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Can Curie replicate Uniswap's success in derivatives?

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This article will highlight the upgrades for Perpetual Protocol V2 and compare Uniswap's history to see if it has the potential to continue to grow as a leader in the Perpetual contract trading circuit.

Curie is the nickname for the latest version V2 of Perpetual Protocol.

The Rhythm Research Institute has already published an article onHow does Perpetual Protocol use zero-sum game principles to change AMM?The Perpetual Protocol V1 transaction mechanism is described in detail, and we'll focus on the improvements made in the latest version V2.

Reviewing the recent upgrading schemes of several major trading platforms, we find that the current platforms focus on two aspects: one is to improve the underlying trading efficiency, the other is to expand the versatility of the platform. After the successful validation of the basic transaction architecture in version V1, Perpetual Protocol is also starting to work on efficiency and versatility.

Brand new trading engine

1. How to solve the problem of setting K value

The Perpetual Protocol, in its V1 version, utilizes zero-sum game principles to create a vAMM platform with no real mobility. But this approach comes with a serious drawback: the value k, which represents the size of the virtual liquidity, needs to be set manually.

However, for a decentralized trading platform, whether relying on the active management of the project team or adjusting through governance, the setting of K value will undoubtedly bring considerable challenges to the security and efficiency of the protocol. How to solve the problem of setting k value is an important proposition for Perpetual Protocol in V2 upgrade.

We know that in spot AMM platforms, the value of K is determined by the amount of real liquidity in the capital pool. Restoring LP's role in Curie would solve the problem of setting the k value in V1. Curie cleverly uses the most advanced trading engine available: Uniswap V3.

Many analysts have suggested that Curie's switch to Uniswap V3 as its new trading engine is to use its liquidity aggregation function to solve the market making efficiency problem. However, this understanding may not be comprehensive, because the k value representing liquidity in the V1 version of vAMM was originally set by hand, so insufficient liquidity and work efficiency are not the focus of Curie's improvement.

Therefore, the real significance of the new trading engine is to further decentralize the setting of K value and solve the setting problem of K value by the market through the market-making mechanism.

2. Leveraged market making

Liquidity providers in Curie also enter the market by pledging margin. The system creates new virtual positions representing different exposures based on the amount of margin invested by LP, which LP can then use to inject corresponding liquidity pools. As a direct application of the mature Uni V3 trading engine, a variety of mature active market making schemes in the market can be directly invoked to help LP earn profits in this virtual gaming market.

The logic of being an LP (also known as Maker) in Curie is not fundamentally different from making a market directly on Uniswap. The only advantage is that you can leverage market-making funds by taking advantage of the margin trading system in the derivatives market. This can greatly accelerate the rate of LP revenue acquisition, for professional market makers with a mature profit strategy, this model undoubtedly provides a better stage.

Of course, since these are virtual positions generated by Curie's system, these virtual tokens will be held by Curie on behalf of the user, so the user does not hold the virtual tokens directly, but can only enjoy the value of the virtual positions through the increase of the margin balance after the liquidation.

Of course, in order to achieve this goal, Curie will abandon the previous side chain solution and instead deploy directly on Layer 2 to help HFC and AUTOMATED trading strategies execute better.

Higher capital efficiency

As a DeFi project, Perpetual Protocol also requires users to lock in funds. It's just that the money locked up is no longer used to provide liquidity to the platform, but instead serves as a risk-control tool for derivatives trades and a clearing tool at the end of the game.

Therefore, if you want to further improve the overall efficiency of the platform, it is necessary to start from the utilization of margin. Curie made two important improvements to increase margin efficiency.

First, the restrictions on the types of margin have been lifted to facilitate users with different positions to participate in the trading of the platform. Of course, the introduction of unsteady currency margin, to some extent, increases the difficulty of user risk management, but also needs users to participate in their own situation.

Second, the joint margin system. All positions at the same address may share a margin account balance. It reduces the complexity of managing multiple margin and increases the efficiency of margin utilization.

A more open ecology

While V1 allowed users to trade only a limited number of trading pairs, Curie gives users the ability to create new perpetual contract trading pairs, better unlocking the potential of the long tail.

For perpetual contract products, the key to achieving the goal of creating a free market without a license is the ability to obtain the target price of any pair of trades, that is, the spot transaction price, without a license, so the agreement also upgrades the predictive machine.

The V1 version uses the mainstream Chainlink as the input source for the target price, but for the longer tail of small currency trading pair, Chainlink has been difficult to meet all the demand. Therefore, in Curie, a Uniswap predictor combined with a Chainlink was used to feed prices. For those on Uniswap that have trading pairs, call its predictor price directly, and for those that do not (such as off-chain assets, etc.) enter the target price via Chainlink.

Compared to Uniswap's history, what did Curie do right

Perpetual Protocol and Uniswap are two different tracks, but the history of Uniswap shows some similarities in the direction they are going.

