Perpetual’s v2 “Curie”: A Nobel Prize for DeFi Applications?

eaglelex
BanklessDAO
Published in
9 min readOct 5, 2021

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Graphic by @Dippudo

At the beginning of the nineteenth century, Marie Curie was the first woman to win the Nobel Prize. Moreover, she was also the first and only person to win two Nobel prizes in different fields. Perpetual Protocol is naming their v2 “Curie.” Hence, Perpetual’s laudable aim is to promote more female involvement in the crypto space. At the same time, the chosen name reveals an ambitious program: providing a disruptive innovation able to change the future of derivatives trading, as Marie Curie did with physics and chemistry.

Background

Before diving into the new version of the protocol, some background information is needed. Perpetual Protocol is already considered one of the leading decentralized derivatives platforms in the blockchain industry with over $19 billion in trading volume in the first 7 months (after its launch in December 2020).

In 2021, PERP, the native token of the protocol, underwent an astonishing price action within the DeFi ecosystem: in January, the value of the token was $1; at the beginning of September, the token surpassed the value of $20 with a circulating market cap of almost $1 billion. The recent decrease does not affect what can be regarded as a triumphant march, compared to the overall lukewarm DeFi summer.

How can such a success be explained? One of the milestones of Perpetual Protocol is the staking and rewards program launched in March 2021. But the more important advancements are the enhanced functionalities of the trading platform through the advent of Perpetual Protocol v2 — “Curie.” The main features of the new protocol were announced at the end of June 2021.

The new version of the protocol will:

  1. grant the possibility of building AMM on top of Uniswap v3, enabling users to take advantage of concentrated liquidity and to trade with leverage,
  2. allow the creation of so-called “private markets”,
  3. launch on Arbitrum, giving users an enhanced UX with fast, cheap and reliable trading,
  4. allow users to operate in a cross-margin mode and use different assets as collateral,
  5. roll out a new tokenomics strategy.

Let us take a look at the listed innovations in more detail and present a comparison with the previous version of the protocol.

1. Building on Top of Uniswap v3

The major innovation of Curie is its connection to Uniswap v3. This element opens a wide array of new opportunities for market makers and traders, the two main user-types of Perpetual Protocol v2 — Curie.

1.1. Concentrated Liquidity

The protocol has introduced a new role in the ecosystem: the “maker”. The maker provides liquidity in USDC and is able to mint virtual tokens, “v-tokens,” through the renewed clearing house, which acts as virtual Automated Market Maker (vAMM). In doing this, the maker can apply leverage up to 10x its liquidity, opening the door to a whole range of new LP strategies. For example, in supplying 100 USDC, the maker can create up to 1000 vUSDC tokens (10x leverage). These v-tokens can then be deployed into Uniswap v3 pools created by the protocol. The 1000 vUSDC could be deployed as 0.25 vETH and 500 vUSDC (assuming an ETH price of $2000). Makers select a price range for their liquidity according to the Uniswap v3 LP model.

Makers can therefore choose the price range they want to use within the current trading price. This means that the 50:50 ratio could be abandoned for a different ratio (e.g. 30:70), depending on the current market situation. This is the goal of Uniswap v3 concentrated liquidity: the makers can now take advantage of market skews by supplying liquidity at customized price ranges.

In this way, everyone is able to create private markets in a permissionless ecosystem! The makers, who can also be DAOs or other protocols, will develop profitable strategies and earn trading fees, calculated by Uniswap v3.

1.2. Trading with Uniswap v3 as Execution Layer

Pure traders can capitalize on Uniswap v3 using v-tokens. Traders can deposit USDC and use up to 10x that amount in vUSDC tokens. For example, a trader can deposit 100 USDC and place a long order with 10x leverage, the clearing house will mint 1000 vUSDC and use those tokens to buy vETH from the vUSDC-vETH Uniswap v3 pool, resulting in an effective leverage of 10x.

Different from what happens with lending protocols, Perpetual Protocol offers broad leverage. Being able to trade with up to 10x leverage is much more than what is possible to get from other lending protocols. In addition, with Curie’s unified interface, the user has many different tools and trading opportunities all in one, without having the need of accessing different apps.

2. The Creation of Private Markets

Within the package of new tools that Curie will bring to the DeFi ecosystem, private markets will play a significant role. The protocol will allow every user the deployment of perpetual markets in a permissionless way. The only requirement will be to choose an asset able to rely on a trustworthy oracle for the determination of prices: e.g. Chainlink or Uniswap.

Private markets will have a dedicated insurance fund (see below n. 5) and users will be able to stake their PERP and get part of the generated fees. Private markets are also a perfect tool for DAOs willing to enhance the use cases of their tokens.

3. Cross-margin Mode + Multi-assets Collateral

Curie will allow traders to open multiple positions using their account balance as a common pool of collateral. It is planned that traders will also be able to use multiple assets as collateral.

Cross-margin Mode will collateralize each user’s entire account balance across all open positions. This is a significant innovation compared to the previous version of the protocol. Perpetual v1 evaluated the margin ratio by market; Perpetual v2 does this by account. This means that, as a position becomes more profitable, the user’s available margin will increase as the entire account balance forms the collateral.

