Introducing Parifi — the next-gen Protocol for on-chain Derivatives
Perpetual future contracts, also known as perpetual swaps or just perpetuals, are a type of derivative instrument that allows traders to speculate on the price movements of an underlying asset without owning the asset itself. Perpetual future contracts differ from traditional futures contracts in that they do not have an expiration date. Instead, they are designed to maintain a perpetual duration, allowing traders to hold positions for as long as they desire. This feature eliminates the need for traders to roll over their contracts or worry about settlement dates, making perpetual contracts more convenient and accessible.
Typically, perpetual contracts are traded on decentralized exchanges (DEXs) within DeFi platforms, eliminating the need for intermediaries and centralized exchanges. The decentralization aspect aligns with the core principles of blockchain technology, providing users with greater control, transparency, and security over their funds. They also offer traders the ability to trade a wide range of assets without needing to own the underlying assets. This enables traders to access various markets and profit from both upward and downward price movements. They allow traders to use leverage, which means they can amplify their exposure to the underlying asset. This feature attracts speculators and provides opportunities for potentially higher returns.
Problem Articulation
While perpetual future contracts have gained popularity in the DeFi ecosystem, there are some inefficiencies and current problems associated with them. Some major inefficiencies are unpredictable price deviations from the underlying asset, high funding rate and volatility, capital inefficiencies, high reliability on external oracles and high slippage to name a few. Addressing these inefficiencies and issues requires ongoing research, development, and improvement in the design and mechanisms of perpetual contracts. This includes enhancing funding rate mechanisms, improving price oracle reliability and implementing risk management measures to ensure the long-term viability and robustness of perpetual contracts.
Bringing parity to the market
The name Parifi derives from the term “parity,” serving as our inspiration to establish equivalence between traders and liquidity providers. Our fundamental concept and architecture are designed to embody a sense of balance and fairness between these two crucial market participants. By embracing the concept of parity, we aim to foster an environment where both traders and liquidity providers are provided with equal opportunities and benefits within our platform.
With Parifi, our aim is to tackle these inefficiencies head-on, promoting transparency and fairness, and ensuring equal opportunities for all market participants. By addressing the concerns surrounding perpetual future contracts, we strive to bring parity to the DeFi ecosystem.
Our primary objective is to accomplish these goals through the introduction and meticulous implementation of advanced frameworks and mechanisms, designed with a strong emphasis on novel features. These groundbreaking additions to the protocol have been carefully crafted to establish a fair and equitable environment for all market participants. Let us now delve into the comprehensive list of refined frameworks and innovative mechanisms that are being integrated into our system:
New Pricing Frameworks:
An innovative mechanism leveraging on-chain oracles to establish an adaptive pricing framework, guaranteeing both market stability and predictability. This framework functions as a metric for market liquidity, aiming to replicate the bid-ask price spread found in order-book based protocols. By employing parabolic curves, the quoted prices take into consideration factors such as asset type, prevailing market conditions, and the overall utilization of liquidity.
The incorporating of a comprehensive fee system that creates a fair system for all market participants is essential to the ethos of the protocol vision. This adaptive pricing framework allows the protocol to flexibly adjust fees in response to the prevailing market conditions.
Parifi replaces Funding Rate, Roll-over fees, Execution fees or any other types of hidden fees that are charged to the traders. The trader only pays fixed Open/Close position fees and Borrowing fees.
Borrowing fees are split into two separate components- Base borrowing fees and Dynamic borrowing fees. The Base Borrowing fee is charged to all traders and it is determined using a parabolic curve. The Dynamic Borrowing fee is a mechanism used to balance the Open Interest (OI) on both sides and it is charged to only one side of the trade, based on the market skew. As opposed to Funding Rate where the fees are collected by other sides of the trade, borrowing fees in Parifi are received by Liquidity Providers (LPs). By employing Parabolic and Sigmoid curves for the borrowing fees, the protocol ensures that traders are charged competitive fees, while also fairly compensating liquidity providers for their contributions to the AMM. This fee structure enhances a balanced and mutually beneficial environment for both traders and liquidity providers within the protocol.
The protocol employs a streamlined two-step process for order creation and settlement, reinforced by the utilization of multiple price oracles. This strategic implementation tackles concerns surrounding reliability, accuracy, and security. To combat risks like front-running and price manipulation, the protocol dynamically updates the oracle price during settlement, while also enabling traders to set a maximum slippage threshold. By incorporating multiple oracles and cross-referencing their prices, the protocol safeguards against potential issues arising from a single-source data dependency. If the price from oracles differ by more than a predetermined setting, it selects the least advantageous price within acceptable limits for the trader, bolstering fairness and enhancing overall security.
New Mechanisms:
Built on the EIP-4626 standards, the protocol incorporates a system for automatic compounding of automated market maker (AMM) fees. The feature provides liquidity providers with a passive income stream, eliminating the requirement for manual claims, and also saves a considerable amount of gas fees. Automated compounding functionality guarantees a hassle-free and uninterrupted passive income source for liquidity providers with little to no manual intervention.
Parifi aims to onboard a new generation of users to experience decentralized perpetual trading using Account Abstraction for a seamless onboarding experience, low entry barriers and making it easier for mainstream adoption of decentralized technologies.
Account Abstraction (AA) eliminates the need for users to directly handle private keys and seed phrases, creating a more user-friendly experience similar to web2 applications. With account abstraction, users can securely interact with Parifi using familiar authentication methods of social logins, without worrying about the complexities of managing cryptographic keys. This removes the need for remembering and safeguarding private keys, reducing the risk of loss or theft of funds.
One of the notable features that significantly enhances the functionality and user experience of the protocol is the utilization of ERC20 collateral tokens for gas fee payments. This integration streamlines transactions by eliminating the need to acquire and manage a separate native cryptocurrency, making the transaction process more convenient and familiar for users. This simplification enhances the overall user experience and ensures smoother and more seamless interactions with the protocol, providing a more efficient and user-friendly environment for participants.
The governance mechanism of the protocol incorporates the ability to establish configurable limits on a per-market basis. This feature allows for tailored risk parameters to be set for each asset, enhancing security and efficiency within the trading environment. By customizing risk parameters, the protocol ensures that appropriate safeguards are in place to mitigate potential risks associated with specific markets or assets and the overall markets in general. This flexibility empowers the governance entity to adapt and fine-tune risk management strategies according to the unique characteristics and requirements of individual markets, thereby fostering a more secure and efficient trading ecosystem.
As the next-generation protocol for on-chain derivatives, Parifi is doing its part to improve the landscape of perpetual future contracts in the DeFi ecosystem. By prioritizing transparency, fairness, and equal opportunities for all participants, Parifi introduces innovative frameworks and mechanisms that address the issues at hand. The protocol’s new pricing frameworks, simple fee structure, improved price oracles, and mechanisms like auto-compounding LP vaults, integration of gas fee payments using ERC20 tokens and account abstraction pave the way for a seamless and user-friendly experience. Along with that, customizable risk parameters for markets further enhance the protocol’s efficiency and security. With Parifi, the vision of bringing parity and creating a robust and inclusive trading ecosystem within DeFi becomes a tangible reality.
Join our Discord community and follow us on our social media channels to stay updated about the latest developments and be a part of the Parifi revolution. Together, we can shape the future of decentralized trading.
Originally published at https://mirror.xyz.
