a fairer trading market, and a transition from the centralized contract market to the decentralized market.

The battle for permissionless derivative trading has just begun.

We have reason to believe that by introducing game-like "homogeneous but different value" trading pools, permissionless and innovative LP reward mechanisms, Surf is expected to bring AMM derivative TVL to a new height, providing traders with a better trading experience while better protecting the interests of LPs, achieving a "win-win" situation.

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