Pika Protocol

Executive Summary

Coin: PIKA

Token Type & Use Case: Revenue Sharing

Sector: Perpetual DEX & Layer-3 App Chain

Status: Trading: Live on Optimism | Staking: Launching June 2023

Founder: Anonymous

Maximum Supply: 100,000,000

Circulating Supply: 19,000,000

Market Cap: $6.75mm (FDV: $35.5mm)

Website: https://www.pikaprotocol.com/#/home

Protocol Description

Pika Protocol is a decentralized perpetual futures exchange on Optimism similar to GMX but offers a wide variety of crypto pairs with up to 100x leverage on BTC and ETH and up to 50x leverage on BNB, SOL, MATIC, ATOM, AVAX, FTM, NEAR, OP, ARB, UNI, LINK, AAVE, CRV, SNX, DYDX, AXS, SAND, DOGE, PEPE, and APE. Pika also offers currency pairs with up to 200x leverage on EUR-USD, JPY-USD, GBP-USD, AUD-USD, and CAD-USD.

Similar to GMX’s GLP or GTrade’s gDAI vault, Pika Protocol employs a USDC vault to provide liquidity. Anyone can deposit USDC to Pika’s USDC vault, which takes the opposite position of all traders on the platform. It covers trader profits and receives trader losses, trading fees, and liquidation profit. To prevent the USDC vault from large losses in highly volatile conditions, the vault has a max exposure parameter for each trading pair. This prevents traders from opening additional positions that would increase the vault’s exposure in one direction. Over the last 7 days, Pika’s USDC vault yielded 5.56% APR in USDC and OP.

PIKA & esPIKA

PIKA

PIKA is Pika Protocol’s utility token that has several uses cases

• Staking: PIKA can be staked to earn a share of 30% of platform trading fees.
• Trading Fee Discounts: Staking PIKA will give users a trading fee discount
• Gas: PIKA may be used as the gas token of a future PIKA Chain.

Lock Period: PIKA has a 14-day lock period associated with staking.

esPIKA

Similar to esGMX, esPIKA is a non-transferable token and can be vested for 1 year to unlock PIKA. The vesting process locks tokens for 1 year and applies a 90% fee for vesting PIKA. The 90% fee will decay linearly to zero over the course of the year, similar to the mechanism perpetual DEX and competitor Kwenta employs with inflationary KWENTA rewards.

PIKA Distribution & Vesting

Distribution

20% of the supply allocated to Core contributors and advisors is generally considered to be on the higher end of distribution allocations.

Vesting Schedule

Future Platform Rewards: All rewards are distributed in esPIKA over 3 years

Growth Fund: 6% designated for liquidity. 14% linearly vested over 3 years.

Core Contributors: Vested linearly over 2 years.

Retroactive and Future Airdrops: Distributed as esPIKA

Only 19% of the PIKA supply is circulating. Inflation will be somewhat mitigated by the issuance of esPIKA, which takes 1 year to vest at a 1:1 ratio of esPIKA to PIKA, but these rewards are delayed through the vesting mechanism but are ultimately inflationary.

Protocol Revenue

Pika Protocol charges two types of fees on the platform: an execution fee and a trade fee.

Execution Fee — ~0.0002 ETH is paid per order to keepers who execute submitted orders.

Trade Fee — Crypto: 0.1% Forex: 0.03% per trade.

Trade Fee Distribution

• 50% USDC Vault
• 20% POL
• 30% PIKA stakers

Unlocking esPIKA early also generates revenue for the treasury. esPIKA can be vested into PIKA over the course of 1 year. However, Pika Protocol will allow users to pay a 90% fee to vest PIKA immediately. The early vesting fee will be sent to the treasury growth fund. The early vesting fee will also decay linearly to zero.

Since Pika’s launch in late July 2022, Pika Protocol has generated $1.69mm in fees, 50% ($846k) went to the USDC vault, 20% ($338k) to protocol owned liquidity (POL), and 30% ($507k) was accumulated by the protocol. When staking launches with Pika Protocol v4 in June 2023, 330% of the fees will be distributed to PIKA stakers.