The Perpetual team has further clarified that Curie will implement a tool on the UI to enable users to track the collateralization factor, in calculating the margin ratio for liquidations. The new design gives traders more flexibility to express themselves in the market.

It should be noted that, even after the launch of the multi-assets collateral option, trades will still be based in USDC.

4. The Launch on Arbitrum

Perpetual has always considered gas fees as one of the main obstacles for retail trading. To grant the possibility of cheaper transactions, the Perpetual Protocol v1 was deployed on xDai, an Ethereum-based sidechain.

In order to increase trading volume, Curie will be deployed on Arbitrum, the most successful “layer 2” solution so far.

This may not be a great surprise, as everyone is moving to Arbitrum in order to assure faster and (much) cheaper transactions! But, given the already significant amount of value locked on Arbitrum, Perpetual’s layer 2 deployment could have a special effect, in terms of enhanced frequency of trade, and open more opportunities for retail investors. As stated by one of the main contributors of Perpetual during an interview, the idea of the team is going beyond the mainnet trading volumes.

5. A New Concept of Tokenomics

Aside from granting governance rights, PERP can be staked within the protocol to get rewards and a portion of fees. In this regard, Curie’s innovations will also bring some changes with respect to the generation of fees. In the previous version of the protocol, fees came from the markets deployed by Perpetual DAO (so called “public markets”).

With Curie, fees will be generated from three different sources:

  • transaction fees from public markets, i.e. markets created by the Perpetual DAO,
  • transaction fees from private markets, i.e., markets created by users,
  • rehypothecation: funds in the insurance fund may be utilized in low risk interest protocols to increase staker earnings.

Each one of these revenue sources is expected to grow as more markets are added to the protocol. Combined with a potentially higher fee income from leveraged liquidity provisioning and fees from private markets, the Perpetual team expects that total fees will be several times higher than what Perpetual Protocol v1 could achieve.

Curie’s new design also influences the role of the insurance fund, which regularly collects trading fees paid by traders. In Perpetual Protocol v1 the insurance fund was essential, as the protocol played the counterparty role in taking the risk to pay out trader profits and collect losses through the insurance fund. With Uniswap v3 every Perpetual Protocol v2 trade will occur between two counterparties (i.e. no v2 position will exist without a corresponding opposite), as funding payments pass between the counterparties via the liquidity pools. For example: if a trader places a long ETH order, a maker will conversely be taking a short and so the funding rate will basically transfer from one to the other, depending if it’s longs paying shorts or vice versa.

The new design should significantly reduce the insurance fund’s role. The fund will still exist, but it will step in only in situations of highly volatile markets.

This should be considered good news for PERP tokenholders, as the token acts as a backstop to protect the solvency of the protocol. Should the insurance fund be depleted, PERP functions as the “token of last resort,” in that it will be minted by the protocol to re-collateralize the system. The risk of facing a significant dilution seems reduced, in the light of the new design of the protocol. Other good news is that the Perpetual team is considering the possibility to enable PERP staking on Arbitrum.

Assessment

The innovations of Perpetual Protocol v2 can be summarized in one word: scaling.

Concentrated liquidity on Uniswap v2, Cross-margin operations, multi-asset collateral, Arbitrum deployment and the new tokenomics should significantly augment the trading volumes and offer to any DeFi user the possibility of creating their own market or testing Perpetual’s trading potential.

One unique feature of v2 should be particularly highlighted: the maker can leverage the liquidity provided. When someone provides liquidity on Uniswap or Sushiswap this is basically done at a one to one ratio. Providing liquidity with Perpetual protocol v2 means being able to apply leverage and tremendously enhance potential earnings.

Compared to Perpetual Protocol v1, which can be depicted as a success story, Curie will enable new functions and ameliorate the user experience. Arbitrum will attract user volume with lower gas costs. The market maker and retail user growth should drive Perpetual Protocol v2 volume and fees above v1 levels. For fees, the goal could be achieved even without an increase in trading volumes, given the strengths of Uniswap v3 concentrated liquidity.

As the recent Perpetual grants program further demonstrates, all this is done in respecting the spirit of the DeFi ecosystem: building together with open-source software and enhancing user experience through collaboration and composability.

If Nobel Prizes would be awarded in the field of DeFi, Perpetual Protocol would be a candidate.

Next Steps

The official launch date of Curie has not yet been set. The team has divided the deployment process of the new protocol in 5 steps:

v2.0 Testnet

v2.1 Mainnet and default maker strategy

v2.2 Limit order and liquidity mining

v2.3 Multi-asset collateral

v2.4 Permissionless market creation

In the video of the latest community call it is possible to see the new UI, also available on smartphones. The internal testing is still going on and the Testnet will probably be released at the beginning of October 2021.

Merchandising:

Check Perpetual Protocol’s online merch shop!

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains. You also affirm that the sole purpose of reading this article is for expanding your educational awareness and nothing more. Be also aware that leverage puts your funds at risk of liquidation at any time. Be sure you understand the risks of leveraged trading before proceeding.

eaglelex is a Law Professor interested in blockchain technology and DAO governance (twitter: @eaglelex_eth)

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