The market for power perpetuals

At Numo, we see power perpetuals as a necessary evolution to the cryptocurrency derivatives market.

What is a power perpetual?

Simply put, a power perpetual is a perpetual instrument that indexes the gains of an underlying asset to a power. But really what it is, is an umbrella term for virtually all perpetuals. See, linear perpetuals, the most popular cryptocurrency derivative instrument is just a x¹ perpetual. When people say “power perpetuals” they are referring to higher order perpetuals that are non-linear.

Here are the following powers and their corresponding names:

x¹ = linear perpetuals

— (non-linear) —

x² = quadratic perpetuals

x³ = cubic perpetuals

x⁴ = quartic perpetuals

Why does crypto need power perpetuals?

The broader cryptocurrency market lacks a native non-linear derivative instrument and crypto options markets are notoriously illiquid. Thereby making it hard for traders to take advantage of market inefficiencies such as mispriced volatility and manage risk.

Right now the most popular derivative to trade in crypto are linear perpetuals. They enable traders to speculate on the change in price with leverage. But they are very limited in their use case. Higher order perpetuals on the other hand give you exposure to higher moments.

Each higher order power perpetual is meant to aggregate options liquidity into a single perpetual contract for a particular moment. A moment relates to the distribution of an underlying asset’s returns. Allowing traders to manage risk and make asymmetric bets as afforded through an options market.

x¹ = mean

x² = variance

x³ = skewness

x⁴ = kurtosis

In theory, if you have a liquid power perpetuals market across all powers or *moments* then you could get options-like exposure without needing a liquid options market. That’s huge for crypto!

So are power perpetuals popular yet?

It is no secret power perpetuals are barely traded in crypto. While they seem perfectly suited to meet the demand for non-linear derivatives, a lack of liquidity is hindering there usage. Squeeth for example, a quadratic perpetual has yet to cross $500M in cumulative volume in over a year of trading.

To figure out where the disconnect is, we talked to a bunch of DeFi users. This a summary of the feedback we got —

We started with retail perpetual futures traders as they comprise the largest market in DeFi.

This is what we felt a power perp product could offer to them…

• Asymmetric upside
• Leverage with no liquidations

This is what most perpetual futures traders told us:

• To complex
• Squared leverage is not enough
• They don’t trade options
• Most don’t care about liquidations

Then we talked to option traders. This is what we felt power perps offered:

• Constant gamma exposure
• Hedge AMM LP positions
• Implicit leverage (same as call options)

This is what option traders said about Squeeth:

• They liked the convexity!
• Preferred the UX of vanilla options (expiry)
• Not liquid enough
• Vanilla options allow for more precise hedging

Finally, we talked to Squeeth users! They already know the benefits so we’ll just skip to their feedback.

• Want even more convexity!
• Most are trading volatility (speculating, arbitrage, etc.)
• Wish there were higher moments (x⁴)
• Not enough liquidity
• Funding rates can be high
• Very restrictive for option sellers

See a pattern?

We do — every willing trader said they liked the convexity but saw lack of liquidity as the main deterrent. Most users required at least a couple million dollars behind Squeeth to make their strategies work.

So will there ever be a liquid power perp market?

A liquid power perpetuals market seems inevitable. No matter if you think crypto’s only use case is speculation, the cryptocurrency market is large and very inefficient.

A liquid market for non-linear perpetuals that enable a trader to take advantage of these market inefficiencies is not only demanded but also necessary for the cryptocurrency market to mature. As was the case with every other asset class, derivative volume should migrate from linear instruments to non-linear instruments.

How to fix Squeeth?

In 2013 Arthur Hayes started BitMex, a perpetual exchange. Inititally they had no traction. It was only when they introduced 25x leverage did demand skyrocket. Taking those lessons, we we will start with the highest achievable order — a quartic perpetual market enabling traders to bet on extreme price swings.

In the meantime, we have a quadratic perpetual market, “Squeeth” available on numoen.com. Tune in as we will soon launch a testnet for the x⁴ perpetual. The dynamics of the quartic perps will be explained in a soon to be released explainer. All in all, we think the potential for power perps remains enormous (and even that’s an understatement).

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