The introduction of Bitcoin was instrumental in creating the crypto market we know today. It laid the groundwork for future crypto projects like exchanges. First, we had centralized exchanges (CEX), but eventually, decentralized exchanges (DEX) came onto the scene. The first DEX was launched in 2014, and many have come since. The Drift Protocol is one such.

DEXs are usually built on a layer one blockchain. The Drift Protocol is built on the Solana blockchain. It has had a bumpy ride on its journey to become a top decentralized exchange on the Solana blockchain. \

Drift has been making interesting moves that are launching it to the top of everyone’s list. This article will discuss Drift, its main features, and why it is rising.

What is the Drift Protocol?

The Drift Protocol is a highly-rated decentralized exchange built on the Solana blockchain. It has a good list of features, but at its core, it is a perpetual DEX with an automated market maker (AMM) that significantly improves the trading experience. Drift Protocol has a great reputation, having previously handled billions of dollars in volume.

Drift is one of the first DEXs on Solana, a layer one blockchain committed to platforming decentralized apps (Dapps), especially in decentralized finance (DeFi).

Looking at the numbers, you understand why Drift is highly rated. It has 191,703 accumulated users and $27.78 billion in trading volume. Currently, Drift has $26.5 million in volume and a market cap of $66.4 million. It was valued higher in the bull run of 2021-2022, but sadly, it was affected by the Terra crash. Experts believe Drift will see even brighter days, partly thanks to its V2, which launched in 2022 and has been impressive so far.

History of the Drift Protocol

Drift Protocol launched in 2021 with four founders, led by Cindy Leow. She is the most prominent face of Drift, but another notable founder is David Lu. Drift has its headquarters in Australia but is used globally. Cindy Leow entered the crypto scene in 2016; she arbitraged the bitcoin price differences between Korea and the USA. She eventually found her way to Solana and then Drift.

Drift Protocol has significantly grown its ecosystem by introducing several features in addition to its spot trading feature at launch. Drift Protocol started as a simple DEX with a virtual ​​automated market maker (VAMM), Cindy Leow, a co-founder of Drift, stated that it was the easiest to bootstrap then. However, there is a problem with VAMMs, it is prone to spillage, so the Drift team switched to a dynamic automated market maker (DAMM). It has all the benefits of a VAMM while giving users great features. Then, just a year after it launched, Drift launched V2, which is still used today.

How Does the Drift Protocol Work?

Drift is a DEX, meaning it is a non-custodial exchange that allows users to trade directly without needing a third party, like a financial institution. Drift users can perform different types of trades, including perpetual futures, spot trades, swaps, and more.

Users of Drift can sign up and make an account in mere minutes and start making trades in the same time frame. The Drift web app is quite intuitive and engaging. New users should note that Drift has no wallet but easily connects to top wallets in the Web3 space.

Insurance Fund

To protect from bankruptcy, Drift Protocol has an insurance fund. It protects margin and perpetual traders from going below the line. Both will be discussed in detail below, but they are trades where users can borrow from the dex to maximize potential profits.

But, with great potential loss also comes potential loss, this is why the insurance fund is necessary. It is in place so that if a trader records a loss, it will not go below 0.

Users can stake into the insurance fund and receive funds from the revenue Pool. Different assets protect different trades. The USDC pool is used for perpetual futures insurance, and the BTC, ETH, and SOL pools insure the borrow-lend features.

Backstop AMM Liquidity (BAL)

Perpetual trades are great, but sometimes, there are liquidity issues. One way to solve this is to backstop AMM liquidity (BAL). It allows other users to easily provide liquidity for perpetual trades while earning a pretty penny themselves. The BAL increases the “sqrtK” of the AMM’s constant product liquidity, which increases the liquidity of the market.

Main features of the Drift Protocol

The Drift Protocol has an arsenal of features that keep its users returning. These features set it apart from other DEXs and make it one of the most sought-after DeFi projects on the Solana blockchain.

Perpetual futures

Perpetual futures are a type of future trade with which you can place a “bet” on market fluctuations. Perpetuals are derivatives. Their worth is derived from the cost of a token, so the “bets” are placed not on the tokens but on contracts that represent them.

A Drift user trading perpetual (perps) would pick a particular token’s perp and buy a long or short perp contract. Assuming the user buys a long BTC-PERP, they are “betting” that BTC will increase in value, and if this happens, they would be rewarded, but if BTC loses value, they will lose as well.

Drift also offers 20x leveraging, when a user “borrows” from Drift to buy a perp contract for higher. This means that if a user has 10 BTC, they can use the leverage to buy 200 BTC-PERP. This means they have more returns if things go their way, but they could lose even more.