At average trading volumes of ~$5.2mm per day, which was true May 22 through May 28 prior to the Optimism Bedrock upgrade and including a recent increase in Forex trading volume on the Pika platform, Pika generates ~$2,175 per day in fees 20% of which are allocated to POL and 30% will be distributed to PIKA stakers according to unionepro’s Pika Protocol Stats Dune Analytics Dashboard.

Assuming constant volume throughout the year, these approximations indicate a yearly revenue of ~$400k for the protocol. Based on a 10x revenue valuation, this translates to a fair valuation of $4mm. However, PIKA’s current market capitalization is around $6.75mm, with an FDV of $35.5mm, suggesting PIKA is overvalued relative to its current revenue. To reach a 10x revenue valuation at current prices, Pika Protocol needs to increase its revenue by approximately 70%.

Ongoing Developments

Pika v4

According to the Pika Protocol Discord, Pika plans to launch version 4 of their platform in the month of June 2023, although timelines for development are subject to delays. Pika’s v4 updates will include the following:

• Decentralized Pyth Network oracle for trustless order settlement
• Over 40 markets
• Stop loss/take profit orders in a single transaction
• Margin adding/withdrawing
• PIKA staking

Pika NFT Perpetual Swap Exchange

Pika protocol intends to launch the Pika NFT Perpetual Swap Exchange for NFT perp trading, scheduled for the end of 2023.

Pika Chain & Pika v5

Pika Protocol intends to launch a layer-3 app chain built on top of the OP Stack to improve scalability while maintaining Ethereum’s security. The PIKA token is expected to serve as Pika Chain’s native gas token.

Pika v5

Pika v5 will be a hybrid AMM and an order book-based exchange.

PIKA Chart

Since its launch on May 29, 2023, PIKA has experienced a persistent downtrend.

Risks

• Pika does not appear to be a market leader, as GMX, dYdX, Gains Network, Kwenta, Level, Perpetual Protocol, and Injective have established themselves as leaders.
• The perpetual DEX sector has become increasingly saturated with perpetual DEXs and GMX forks. Saturation in this sector may make it difficult to compete.
• Pika Protocol appears to be overvalued based on its current revenue.
• Only 19% of PIKA’s supply is circulating. PIKA will experience significant inflation.

Investment Thesis

While Pika Protocol may be overvalued based on its current revenue, it has highly anticipated developments such as Pika v4 and PIKA staking which should come with incentives to promote trading on Pika. PIKA staking will also distribute fees to stakers and likely drive demand for the token. Pika Protocol’s daily trading volume of ~$5.2mm is relatively small compared to GMX (~$34mm) and Kwenta (~193mm). However, as yield opportunities and incentivized activity present themselves, Pika has the potential to capture additional market share. Pika Protocol offers a user-friendly UI, which will further improve with future iterations at a time when crypto traders are again being forced off of CEXs. The future Layer-3 scaling solution Pika Chain should also enhance the value of the PIKA token as that development nears fruition. Currently, PIKA appears overvalued at ~$0.35. However, PIKA becomes more attractive within the $0.25 — $0.20 range. Pika Protocol should continue to be monitored as it may present an investment opportunity closer to the launch of Pika v4 if the protocol can capture trading volume with upcoming trading incentives, but it does not present an immediate opportunity.

Disclaimer

This commentary is provided as general information only and is in no way intended as investment advice, investment research, a research report or a recommendation. Any decision to invest or take any other action with respect to any digital assets and/or securities discussed in this commentary may involve risks not discussed herein and such decisions should not be based solely on the information contained in this article. Past performance is not indicative of future results. Please note that products, platforms, or other items mentioned in this article may be prohibited in the US and other restricted jurisdictions.

Author:

0xBoomz — Research Analyst at Magnus Capital and former Research Analyst at The Block.

Twitter: @0xBoomz