Product deep-dive #1: PLP — Become a market maker & earn 85% of protocol revenue!
This article is the first part of the series that will provide a comprehensive look at Perp88 before its official launch on November 15th. Today, we will be covering one of the core features, the PLP fund, which is an essential component that powers our leveraged trading function on Perp88. Below are the key topics that we will cover in this article:
- What is the PLP fund
- PLP Assets & Target Weight
- What do you get from being a liquidity provider in the PLP fund?
- What are the safeguards that Perp88 has put in place to protect PLP depositors
What is PLP fund?
The PLP fund is a pool that provides liquidity to the exchange when traders open a leveraged position or when traders swap assets on the platform. The PLP fund is made up of stable coins and crypto assets as follow:
- Polygon (MATIC)
- Ethereum (WETH)
- Bitcoin (WBTC)
- USD Circle (USDC)
- USD Tether (USDT)
By acting as the market maker for leveraged traders, the PLP fund also accrues profits when traders make a loss. Users can deposit any assets above into the PLP fund, and in return, Perp88 will mint the PLP token of equal value to the deposit for the users. The token represents the share of the ownership of the fund.
To withdraw assets from the PLP fund, users can burn the PLP token of equal value to the withdrawals. Users can select which of the five assets in the PLP fund they would like their withdrawal to be in.
PLP Assets & Target Weight
Since PLP fund functions as the liquidity for traders, it is highly important to ensure that there’s sufficient liquidity of each type of asset to cater towards the demand of leveraged trading and swapping. With that said, Perp88 has assigned a target weight to each of the asset in the PLP fund.
The table below represents the target weight for each asset type within the PLP fund:
As a liquidity provider, you will have exposure to this basket of assets.
To keep the assets in the pool close to the target weight, we use the following mechanics:
Deposit fees are charged when you deposit an asset whose actual weight is higher than the target weight to prevent the fund from having excessive amount of one type of asset. To avoid paying deposit fees, users can deposit assets whose actual weight is lower than the target weight.
Similarly, withdrawal fees are charged on an asset whose actual weight is lower than the target weight to prevent the asset from being withdrawn. To avoid paying withdrawal fees, users can take withdraws in assets whose actual weight is higher than the target weight.
What do you get from being a liquidity provider in the PLP fund?
Depositing funds into PLP yields multiple benefits:
- 85% of Protocol Revenue in the form of USDC rewards:
Perp88 will allocate 85% of the protocol revenue to the depositors of the PLP fund (in comparison to the industry rate of 70%), which are: position opening / closing fees, borrowing fees, swap fees, and PLP deposit / withdrawal fees. The protocol revenue will be converted into USDC and distributed to liquidity providers. Note that in order for the depositors to receive USDC yields, they must stake their PLP tokens. - Profit from acting as the market maker for Perp88 traders:
Since the PLP fund acts as the market maker for the traders of Perp88, it accrues 100% of the profits in the form of traders’ losses. PLP tokens do not need to be staked in order to accrue profits from countertrading. Based on historical data, it has been shown that as a group and over a period of time, traders tend to make losses from trading. Since their inception (as of September 2023), traders on GMX have accrued a total loss of ~$45Mn (~12.5% of market making liquidity) while traders on Gains Network have accrued a total loss of ~$3.5Mn (~35% of market making liquidity). Based on these statistics, long-term focused LPs can make substantial passive return.
If you are already holding crypto assets for the long term, PLP fund presents a great opportunity for you to earn additional yields for your holdings.
3. Yields Generated from Re-deployment of Unutilized Funds: In the near future, Perp88 will have a capability to deploy a portion of unutilized funds will be deployed into safe yield-generating strategies, earning extra returns for LPs.
Safeguard Protecting PLP Depositors 🛡️
Perp88 has multiple safeguards in place to help protect liquidity providers from potential price manipulation or from taking on too much risks. You may have heard of a recent exploit on a leading perpetual exchange, which was caused by their 0% price-impact trading feature. While Perp88 users can enjoy similar benefits, we have put in place to protect our PLP depositors from those risks:
1. Robust Oracle Price Feed 💱
Perp88 uses Chainlink’s price feed, which aggregates price from multiple sources. Prices are updated every 27 seconds, making it very difficult to front run profitably. To front run profitably, price deviation must be greater than the position opening / closing fees.
2. Dynamic Funding Fee 📈
Perp88 implements a dynamic funding fee on top of our single slope Borrowing Rate model, which will be discussed in the next article. The objective of implementing funding fee is to bring a balance between long and short exposure on Perp88.
This means that if there’s significantly more long exposure than short exposure, the traders with short exposure may receive subsidization or even earn funding fees while long traders pay higher funding fee and vice versa.
In addition to bringing back the balance between long and short exposures on Perp88 open interest, another benefit of implementing funding fee is that it also opens up an opportunity for protocols to build carry-trade vaults on top of our trading feature, by opening a trading position with there’s negative funding fee (i.e. when traders earn fees) while hedging their leveraged position on another exchange, arbitraging the funding rates in the process. If this is something that you are looking to do, please get in touch with us via DM on Twitter.
We will provide more details on our Dynamic Funding Fees in the next article.
3. Maximum OI Limit ⛔️
Perp88 places a limit on the maximum OI for each trading asset. This is to make sure that traders do not take advantage of our 0% price impact benefit and that the OI does not go above a safe threshold.
Initially, the platform may place a small limit on the maximum OI, and as we deem the threshold conservative, we will gradually push up the limits.
4. Min Profit & Time ⏰
The Min Profit & Time requires that the traders must keep his position open for over a certain amount of time or make at least a certain percentage of profit on position size in order to close the position with profit.
This parameter is created to protect PLP depositors from potential price manipulation, as it will significantly increase the uncertainty and the cost of a successful exploit:
- The attacker will need to manipulate the price over the profit threshold in order for them to receive profits from trading, which requires significant cost
- If the attacker is unable to manipulate the price over the threshold, they must maintain the price for extended period of time, increasing the chance of arb bots participating
In the beginning, we will not activate this parameter, as we believe Polygon’s block architecture and chainlink’s frequent price update (every 10s) and 0% price deviation requirement for the update have already made it nearly impossible to successfully pull off a similar exploit.
However, if we feel that our user’s fund security is threatened, we will activate the this security parameter.
Closing Remarks 🙇🏻♂️
In the next article, we will be doing another deep-dive where we share more info about the Leveraged Trading feature, which boasts high leverage and high liquidation threshold. We’ll be going through in details what happens when traders open and close their positions. We will also go through details on the Borrowing Rate and the Funding Rate model as well as how the liquidation process is carried out at Perp88.
In the meantime, please do not forget to follow our official Twitter account for the latest updates on Perp88, or join our community groups to start chatting with other community members!
