Drift Labs is committed to improving the DeFi experience, which is why we’re excited to announce the launch of Drift V2, which introduces:

• Liquidity Trifecta (Hybrid AMM, Orderbook & JIT)
• New Product Offerings — Borrow/Lend
• Additional Risk Controls & Security Measures

The Differences

1. Increased Liquidity Depth

Drift V2 features multiple sources of liquidity (a Liquidity Trifecta) - decentralised orderbook, Just-in-Time (JIT) Liquidity, and passive LPs, to better support the V1 dynamic virtual AMM (DAMM) and allow for more counterparty participation (external market makers).

This is a significant development over V1, providing:

• improved pricing and depth of liquidity available for takers on the platform;
• increased collateralisation of the AMM

These mechanisms are supplementary to the core features of V1, as Drift V2 contains critical features of the V1 AMM, such as backstop liquidity and no reliance on market makers to bootstrap new markets.

You can read more about the Liquidity Trifecta here, and JIT Liquidity here.

2. Products – Full Service Exchange

Decentralised finance today is fragmented. It’s currently impossible to swap, borrow, lend and trade without accessing multiple different interfaces, locking your capital up in multiple different pools. Using multiple single-feature protocols is capital-inefficient and involves heavy switching costs for the user. This results in a poor user experience for traders, and prevents the wider adoption of DeFi trading.

Drift’s V2 solves this by expanding its product offering from perpetual swaps to include spot trading, borrow and lend, passive liquidity provision (LP) and Insurance Fund staking. Traders can do this all under one roof, with one pool of capital.

On launch, Drift V2 has perpetual swaps and borrow-lend interfaces. Soon, Drift will launch interfaces for spot markets, passive LP, and staking products.

To read more about Drift V2’s new products, visit docs.drift.trade.

3. Security and Guardrails

In light of recent industry exploits, the team has run comprehensive agent-based simulations to test a variety of market conditions. As a result, this led to Drift V2 building many robust security measures. We highlight a select few below:

Multi-Step Oracle Validity Checks

The oracle price is an important data feed, that if invalid or manipulated, can lead to draining of exchange assets in a short period of time.

Drift V2 reduces this risk by validating that the 5-minute oracle TWAP vs AMM reserve price is within ~10% prior to a risk-increasing order being filled. Given the trimmed update used in updating TWAP, this introduces multiple intervals that act as circuit breakers for large price moves; thereby allowing more time for the exchange and the AMM to react.

These measures increase capital protection and reduce the leverage extended to users in volatile periods.

For more, read our docs on oracles and protocol guard rails.

uP&L Asset Weight

On Drift V2, uP&L will not be available as margin to increase leverage or borrow against.

In order to reduce the risk that volatility and oracle manipulation poses to the system, Drift V2 calibrates the asset weight of unrealised P&L to 0. This may be increased over time, but a big learning from observing V1 and recent events is that uP&L cannot be treated the same as settled collateral – this is particularly pertinent during times of extreme volatility.

For more, read here.

Settled and Realised P&L

Drift V2 implements a new P&L accounting mechanism to isolate capital risk within each market to pay out a user’s realised P&L.

To avoid the possibility of a short fall within the system, Drift V2’s settlement mechanism requires users to settle realised P&L before realised P&L can be withdrawn, ensuring all settled gains have offsetting settled losses. This minimises the risk vector of a short fall occurring within the system.

For more, read here.

Exchange Auto-Settlement

Drift V2 has an auto-settlement mode on each market that can be triggered in the case of any long-tail events. At settlement, the market will enter a reduce-only mode with a set expiry date and upon expiry calculate final settlement price (targeting the 1-hour oracle TWAP). Once it expires, the remaining users in the pool will be paid out based on the amount of capital in each individual market’s revenue pool. This means that delisting individual assets will isolate the risk of a single market, ensuring the rest of the exchange and the overall risk engine is not affected.

AMM Bid / Ask Spread

Drift V2’s AMM features inventory adjusted bid-ask spreads to quote different prices for buyers and sellers.

This mechanism is designed to further protect the AMM from a protracted long-short imbalance. For example, if the AMM becomes increasingly long, the spreads adjust so it becomes more expensive for users to further increase the AMM’s long position (by taking short positions).

Adjusting spread also tilts funding rate in favour of the AMM’s position, incentivising users to take over, rather than contribute to, its position.

For more, read here.

Preventing AMM Toxic Flow

To prevent toxic flow and to reduce the risk of the AMM’s long / short imbalance, the AMM actively participates in the JIT auctions in order to offload portions of its toxic inventory. For example, if the AMM’s inventory skews more towards being net long; it will begin to offload its delta by filling long positions (therefore increasing its short exposure) via the JIT auction.

For more, read here.