Spot trading

Like most DEXs, Drift allows for spot trading, which involves buying and selling crypto assets at around their current market value. Drift uses a DAMM, which better protects users from slippage and liquidity issues. The AMM puts users’ funds into a liquidity pool and then uses an equation to determine buy or sell offers. The offer will fluctuate depending on liquidity, so users can still earn a profit from sales.

Dynamic automated market maker (DAMM)

AMMs have their perks, but there is a danger of slippage. To address this issue, Drift created DAMM. It is a three-step plan for slippage reduction. There is still a margin for slippage, but Drifts DAMM brings slippage tolerance down to 0.1%

The first line of defense is just-in-time liquidity. Here, the market makers have five seconds to submit their best quotes. Next is the AMM liquidity. If the first fails, no worries; the AMM uses a formula to ensure constant liquidity. The final line of defense is the orderbook liquidity. This alerts keeper bots to record on-chain orders off the chain and then match them.

Drift V2

Drift is a DeFi solution that provides low fees, even lower slippage, and the least price impact in trades. However, being an off-chain project, Drift has some drawbacks, like slow fills and low liquidity. In response to these issues, a new version of Drift was made, Drift V2.

Drift V2 has nifty upgrades to the last version, and these updates have excited users and made them want more.

First is its just-in-time liquidity. This asks for liquidity at the best price possible when a user puts down a market order. It takes an average of 5 seconds, and after the best option is selected, the price starts from the Oracle price but can go higher. If the offers are not good, they move to the AMM liquidity.

The AMM liquidity provides constant liquidity, which means that Drift V2 can sustain itself without external liquidity.in addition to AMM liquidity Drift V2 has structures to protect against single liquidity, one of which is the revenue pools, the funds come from the fees from borrowing, perpetual market exchange, spot market exchange, and liquidation.

If AMM liquidity does not work, we will fall to the order book liquidity. What drives order book liquidity are keeper bots, they source and record order limits and then sort them by age and price. If two orders have identical ages they are sorted by size. Keepers will only execute when the particular trigger order is given, then they will load their limit order against the AMM. But if the conditions tally they will match users’ orders with the resting limit.

What is DRIFT?

After all Drift Protocol had accomplished, they decided to hit another milestone, so DRIFT was launched. DRIFT is a governance token, and it was made in part to make Drift Protocol more decentralized. The token will give users the power to participate in the platform’s decision-making and be an important instrument for Drift’s progress. DRIFT will surely empower its holders, but more than that, the decentralized ecosystem as a whole will also get a boost.

The Drift DAO Foundation will coordinate all holder input; however, it will be administered by Webslinger, a company that provides advisory services to top-tier Web3 companies.

The Drift DAO will be set up innovatively, and it will be split into three parts. First will be the Realms DAO, in charge of the overall development of the Protocol and electing members of the Security DAO. Next, we have the Security DAO, tasked with determining and updating the risk and fee parameters, approving software, and more. Finally is the Futarchy DAO, which handles funding for new Drift projects and remunerations for contributions.

DRIFT Tokenomics

Only 1 billion DRIFT tokens will be created to be shared with holders over five years. The Drift community will get 53% of the tokens, but this will be split further, with 10% going to the airdrop and 43% to improve the ecosystem and as trading rewards. 25% will be allocated for developing the Drift protocol, and the remaining 23% will be allocated to special participants who have helped Drift come this far.

News on the Drift Protocol

Drift has not rested on its oars, it is still making headlines. Most recently, it announced the creation of its governance token, DRIFT. This is in a continuing effort to decentralize the platform. Drift also announced an airdrop of 10% of its total supply to loyal users and long-standing traders.

The DRIFT token and airdrop went live on the 16th, with a total supply of one billion DRIFT. Drift is allocating 53% of its supply to its community, 43% to developing its ecosystem and as rewards for trading, and, as said earlier, 10% to the airdrop. This means 100 million DRIFT is up for grabs.

The launch of DRIFT has the world talking, and even though it is pretty early, the token is showing signs of strength. Since it went live, DRIFT has seen a 343% uptick. From the looks of things, there is no slowing down for the new coin.

Conclusion

Since its launch in 2021, the Drift Protocol has been doing amazing things on the Solana network. The DEX has constantly proved itself as a force to be reckoned with. Although the Terra crash destabilized Drift for a bit, it has come back stronger than ever with the launch of its V2 and now the unveiling of its governance token. With such amazing features and a great team of people at the helm of affairs, the Drift Protocol still has its best years ahead.