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Multicoin: A brief introduction to the DeFi perpetual contract agreement Perpetual Protocol

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The perfect combination of CeFi's leverage and DeFi's AMM.

Original title: "A brief description of the perpetual contract agreement"

Original source: Kyle Samani, managing partner of Mpticoin Capital

There is such a The old joke is that all financial innovation really boils down to two things: finding ways to increase leverage, and bundling/unbundling risk so investors can price assets more efficiently.

Among them, the first major financial innovation dates back to the separation of debt and equity in the fifteenth century. It splits risk, creating two types of risk holders: debt (low risk, low return) and equity (high risk, high return).

In the past 20 years, the development speed of the financial market has increased by 1000 times, but the overall financial structure has basically remained unchanged, and most capital flows are in the same way : Debt, Equity, Preferred Stock, Futures and Options.

The emergence of securitization has improved the overall efficiency of large-scale capital allocation, but most of the underlying assets that have undergone securitization have not changed substantially. The same is true in financial structures: the big banks that offer these complex products essentially use the aforementioned popular tools to hedge potential risks.

In terms of new financial structures, credit default swaps (CDSs) and covered debt obligations (CDOs) have exploded over the past 20 years. They both unbundle risk, allowing investors to price assets more efficiently based on guarantees and underlying cost of capital.

In the crypto industry, the DeFi ecosystem is experimenting with new financial structures at an alarming rate. For example, a large number of tools based on liquidity pool market makers have shown a Cambrian explosion, including options (such as Hegic, Potion) and spot transactions (such as Uniswap, Balancer, Curve).

But in fact, the most important financial innovation in the past ten years is the "perpetual swap contract" launched by BitMEX in 2016, also known as "perpetual swap contract". Many current financial structures in the market focus on the trading of synthetic assets, but we believe that perpetual contracts are the first echelon of the correct structure. This is also evident empirically. At this stage, the contract trading volume of cryptocurrencies is 3-10 times that of the spot, while the trading volume of other synthetic assets only accounts for a part of the spot. In fact, the market is very clear: Compared with synthetic asset transactions, perpetual contracts are the most ideal financial structure. At the same time, we expect perpetual swap contracts to become a very popular asset class in the next decade.

Therefore, as early as August 2020, we led the investment in a new automated market maker (AMM) agreement focusing on perpetual contractsPerpetual Protocol (aka Perp.fi) closed a $1.8 million investment round!

Among them, partners from Alameda Research, Three Arrows Capital, CMS Holdings, Zee Prime Capital and Binance Labs, well-known cryptocurrency angel investors Alex Pack, Andrew Kang, Tony Sheng, Calvin pu, George Lambeth and Regan Bozman also participated in the investment.

Since then, the team's work has progressed very well. Perp.fi, which officially launched a month ago, has seen $304 million in trading volume over the past week, making it the sixth-largest decentralized exchange on Ethereum at the time of writing. They just released a blog today, giving a comprehensive review of the results achieved since the mainnet was launched one month ago. In order to understand the reasons for Perp.fi's meteoric growth, it is necessary to take a closer look at its structure and team.

About Perpetual Protocol

Perp.fi is a breakthrough It combines the advantages of CeFi and DeFi: the CeFi-style leverage expected by perpetual contract traders, and the liquidity and simplicity provided by the DeFi system AMM.

Traditional AMMs have some disadvantages, the most prominent of which are impermanent losses and low capital efficiency faced by market makers unilaterally. Perp.fi essentially solves both of these problems by eliminating the order maker. Only Takers exist in Perp.fi!

So how does it work? This blog There is a detailed explanation, the following is a brief summary.

Perp.fi is powered by a Virtualized Automated Market Maker (vAMM for short). Before trading with vAMM, traders need to deposit collateral into a vault (vapt), which is the same as other derivatives exchanges (only USDC is supported initially, and other collaterals may be introduced later). Once collateral is deposited, they can trade perpetual contracts just like they would on a centralized exchange, with one key difference: On a centralized exchange, the trader’s counterparty is a pending order on a centralized limit order book (CLOB) party, while the counterparty of the Perp.fi trader is the vAMM itself. Perp.fi's vAMM uses the same xy = k curve as Uniswap.

Since the vAMM is virtualized, so is the k value - meaning it can be based on volume, open interest, funding rates and other Market data, adjusted by algorithms. As the value of k increases, the trader's slippage is lower.

Perp.fi provides traders with all the features that other perpetual contract platforms have, and it balances longs and shorts through a funding rate. The V1 version uses Chainpnk as a price oracle and provides a reference base index. The funding rate formula is the same as that of the FTX exchange. Perp.fi also has an insurance fund, which is used to ensure that successful traders can get profits.

Perp.fi is powered by a token called PERP. PERP tokens have the following functions. First of all, PERP holders govern the entire protocol, managing parameters including transaction fees, asset listing, and insurance fund management. Second, PERP holders will act as the ultimate backstop in the extreme case of exhaustion of insurance funds. If this happens, the protocol mints new PERP tokens and conducts an auction, with the proceeds of the auction paid out to the winning trader.

Founder of Perp.fi Feng Yanwen ( Yenwen Feng) and Shao-Kang Lee are serial entrepreneurs who have founded 7 company. They were pioneers in mobile app development before the iPhone, working on early real-time social and mobile experiences, and more recently in crypto for several years. Obsessed with financial engineering and the design principles of derivatives, after studying the complexity of DeFi, they realized the possibility of developing perpetual contracts based on vAMM curves.

I have been working closely with the Perp.fi team over the past few months and have found them to be very humble and hard working. They assembled a great team and attracted a lot of investors and advisors. Along the way, they were pragmatic and thoughtful at every point, and their execution was smooth.

Perpetual protocol is perhaps most advantageous in that it can trade any asset with a public price, i.e. it can trade cryptocurrencies, commodities and/or any asset class Perpetual contracts. Thanks to its license-free and censorship-resistant nature, Perp.fi protects billions of people around the world, democratizes the public's access to financial markets, and allows them to enjoy the liquidity it provides. We couldn't be more excited to be a part of it.

Disclosure: Mpticoin has developed, maintained and implemented written policies and procedures reasonably designed to identify and effectively manage conflict of interest. Mpticoin Capital adheres to a "no-trade policy" for the assets listed in this report within three days of the public release ("no-trade period"). Mpticoin Capital is an investor in the Perpetua protocol and holds PERP tokens.