Variational: The Omnipotent Market Maker in the Perpetual Market

Variational doesn't produce liquidity; it merely transports it. After an extensive introduction to Hyperliquid, the capital operations surrounding $USDH and DAT/ETF will be addressed later.

Binance is becoming increasingly skilled in post-crisis public relations, while OK is accelerating its internal cleanup. Hyperliquid continues to rise, and although events like 1011 may affect some market makers or YBS projects, it's unlikely to harm major platforms, or even second- or third-tier CEX/DEX exchanges like Lighter or Matcha, which have shown strong resilience.

Hyperliquid's rise is unstoppable after Aster and 1011, unless it collapses on its own or is shut down by regulators. Binance is unlikely to be able to overthrow HL in the same way it did FTX. The cryptocurrency trading structure has solidified, so what should late-coming Perp DEXs do?

Market-Level Market Maker: OLP for Everything

Variational's idea is based on connecting all liquidity. Variational predicts that no single company will dominate, and even if one does, there will be a third-party market maker on top of it. We mentioned earlier that Binance and HL claim to be open to market makers, even HL's HLP claims to account for only 1% of the trading volume.

The logic is simple: Qualcomm will only be accepted by the entire industry if it sells its telecommunications business, Visa/Mastercard will not establish their own banks, and Stripe's Tempo is unlikely to issue a stablecoin. Only sufficient neutrality will be actively accepted by all market participants.

If Hyperliquid's Builder Codes are the front end of liquidity, then Variational's OLP is the counterparty to all market makers. Technically, Variational is not a traditional Perp DEX. It has a high degree of centralization. In the Request for Quotation (RFQ) structure, users actively inquire about prices, and OLP, the sole market maker, provides the quotes. Order details are pre-set by Variational, and the final price is determined by OLP.

Note: The slippage problem solved by CLOB in AMM reappears in Variational under the RFQ mechanism, but this defect can be compensated for by setting limit orders. However, benefits come with it. Each user order must have a counterparty, the market is perfectly balanced between long and short positions, and each order is guaranteed under the OLP contract, where profits and losses are from the same source and have nothing to do with others. Moreover, OLP is the only market maker on Variational, i.e., there is no third-party market maker. Any user must trade with OLP, in order to ensure the minimum granularity of market balance. The benefit of this is that in the event of extreme liquidation, your profit is only responsible for the loss of the counterparty to the order, not for the losses of other orders, in order to maximize control over the liquidation volume on Variational.

But this does not prevent the spread of liquidation in the market as a whole. Note that OLP is the only counterparty to users on Variational, but OLP will not only make the market on Variational.

In addition to users commonly depositing OLP to earn income and take responsibility for liquidation, the biggest difference between OLP and HLP is that OLP will go to DEX/CEX in the market to hedge. For example, if Alice opens a long position on OLP and cannot find a corresponding short position to match it, OLP will directly open a corresponding short position on BN/HL to achieve its own balance. Therefore, Variational is not like a Perp DEX, but more like a market-level market maker like WinterMute, it does not open liquidity, but opens market maker access. For HLP, user deposits need to earn market maker income, but HLP cannot over-occupy market traffic, otherwise ordinary users and market makers will flee. But OLP is the only market maker, users must either deposit OLP or be its counterparty, naturally eliminating market maker participation.

In 1011, market makers couple positions on Binance and on-chain, and when the crisis comes, multiple market makers will have a domino effect, causing the market crisis to spread indefinitely. On the contrary, OLP will close and liquidate positions according to predetermined conditions. For Binance and HL, OLP will be a better market maker choice, at least it will reduce the probability of "running away" in moments of crisis. OLP is unique on Variational, but it is a major client for other exchanges.

Remember that OLP's positions are perfectly balanced in a P2P system, and each user's position is only responsible for the counterparty. Loss rebates are the cost of customer acquisition. When the competition in Perp DEX intensifies, how do you participate and make steady profits?

Variational targets the fact that BN/HL allows third-party market makers to exist, and that retail investors are unable to resist market makers and large platforms. OLP is embodied in an open market maker. If users want to obtain passive income from Perp DEX, they can only participate in OLP and not trade. But! Is this really true?

The loss rebate on Lighter has not stopped, and there is already a new TurboFlow Perp exchange adopting the AMM mechanism and claiming to provide zero trading fees/no slippage, and that the exchange only shares profits when users profit.

The loss rebate in 1011 was very unusual, but the loss subsidy in Variational has become normalized, which is the direct reason why the market paid attention to it after the big liquidation. In a sense, Lighter's loss subsidy, Binance's US$200 million compensation, the Fellowship Program, and potential Hyperliquid S3 trading points are all means of acquiring customers. But loss subsidies already indicate that the cost of this customer acquisition channel is approaching the edge of diminishing returns. If the project itself is not profitable but still wants to acquire customers, it means danger.

Variational is normalizing this danger, treating it as its daily customer acquisition method. OLP is not only the only market maker, but also the counterparty that does not charge fees. OLP's profit source is based on market making spreads, that is, "BN/HL is too strong and will prioritize liquidating user positions, but OLP uses a black box to ensure the rights of retail investors." Yes, OLP's market making mechanism is still a black box, and OLP is currently still under the control of the project. Retail investors do not need to believe that OLP will not deliberately cause them to lose money, because OLP will subsidize losses.

OLP will meet the interests of OLP depositors while maintaining a neutral market making strategy. In addition, OLP is the counterparty to all traders, and can control the intrusion of whales into the market to a certain extent. Cases of hijacking HLP for arbitrage will occur less often, because the degree of openness of OLP is lower, and in extreme cases, whale positions can be directly closed.

However, it should be noted that the current trading volume of Variational is relatively small compared to HL/BN, and the ability to ensure subsidies after increasing the market making volume still needs market verification.

Conclusion: The End of the Decentralized Era

Before Variational, liquidity in the market was secret and fragmented, but Variational introduced the power of retail investors into it to counter market makers and large trading platforms.

• From the user's perspective: OLP controls the liquidation power, but it cannot inherently resist overall market changes, it is mostly a matter of feeling at ease.
• From the project's perspective: Absorb user deposits to hedge positions on BN/HL, and rely on free and APR to increase its own trading volume.
• From the perspective of BN/HL: Increase institutional-level market makers, and can be used as a bridging channel, using the overall liquidity of the market.

However, the degree of the black box in Variational is excessive, and retail investors are still unable to resist. This may be the helplessness of retail investors in this era. Coinbase, which represents American exchanges, has taken an early step towards institutionalization, following in the footsteps of American stocks. The on-chain and Asian markets are the remaining markets for retail investors, and no one knows whether they will give rise to Frankenstein or a new Cyberpunk concept.