Essential Pillars of a Robust Perpetual Trading Platform

Creating a perpetual trading platform involves addressing several critical factors to ensure it remains stable, efficient, and resilient over time. That’s because this market sector encompasses volatility and dynamic transformations, which bring up various challenges.

Overall, the foundational pillars for a successful platform include:

• Liquidity
• Pricing mechanism
• Fee system
• Reliability & performance
• Security & trustworthiness
• Risk management
• UX & Accessibility

This article analyzes each challenge and details Parifi’s solutions to overcome them.

Addressing the Challenges

Perpetual trading requires a complex mechanism that can deliver efficiency in pricing, charging fees, maintaining liquidity, and ensuring technical performance and top security. However, all this must be done by keeping all complexities backstage so users can enjoy a seamless experience.

Let’s go through Parifi’s strategy, one challenge at a time.

Liquidity Challenges

• Building and maintaining sufficient liquidity across various markets, especially for newer or less popular assets.

Liquidity is a crucial aspect, and to ensure a sufficient level, Parifi was made to start with a limited number of markets for Alpha Testnet and Beta Mainnet. Then, as the protocol grows and the platform is fully launched, the number of markets will increase progressively.

• Attracting and retaining market makers and liquidity providers in a competitive environment (in our case, liquidity providers also function as passive market makers).

Liquidity providers are an essential element in the Parifi ecosystem, and their fair compensation has been a top priority from the start. To that end, auto-compounding vaults have been introduced so LPs can enjoy the benefits of automatic value accrual, free from the hassle of manual claims.

Two different types of pools are available to cater to LP’s needs:

• Stable pools backed by stablecoins like USDC for risk-averse users
• Volatile pools backed by volatile assets like ETH for users seeking higher returns

Moreover, a significant part of the protocol revenue goes to liquidity providers to incentivize them to keep playing their crucial part.

The Quest for the Right Pricing Mechanism

• Ensuring fair and efficient pricing

One of the protocol’s major strengths is providing an efficient pricing method. Parifi has introduced an adaptive pricing framework based on Pyth Network’s Price Feeds and innovative liquidity curves. This mechanism’s advantage is that prices are constantly updated, and quoting is done by factoring in essential aspects like liquidity, active long and short positions, and utilization.

• Preventing price manipulation and market abuse by rogue traders or coordinated groups.

In this case, the solutions are a two-step process for order creation and settlement, updating the oracle price on demand during settlement and allowing traders to set a maximum slippage to mitigate risks such as front-running and price manipulation.

Not using a single data source also ensures the protocol is not prone to price manipulation or incorrect feeds.

• Addressing issues related to price slippage and order execution, especially during high-traffic periods.

The capability to set maximum slippage is a major advantage for traders. The transaction is reverted if the price deviates more than the slippage from when the order is submitted until it is settled.

Limit orders also ensure efficient order execution and enhance the protocol’s versatility and adaptability.

Efficiency in Charging Fees

• Designing a fee structure that balances generating revenue for the platform and remaining competitive with other exchanges.

The Dynamic Borrowing Fee system has been designed to ensure balance and flexibility that benefits all participants. The system ensures competitive fees by constantly adjusting to current market conditions and encouraging trades. Most of the fees go to LPs, encouraging liquidity provision.

• Communicating fee schedules and breakdowns clearly to users and ensuring transparency in fee calculations.

Parifi has replaced funding rates with this adaptive fee system, which provides high accuracy and efficiency. The whitepaper clearly presents how the base and dynamic borrowing fees are charged for full transparency.

• Adapting fee systems to changes in market conditions, regulatory requirements, and user preferences.

The protocol quotes fees based on current market conditions. To dynamically modify these fees according to market conditions, it employs a parabolic curve for the base borrowing fee and a sigmoid curve for the dynamic borrowing fee.

Reliability & Performance

• Scaling infrastructure to accommodate growing user demand and trading volumes without sacrificing performance or stability.

One reason Parifi is launching on Arbitrum is the scaling possibilities. Additionally, due to the allocation received from Pyth Network through their Retrospective Airdrop Program, the existing infrastructure can be upgraded for higher efficiency, including scaling up backend systems.

• Addressing technical issues, bugs, and glitches promptly to minimize the impact on user experience and confidence.

The platform’s launch plan has been designed in three phases to ensure all issues and bugs are discovered and handled before the full launch. The Alpha Testnet has already provided essential feedback, and the improvements made will already be visible during Beta Mainnet. Then, the additional insights gathered during the second phase will help ensure a seamless user experience after the full launch on the mainnet.

Security & Trustworthiness

• Protecting user funds and personal information from hacking attempts, data breaches, and insider threats.

Unlike CEXs, which typically require users to deposit their funds into centralized wallets, Parifi allows users to always control their assets. Hence, each user is responsible for the security of their wallets and private keys.

• Building and maintaining trust with users and regulators through transparent security practices and compliance with industry standards and best practices.

Parifi contracts have undergone thorough auditing by a team with experience with reputable DeFi derivatives protocols. The audit report and the protocol’s open-source code have been published on the GitHub repository for full transparency.

Enhancing Risk Management

• Implementing effective risk management tools and controls

With Parifi, traders benefit from the ability to adjust their strategies according to predefined risk tolerances, while liquidity providers gain from controlled exposure to specific assets. This approach ensures precise and accessible risk management, fostering a sustainable and stable market experience for all users.

• Monitoring and managing leverage and margin requirements to prevent excessive risk-taking and potential defaults.

One of the advantages traders get from engaging with Parifi is adjusting leverage based on their risk profile. For better risk management, the protocol has also introduced configurable limits per market that allow the protocol’s governance in the future to set customized risk parameters for every asset, adjusting maximum open interest and exposure.

• Balancing risk management practices requires attracting and retaining traders and liquidity providers in competitive markets.

This goal is reached by ensuring equality between traders and liquidity providers, competitive fees, useful instruments, fair compensation, and automatic value accrual for LPs.

Seamless UX & Accessibility

• Designing an intuitive and user-friendly interface that caters to a diverse range of traders with varying levels of experience and technical expertise.

This is precisely Parifi’s ethos: to make perpetuals accessible to all and bring parity among all market participants. The UI has been designed to be as simple and friendly as possible, and the Alpha Testnet has provided valuable feedback on improving it even further, for example, by adding light/dark themes.

A Multidimensional Approach for a User-Centered Platform

A complex approach is required to handle all the aspects necessary to ensure a perpetual platform’s robustness, stability, and efficiency.

Parifi’s architecture has been crafted to address all these challenges by employing liquidity curves to control price deviations, incentivizing LPs to maintain a strong flow of liquidity, allowing traders to set a maximum slippage, and ensuring timely liquidations due to PythNetwork’s Price Feeds.

For more information or assistance, please follow these links:

• Telegram: https://t.me/parifi
• X (formerly Twitter): https://twitter.com/parifinance
• Discord: https://discord.com/invite/w87gpcau8X
• Mirror: https://mirror.xyz/0xC9F89fb9B2C15B6120f81759A472489658785953
• Website: https://parifi.org/
• Whitepaper: https://arxiv.org/abs/2308.16256