SquaredLabs’ Ecosystem: A liquidation-free approach to derivatives trading.

The world of decentralized finance (DeFi) is constantly evolving, with new innovations emerging at a breakneck pace. Among the most exciting recent developments is the rise of DeFi derivatives, which aim to bring the power and flexibility of traditional derivatives trading to the decentralized ecosystem.

SquaredLabs, recently released whitepaper is set to change the game for DeFi derivatives trading with a unique liquidation free ecosystem.

What are Power Perpetuals?

Power Perpetuals are an innovative type of derivative product that allows traders to gain leveraged exposure to an underlying asset without the risk of liquidation. While current power perpetuals offer long leverage without liquidation, they require collateral for short positions, which come with the risk of liquidation.

Potentia takes this concept a step further by eliminating the need for collateral for short trades and removing the liquidation risk entirely for both long and short traders.

Stay tuned for more information as we approach our mainnet launch.

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Its not magical, its mathematical.

Unlike traditional perpetual swaps or futures contracts, Power Perpetuals are “indexed” to a power of the price of the underlying asset, creating a unique return profile with “positive convexity”.

What is “indexing” and “positive convexity”?

Indexing

To explain indexing in the context of Power Perpetuals, let’s use a simple example.

Suppose the current price of Bitcoin (BTC) is $100, and we have two Power Perpetuals:

1. BTC² (Bitcoin squared): Indexed to the square of the price of BTC
2. BTC³ (Bitcoin cubed): Indexed to the cube of the price of BTC

Indexing means that the value of these Power Perpetuals is calculated based on the respective power(^p) of the underlying asset’s price.

For BTC², the value is calculated as:
Value of BTC² = ($100)² = $100 * $100 = $10,000

For BTC³, the value is calculated as:
Value of BTC³ = ($100)³ = $100 * 100 * $100 = $1,000,000

Now, let’s see what happens when the price of BTC changes by 10%:

Scenario 1: BTC price increases to $110 (+10%)

• Value of BTC² = ($110)² = $12,100
• Percentage change: ($12,100 — $10,000) / $10,000 = 21%
• Value of BTC³ = ($110)³ = $1,331,000
• Percentage change: ($1,331,000 — $1,000,000) / $1,000,000 = 33.1%

Scenario 2: BTC price decreases to $9,000 (-10%)

• Value of BTC² = ($90)² = $8,100
• Percentage change:
  ($8,100 — $10,000) / $10,000 = -19%
• Value of BTC³ = ($90)³ = $729,000
• Percentage change:
  ($729,000 — $1,000,000) / $1,000,000 = -27.1%

As you can see, the value of the Power Perpetuals is indexed to the respective power of the underlying asset’s price. When the price changes, the value of the Power Perpetual changes by a different percentage compared to the linear price change. This is the essence of indexing in Power Perpetuals.

Positive convexity

In one sentence,
Traders gain more when price moves in their favor and loose less when price moves against them.

Lets understand in detail,

Suppose there are two traders:

Alice, who holds a Power Perpetual with a power factor of 2 (e.g., BTC²), and,

Bob, who holds a linear perpetual swap.

Both traders have a position size of $1,000, and the current price of the underlying asset (e.g., Bitcoin) is $10,000.

Scenario 1: Price increases by 10%

• New price: $11,000
• Alice’s Power Perpetual (BTC²) return: (1 + 0.1)² — 1 = 0.21 = 21%
• Alice’s new position value: $1,000 × (1 + 0.21) = $1,210
• Bob’s linear perpetual swap return: 0.1 = 10%
• Bob’s new position value: $1,000 × (1 + 0.1) = $1,100

Scenario 2: Price decreases by 10%

• New price: $9,000
• Alice’s Power Perpetual (BTC²) return: (1–0.1)² — 1 = -0.19 = -19%
• Alice’s new position value: $1,000 × (1–0.19) = $810
• Bob’s linear perpetual swap return: -0.1 = -10%
• Bob’s new position value: $1,000 × (1–0.1) = $900

In both scenarios, Alice’s Power Perpetual position experiences a larger gain when the price moves in her favor (Scenario 1) compared to the loss when the price moves against her (Scenario 2). This is the essence of positive convexity.

Furthermore, Power Perpetuals offer continuous funding and no expiration date. This means that Alice can maintain her position for as long as she wants without the need to roll over or close her position at a predetermined date. The continuous funding mechanism ensures that the price of the Power Perpetual stays aligned with the underlying asset, providing Alice with the flexibility to manage her position according to her trading strategy.

This means that traders can potentially earn more when the price moves in their favor than they lose when it moves against them — a significant advantage over linear derivatives, providing traders with unparalleled flexibility and control over their positions.

What is Potentia and Genie, and why do they Matter?

At the core of the ecosystem is the Potentia Protocol, the foundational layer for permissionlessly creating and managing Power pools with the ability to choose power (^p) ranging from 2 to 16. Potentia interacts with the protocol, which defines the mechanics of the Power Perpetual system. These products provide traders with unique exposure to the underlying assets, with varying levels of convexity and leverage.

Genie represents the user-facing DEX of the ecosystem, providing a seamless interface for traders to access and interact with the Power Perpetual markets created through the Potentia Protocol

The introduction of Potentia will be a major milestone for the DeFi derivatives space, as it offers several key benefits over existing derivative products:

• Customizable Leverage: Traders can adjust the power factor (p) of their perpetual derivative to suit their risk appetite and market view, effectively tuning their leverage and convexity. This flexibility enables a wide range of trading strategies and allows traders to optimize their capital allocation.
• No Liquidation Risk: Potentia and Genie does not expose traders to liquidation risk for both long and short trades, as the value of the derivative always remains positive. This feature is particularly attractive to traders who seek to manage risk while still having the potential for enhanced returns.
• Capital Efficiency: Power Perpetuals enable more efficient capital allocation when trading with maximum leverage, with leverage increasing exponentially with positive returns and diminishing with negative returns. This dynamic leverage adjustment helps traders navigate varying market conditions more effectively.

To summarize:

• Potentia is a permissionless protocol that allows liquidity providers to create power perpetual pools with customizable power factors. This opens up the creation and trading to a wide range of participants, fostering a more mature and accessible derivatives market.
• Genie, on the other hand, is a suite of user-friendly tools and DEX that make it easy for traders to access and utilize the power of Potentia Protocol, as well as advanced features like short-term hedging strategies, automated trading algorithms, cross-asset perpetual routing and a lot more.

The Road Ahead SquaredLabs’ whitepaper also outlines an ambitious roadmap for the future of Power Perpetuals.

This is just the beginning — SquaredLabs plans to roll out composite pools for enhanced capital efficiency and cross-chain deployments on major Layer 1 and Layer 2 networks.

As the DeFi derivatives space continues to grow and mature, innovations like Power Perpetuals will play a crucial role in driving adoption, liquidity, and capital efficiency. By providing traders with flexible, customizable, and risk-managed exposure to a variety of assets, SquaredLabs will position itself at the forefront of this exciting new frontier in derivatives approach without liquidation.

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