Perpetual Protocol is a DeFi platform focused on trading futures-like contracts, supporting the trade of cryptocurrency and other assets such as gold, crude oil, and fiat.
Crypto derivatives came to add fun to spot virtual currency trading. Popular derivative products include futures and perpetual contracts. In a futures contract, participants bet on the future price of a crypto asset.
On the other hand, a perpetual contract mimics a futures contract’s qualities but lacks a fixed expiry date. Unfortunately, its uptake has been slow due to, among other things, counterparty risks and fees.
Fortunately, decentralized finance (DeFi) removed the risks involved when trading derivatives on a centralized platform. However, the approach that was taken by Uniswap, Balancer, and other DeFi networks to power the DeFi ecosystem was not ideal for handling perpetual contracts. Therefore, Perpetual Protocol bridged the gap with a new market-making model.
In its early days, Perpetual Protocol was supported by an elite team based in Taiwan. However, its continued development saw the involvement of a distributed team spread across the world. Perpetual’s co-founders are Yenwen Feng and Shao-Kang Lee.
Furthermore, the team comprises of blockchain developers, researchers, and engineers. Among those who believe in the project’s mission are Binance Labs, Alameda Research, CMS, Three Arrows Capital, Divergence Ventures, Mechanism Capital, and Multicoin Capital.
What is Perpetual Protocol?
Perpetual Protocol is a DeFi platform focused on trading futures-like contracts. Interestingly, it supports the trading of cryptocurrency and other assets such as gold, crude oil, and fiat.
What sets it apart is its use of virtual automated market makers (vAMMs). This is an iteration of the automated market maker (AMMs) approach that’s common in the DeFi ecosystem.
You may be wondering what’s the difference between AMMs and vAMMs. A system that uses the AMM model employs direct liquidity pools, while a vAMM introduces virtual pools where funds, instead of a pool, are held in a smart contract.
Then, the contract handles the collateral backing. As such, liquidity on vAMM-inspired platforms such as Perpetual can be algorithmically proven. AMM-based protocols such as Balancer and Uniswap forecast the strength of a market through liquidity providers.
vAMMs provide advantages such as ever-present liquidity, predictable pricing, unbiased markets, and ensure contracts are fully collateralized. With enough collateral, traders always receive their fair share during settlement. Notably, a combination of these features removes the risk of impermanent loss that would be borne by stakers in the case of AMM.
Apart from guaranteed liquidity and eradication of impermanent loss for stakers, the Perpetual network allows traders to pump their positions with a leverage of up to 20X.
Perpetual Protocol, xDAI, and Chainlink
The Ethereum blockchain powers Perpetual Protocol. However, to minimize the high gas costs on the decentralized platform, the system uses xDAI, a layer two scaling solution. The scaling platform handles Perpetual’s core components, such as the Clearing House and Insurance Fund.
Since the network interfaces with Ethereum under the hood, its users can use MetaMask to deposit funds. Fortunately, opening a position on Perpetual is handled as a meta transaction hence no gas costs.
To accurately determine funding, the system relies on Chainlink oracles to supply an aggregated price from major exchanges, commonly known as the index price. Perpetual embraces FTX exchange’s plan to calculate the hourly funding payment by multiplying the position size with the funding rate. A funding rate is a small fee paid by one party in a perpetual contract.
How Perpetual Protocol Works
Trading on the network is simple. To kick start the trading journey,
- A trader sends funds to the Clearing House and provides additional information on the amount of leverage.
- The Clearing House sends the funds to the Vault. Also, the house makes changes to the platform’s vAMM to indicate the deposit, the leverage, as well as to determine whether it’s a long or a short position.
- A constant-product curve calculates the amount credited to the trader.
- The trader can then close their position at will. Note that the network works on a win-lose situation; in a trade one has to lose while the other gains.
Perpetual Protocol’s Native Currency (PERP)
The network’s native token, PERP, is an ERC-20 token with an initial and maximum supply of 100 million and 150 million coins, respectively. PERP tokens are shared among the ecosystem, seed investors, team/advisors, strategic investors, and the Balancer network.
Interestingly, the token’s maximum supply is adjustable depending on agreement by the governing community.
PERP handles governance and staking-related functions.
Although the network initially supported decisions from top contributors, it aims at decentralizing the function to accommodate ideas and proposals from the entire Perpetual Protocol community. However, proposing ideas or voting on submitted ideas requires holding PERP tokens.
Through governance voting, the community can change the collateralization ratio, fee ratio, maintenance margin requirement, initial margin requirement, staking epoch length, and liquidation fee ratio.
PERP tokens can be staked to rake in more rewards. Apart from staking rewards, PERP stakers share 50 percent of the system’s trading fees. Note that staked funds are locked for seven days. Perpetual calls this period an epoch.
After this time, stakers must unstake their funds before initiating a withdrawal request. Note that although an epoch lasts for one week, stakers can join an epoch along its lifetime. However, the number of rewards earned will depend on how long they’ve been active in the lockup period.
Interestingly, transaction fees earned from staking are claimable after the end of an epoch, but PERP-denominated staking incentives are availed on “the first day of the same month in the subsequent year.” While this may seem like a long wait for rewards, it’s meant, in part, to attract dedicated and longtime users.
Supported Perpetual Contracts, Liquidation, and Liquidity Mining
During launch, the system supported BTC/USDT and ETH/USD contracts with a promise to expand the list.
Traders interacting with either of the two agreements must comply with a 10 percent initial margin, 5 percent maintenance margin, a 0.1 percent transaction fee, and a funding interval of 60 minutes. The initial margin represents the minimum amount required to open a position. The maintenance margin represents the amount needed to keep the position open.
Perpetual Protocol initiates liquidation when the maintenance margin referred to by the system as the “Margin Requirement Ratio” falls below five percent. During liquidation, the network rewards keepers, entities tasked with ensuring positions are adequately collateralized, with liquidation incentives.
Currently, the incentives stand at 2.5 percent of a trader’s standard position size. The Insurance Fund holds the extra collateral. Apart from storing the additional collateral, the Insurance Fund supplements the liquidation fees if a trader’s normal position size isn’t enough to pay keepers.
The system’s liquidity mining program is a proposal by the Perpetual team to reward early adopters. Early adopters receive discounts on trading fees and funding payments. The program aims to attract more traders, put more PERP tokens at the hands of the community, and discourage wash trading.
Futures-based trading has not gained enough attention in DeFi circles compared to spot trading. However, Perpetual Protocol adds impetus to the DeFi perpetual market through a unique network endorsed by leading firms such as Binance Labs, Alameda Research, and Three Arrows Capital.
Furthermore, the system’s use of vAMM has proven to bring more benefits to traders compared to AMMs. With community-based governance, the network ensures new features are demand-based. Additionally, utilizing xDAI minimizes transaction costs while boosting the platform’s speed.