1. Enter the largest market segment through the innovation of the bottom trading mechanism

Before Uniswap, the industry had been experimenting with order book-based, on-chain trading platforms such as the 0X protocol. The projects have been so tepid that people are beginning to question whether there is a real need for DEX. As it turned out, the problem was the traditional trading engine, and once the new AMM engine was replaced, pent-up demand exploded.

Perpetual contracts, which have the largest volume on the derivatives circuit, may run into a similar hurdle. The early dYdX Protocol, which relied on the order book to build Perpetual contracts, failed to hit the market. Instead, Perpetual Protocol, which relied on the vAMM mechanism, achieved the number one market segment volume in less than a year after its launch.

Of course, Perpetual Protocol has somewhat abandoned the proven vAMM engine in its latest upgrade, and the continued success of the new model needs to be verified in the real market.

2. Remove access restrictions to meet the demand of the long tail market

Many may not remember, but Uniswap was not an early adopter of AMM. The Bancor project was the first to integrate AMM into spot trading. Unlike the now-familiar Uniswap, However, Bancor adopted a more closed coin strategy, requiring users to submit an application to the Bancor team for manual review to create a new pair. This closed and conservative mechanism killed Bancor's momentum and gave Uniswap a chance to overtake it.

So, openness and sharing is not just a metaphysical blockchain spirit, but a really viable business strategy. After its initial model validation in version V1, Perpetual Protocol is also attempting to gradually remove all access restrictions and become a more open and universal underlying transaction Protocol to better serve the needs of the long tail market.

3. Minimize governance

Uniswap does not require the participation of a governance mechanism in all aspects such as currency and transaction, which greatly improves the operation efficiency of the protocol and reduces the negative impact of governance failure on the protocol. Perpetual Protocol V2 also focuses on reducing the impact of governance mechanisms, from the adoption of the Uniswap V3 trading engine to the elimination of manual K setting, to the release of trade pair creation and the elimination of margin currency restrictions. Measures are moving in the direction of reducing the human impact.

What are the potential risks to Curie

Because the requirements of risk control, product design and public chain performance of derivatives are much higher than that of spot trading platform. While acknowledging the advantages of Curie's improvement, we can't ignore the following risks.

1. Will the new trading engine attract enough liquidity

After dropping the proven vAMM engine in version V2, Perpetual Protocol reintroduced the LP market-making mechanism. Whether illiquidity will return to the more independent and closed margin market, and how best to motivate LP participation in market making, remains a big uncertainty for the success of the new platform.

2. Can Layer2 meet the future development needs of derivatives

With the overall development of the blockchain industry, we believe that the expansion of public chains and the growth of computing demand for on-chain applications are likely to reproduce the development relationship between hardware and software in the computer field. That is, any computing power gains from hardware updates are quickly consumed by software updates. Therefore, Layer2 may still face transaction congestion in the future, affecting the future development of Curie protocol.

3. Whether the new system can withstand extreme market conditions

Whether the design of financial products is mature and stable cannot only depend on the logic verification, but also need to be tested by the real market. In particular, whether the overall risk control mechanism of the agreement can maintain price anchoring and guarantee immediate clearing in extreme markets requires actual stress tests in real market conditions.

4. Threats from competitors

In addition to dYdX, an established perpetual contract that has been working on Ethereum for a long time, Curie is currently competing with new rivals like Injective, which is based on a chain of independent apps. They rely on different public chains and trading engines, each with its own unique advantages. The competitive landscape across the derivatives circuit is unclear, and it is hard to tell which technological path will ultimately be validated by the market.

A little thought on the derivative track

The volume of on-chain derivatives trading has struggled to compete with that of spot trading platforms, so much so that many people have forgotten about this crucial track. However, the main problem restricting the development of derivatives today may not be lack of demand, but its development has been hampered by two key bottlenecks.

First, the structural defects of traditional derivatives make it difficult for their product model to adapt to the trading environment of low-performance public chains such as Ethereum. For example, the traditional delivery period system of futures and options products will lead to the fragmentation of liquidity and reduce the efficiency of the transaction agreement. Derivative agreements that try to copy the off-chain model are more likely to be unaccungable.

Second, the trading capacity and speed of blockchain still cannot meet the demand of derivatives high-frequency trading. It can be seen that various derivative projects are actively experimenting with various capacity expansion solutions, including application chain, Layer 2, side chain and high performance public chain. Although these expansion plans have developed rapidly in the past year, they are still not fully mature.

Therefore, in this bottleneck period of the industry, whichever project can make a breakthrough in the above two key aspects is likely to obtain the first mover advantage. As the infrastructure continues to improve, the future demand for derivatives trading is bound to move quickly to the chain. This is a huge market with unprecedented scale, and there will probably be new head DeFi projects.