Perennial is an on-chain derivatives protocol, built from scratch as a fundamental piece of DeFi infrastructure. Let’s explore what makes Perennial unique.
What is Perennial?
Perennial is a user-friendly trading platform that offers a flexible and efficient way to trade derivatives. It’s powered by a fully on-chain automated market maker (AMM), allowing Perennial to match trades directly at current market prices. The platform uses dynamic funding, fee, and interest rate mechanisms to incentivize a balance in skew and open interest, helping to control risk while efficiently meeting the needs of liquidity providers and traders.
Perennial is more than just a trading platform; it’s designed to support the growth of other financial products and applications through its adaptable framework. With a team from Coinbase and Polychain, and support from top investors like Archetype and Scalar Capital, Perennial is a pioneering force on the Arbitrum network, dedicated to creating new markets and trading opportunities on a shared liquidity base.
You can learn more about Perennial’s founding and backers here. To understand why Perennial are key innovators in the decentralized perps space, let’s take a look at their mechanism design, and how these design choices impact the trader and LP experience.
How Perennial Works
Perennial operates as a peer-to-pool derivative Automated Market Maker, facilitating seamless and trustless trading between traders (Takers) and liquidity providers (LPs or Makers) using decentralized oracle networks.
In Plain English
To cut through the jargon, this means Perennial relies on makers and LPs who back profits and losses, and traders who take positions and pay a small fee for the privilege. Since perennial perps are synthetic and cash settled, this means prices from Pyth are used to settle trades. By using these oracles, Perennial can offer nearly unlimited markets without needing the underlying asset on the same chain, or onchain at all.
What is Accomplished?
This design gives traders access to two sided markets, meaning traders can obtain leveraged exposure to simple long or short positions, and even exotic payoffs such as power perps.
When we say “Takers,” think of the end user, or retail trader. These Takers deposit collateral to open positions on a desired market, which are matched against positions held by Makers. While Perennial’s system is designed to facilitate a balance between long and short traders, Makers back any market imbalances, ensuring Takers are able to enter and exit positions at will. Makers earn fees for filling these positions in exchange for taking any net exposure.
Key Features For Traders
Perennial’s system is similar to other decentralized perps AMMs you might be familiar with, but has a few unique design elements aimed at improving the trading experience.
Collateral and Settlement
Traders use USDC.e to trade on Perennial, a stablecoin familiar to DeFi traders, backed by real-world assets. Settlement happens via DSU, a wrapped version of USDC.e, ensuring trustless and flexible transactions. Most traders won’t notice the technical details, as DSU is fully backed by and redeemable for USDC.e. If you’re interested, you can learn more about DSU here.
Low Fees
Fees on Perennial are dynamic, and set individually for each market, but can be as low as $0 for maker orders. Dynamic fees allow Perennial to offer the lowest fees possible while still protecting LPs from manipulation, and properly incentivizing a neutral skew. Parameters for each market can be found in the Market Info tab of the trading UI.
Up to 100x Leverage
Perennial offers industry leading capital efficiency for traders with up to 100x leverage on certain pairs. With higher capital efficiency, traders have more flexibility in how their capital is put to use.
A Customizable LP Experience
The key difference over similar perps AMM designs is Perennial’s unique approach to market making and liquidity provision. In most AMMs, vaults are used to back many different markets, while in order book systems, market makers manage orders for specific markets. Perennial has leveraged their AMM to create a hybrid approach. Vaults exist to back the liquidity of several different markets at once, helping to bootstrap popular markets like ETH, LINK, and BTC. Additionally, market makers can take a more active approach, making specific markets based on their own risk tolerance.
Providing Liquidity Through Vaults
Like most similar perps AMMs, Perennial offers vaults which consolidate collateral and passively provide liquidity to multiple markets. Vaults take on directional exposure and receive interest and funding from the markets they back. Vaults help bootstrap new markets by sharing liquidity with existing ones and offer diversified yield by enabling LPs to earn from multiple markets simultaneously.
Leveraged Market Making
Perennial’s key differentiator and most innovative feature is leveraged market making. While market making with leverage is a common practice on centralized exchanges, using an AMM to facilitate the practice is a new approach, potentially solving one of the biggest limitations of AMM design.
LPs can provide liquidity directly to specific markets with up to 100x leverage by using the “Make” interface. This approach offers more efficient use of collateral and potentially higher fees and interest. However, it comes with liquidation risks, so LPs must carefully manage their positions and hedge their exposure.
By using this hybrid approach, Perennial is able to cater to a range of different market participants to make markets. More passive and risk averse actors can simply deposit in a diversified vault which backs highly liquid markets. To provide long tail assets or more niche products, sophisticated actors can actively make markets with high capital efficiency and tailor their approach to their own needs.
Permissionless Market Creation
As of the publication of this blog, Perennial’s markets are deployed only with permission. However, the previously covered approach to tailored market making is designed to facilitate permissionless market creation in the future.
With permissionless market creation, integrators and users have the freedom to design their own derivative markets, choosing everything from the payoff structure to the fee system. This level of customization is unparalleled in DeFi and opens up a world of possibilities for traders and developers alike.
The Perennial Mechanism
For a detailed view of perennial’s mechanism design, parameters, and other technical specifications, please see Perennial’s documentation, or join the Perennial Discord server. To understand how Perennial’s mechanism balances flexibility with risk management, let’s dive in to some of the specific mechanisms which power the AMM.
Funding Rate
The purpose of Perennial’s funding rate mechanism is to provide a balance between demand for longs and shorts, reducing exposure and risk for Makers. Reducing this systemic risk is one way that Perennial increases capital efficiency.
When longs and shorts are imbalanced, the funding rate on Perennial begins to move based on the size of this imbalance. For example, if more traders are long, the funding rate will begin to increase, causing longs to pay shorts. A “fair” rate for funding is found when longs and shorts are in balance, which may be higher or lower depending on organic demand in the market. The result is that longs and shorts typically stay balanced.
Interest Rate
An interest rate applies to both longs and shorts, and depends on the utilization of available liquidity. This interest rate stays low when there are enough makers to satisfy trader demand, and moves higher as liquidity is exhausted.
Much like the funding rate mechanism incentivizes a balance between longs and shorts, the interest rate incentivizes a balance between Makers and Takers, rewarding LPs the most at times when their liquidity is most in-demand, and preventing malicious attacks on open interest by increasing the cost of these attacks.
Oracle Agnosticism
While Perennial’s current markets use Pyth’s high speed oracles, the system is designed to support multiple oracle integrations. This ensures a high degree of customization for future markets, both permissioned and permissionless, and future-proofing as oracle technology changes.
Integrating Perennial
By prioritizing capital efficiency, composability, and customization, Perennial has positioned itself as a DeFi primitive rather than simply another perps trading platform. Perennial’s liquidity layer is engineered for integration with venues like Kwenta which specialize in building interfaces and advanced tooling for traders.
Perennial’s unique approach to facilitating flexible market making with a fully onchain AMM, a mechanism designed to mitigate risks for all parties, and a path to fully customizable and permissionless markets makes Perennial an ideal partner for products like perps aggregation.
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