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Last updated: Nov 23, 2022
Perpetual Protocol is an open source software project developing financial tools with its core product being an on-chain perpetual futures DEX. By building on top of Uniswap v3’s architecture, the protocol allows users to trade a variety of assets using perpetual futures, open long and short positions, as well as use up to ten times leverage. When leverage trading, there is a liquidation trigger set to go off if the user’s margin ratio falls below 6.25%.
Short and long positions expose users to a wider range of price movement of an asset. Perpetual Protocol allows its users to keep their positions open for as long as they want, provided they can cover the required funding payments.
Funding payments are a key mechanism used to keep the mark price of each perpetual contract close to the index price. The price of perpetual contracts remains unattached to the spot market values and can be affected by factors such as traders’ expectancy on the increase in value over time of the underlying asset, in which cases the price of the perpetual contract may exceed the spot price. In the opposite case, when most traders expect the price to fall, the perpetual may trade below the spot price.
Essentially, this means funding payments are paid by traders moving the mark price further from the index price, and are earned by traders who move the mark price closer to the index price. Funding payments are accrued on all open positions, be it market orders or acting as a maker/liquidity provider.
Due to the cross margin system used by Perpetual Protocol v2, all user funds are kept in pools, backing each other’s positions. A trader can open positions with a size that is larger than the assets they own, provided they have allocated the required amount of collateral. The current buying power, which is the amount of funds that can be deployed by a user, is set to 10x leverage. This means a 100 USDC deposit is equal to a buying power of 1000 USD, for example.
In order to keep its users safe, the protocol incentivizes liquidators to liquidate users’ positions where the margin ratio of the collateral is below 6.25%. To increase or decrease the leverage users can increase or decrease their position size, or deposit or withdraw from the exchange.
Perpetual Protocol allows users to trade as makers, thus creating orders for takers, using concentrated liquidity. Makers place liquidity in price ranges for takers to trade against. For providing liquidity, makers earn protocol fees from trades placed in their range, OP and PERP incentives and they also can apply leverage to maximize capital efficiency.
Trades on the project are performed using an Automated Market Maker (AMM) model which allows users to place trades right away no matter their size. In such cases it is important to note the expected price impact before placing a trade.
The AMM architecture is fairer for makers, since with Centralized Limit Order Books (CLOBs), a handful of market makers compete with each other to earn the spread, whereas with AMMs, this competitive dynamic is not present for liquidity providers. Providing liquidity is accessible to all and they’ll all earn a share of trading fees if trades occur in their range.
For traders, AMMs facilitate trades without centralized third parties overseeing the trading activity since a smart contract will swap their assets for those supplied in the liquidity pool. The AMM algorithmically provides a price to a trader without the need to match price and volume orders provided by buyers and sellers as in the CLOB model.
Users need to have some USDC and a small amount of ETH on Optimism to start trading or market making on Perpetual Protocol v2. A number of bridging solutions, such as Biconomy’s Hyphen, Li.Fi, and Socket, are integrated within the app to allow users to seamlessly move funds from their desired chain over to Optimism. As well as USDC, traders can also benefit from the protocol’s multi-collateral feature, which allows users to open positions using ETH, WETH, OP and FRAX tokens as margin.
To connect to the Perpetual Protocol dApp, users can use MetaMask, Coinbase, Torus, and all other wallets supporting Wallet Connect. Alternatively, more technically inclined users can trade directly with the smart contract via EtherScan.
Using the protocol’s perpetual contracts allows for speculation on the price of an asset by buying/going long or selling/going short perpetual futures contracts, hedging to eliminate the impact of fluctuations in the cryptocurrency market on users’ portfolio, and for arbitrage, where traders can profit from the price differences on Perp v2 and other exchanges. Perpetual Protocol fees include 0.1% charged on all trades, 80% of which is distributed to makers, proportional to their share of facilitated volume.
The PERP token’s main utility features include governance management and staking. It has a fixed supply of 150 million PERP. 54.8% of the tokens are allocated towards ecosystem growth and rewards funds, 21% are given to the team, 15% to strategic investors, 5% to the Balancer LBP, and 4.2% to seed investors.
When staking PERP tokens in v1 of the protocol, users were allowed to withdraw their funds at any time, however, when unstaking there was a cool-down period of seven days, which was reduced from 14 via governance proposal and voting.
However, with the launch of v2, Perpetual Protocol utilizes a veTokenomics (vote-escrowed tokenomics) model, similar to that of Curve. In this model, users need to lock (stake) their tokens for a preset amount of time, thus reducing the available supply on the market. In return, users get vePERP tokens, which are not transferable and can not be sold.
Currently, PERP tokens can be locked for between 1 and 52 weeks, however, users wishing to receive rewards from Lazy River (the latest staking initiative that’s been launched) must lock their tokens for at least 2 weeks. The rewards earned depend on not just the amount of PERP that is locked, but also how long the tokens are locked up for.
When users lock PERP for vePERP, their voting power on governance proposals increases by a multiple of up to 4x, the maximum can be achieved by locking PERP for 52 weeks.
vePERP token holders that have at least 10 vePERP can further benefit from Perpetual Protocol’s referral program. To do so, they need to share their referral code with their referral partners (referrals). Referrers earn a share of the fees generated by their referrals, which can earn 20% rebates on their trading fees.
The Perpetual Protocol team was formed by co-founders Shao-Kang Lee and Yenwen Feng. Shao-Kang Lee was also co-founder of Decore, a payroll and accounting software service for crypto companies, as well as co-founder of Cinch Network, a decentralized uncapped naked options protocol. Before that, he co-founded Zaoo Inc, and POPAPP. Shao-Kang Lee has experience working as a web and mobile engineer and iOS developer.
Yenwen Feng also co-founded Decore and Cinch Network, as well as Zaoo Inc and Cubie Inc. His past experience includes co-founding gamelet.com and willmobile Inc. All the companies co-founded by Feng have taken him as a CEO, except Decore.
Perpetual Protocol audits can be found in the protocol dashboard on this webpage.
Some of Perpetual Protocol’s main partnerships are with Galleon, DeCommas, Diamond Protocol, and Brahma.fi.
The collaborations with DeCommas and Galleon offer low risk yields from a delta-neutral basis trading strategy, which goes short on Perpetual Protocol and long with spot assets to earn funding payments from the short perpetual position without having any directional exposure.
All of the mentioned partnerships allow users to earn yields by depositing USDC in Perpetual Protocol’s v2 vaults. An updated list of available partner vaults is available on the project’s website.
The developers are focused on hardening and optimizing the protocol, and improving the overall trading experience and profitability for liquidity providers. More collateral types are expected to be added in the near future and the Perpetual Protocol team is also working with its partners on rolling out more integrations and tools to accommodate retail users.
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