What is Perpetual Protocol?
Once you’re slightly bored of just trading spot, the next thing you might look for are crypto derivatives. Like financial derivatives in the traditional financial markets, they come in various forms and various assets. One of the latest additions to the repertoire of the crypto instrument are perpetual contracts.
Perpetual contracts are similar to futures contracts in which traders bet on the future price of an asset, be that higher or lower than the current. However, unlike futures contracts, perpetual contracts don’t have an expiry date and can be traded for an infinite amount of time.
When trading these contracts on centralized platforms, uptake can be slow due to high counterparty risks and fees. And while platforms such as Uniswap have taken out the dangers of trading on centralized venues, the algorithms they use aren’t designed to deal with derivative products but to facilitate token swaps.
Perpetual Protocol builds on the innovations brought along by decentralized exchanges such as Uniswap and offers a secure platform for crypto traders looking to trade perpetual contracts. Like other DeFi exchanges, traders opening positions on Perpetual protocol don’t interact with other humans directly but with the smart contracts governing the system.
Created in 2019 by two serial entrepreneurs in Taiwan, Perpetual protocol has created a new automated market-making algorithm to enable perpetual contract trading and allowing traders to set leverage or define if positions are short or long.
When traders enter a short position, they bet against the price of an asset, in the belief that the price will go down. Therefore if the price goes up, they actually lose money, while increasing returns when the price does go down. Long positions work the other way round.
The virtual automated market maker (vAMM) that enables trading on Perpetual contracts is inspired by other automated market maker algorithms that calculate prices of assets in token pools and conduct swaps based on a function: x*y=k. “k” in this case is the liquidity pool of the protocol. The vAMM uses the same formula; however, instead of using a real liquidity pool for the “k,” it employs a virtual pool. As such, developers can set parameters of the vAMM to offer competitive perpetual products for any market.
This innovation enables markets without a market maker while maintaining on-chain liquidity, which drastically lowers the capital requirements to trade perpetuals in DeFi and could be a building block for more perpetual products in the future.
The PERP token, an ERC20 token, governs the protocol. It is designed to foster a vibrant and engaged community through staking and governance. PERP holders can stake their tokens in the staking pool for a fixed amount of time and receive rewards for staking and a portion of the transaction fees paid out in USDC.
Each staking period lasts seven days, during which holders can’t withdraw their tokens. If at the end of the seven days, tokens aren’t unstaked, they will automatically be rolled over and continue staking. Holders can claim their fees at the end of each staking period.
Another way to make the most of your PERP is to contribute PERP to the Balancer shared pool to receive further Perp token rewards.
Lastly, perp protocol incentivizes traders to exchange by paying out a percentage of trading fees back to its users.
The Perpetual Protocol Exchange
The perpetual protocol fuels the perpetual protocol exchange that is now live on the Ethereum mainnet. If you are worried about gas fees, you can rest assured, as Perpetual Protocol works with xDAI. xDAI is a layer two scaling solution that handles all core components of the ecosystem. Thanks to this integration, fees are lower than on other exchanges, while opening positions comes at zero gas cost.
A few other notable features of the exchange besides the user-friendly interface are leverage offered, long/short positions, quick set-up and withdrawals, and settlement of all trades via USDC.
The perpetual protocol is the first and only DeFi exchange today that offers up to 20x leverage on perpetual contracts in a decentralized manner.
When opening a position on the exchange, traders will send their funds to a clearinghouse which forwards the funds to the vaults and makes changes to the vAMm to indicate deposits, leverage, and if it’s a short or long position. The trader can then close their position at will and either take profit or accept losses.
Perpetual contracts in DeFi are just getting started and considering the high entry barriers to trade such instruments in traditional finance, solutions like Perpetual protocol could help enable more traders to hedge their risks with perps.
$PERP will be trading on Bitcoin.com Exchange with BTC and USDT pairs.