Wtf is SQUOL?
It’s been an exciting year for DeFi derivatives, huh? We’ve witnessed the rapid growth of DeFi protocols, especially within the Solana ecosystem. We’ve covered projects exploring DeFi concepts like exotic options “Cega” and delta-neutral AMM vaults“OptiFi”. These protocols demonstrate how composability can introduce complex trading strategies easily to users.
Riding on this derivatives train, let’s talk about a relatively new DeFi product today — Power Perpetuals.
Table of Contents
- What are Power Perpetual?
- Trading Strategies
- Concluding Thoughts
Part 1. What are Power Perpetual?
In August of 2021, Paradigm introduced a new type of derivative — Power Perpetuals. This primitive is an evolution of everlasting options that improves hedging for non-linear things like AMM pools. Think of it like squaring the index price in a perpetual swap. Shortly after, Opyn shipped a new DeFi primitive called SQUEETH, or Squared ETH.
01 Exchange introduced their own power perpetuals — SQUOL, squared SOL. Imagine a regular SOL perpetual future but raised to a power so, it’s like leveraged exposure with super saiyan power.
For example, Vegeta purchase $100 worth of Squol, and after a while the price of SOL doubled from $200 to $400. The value of Squol purchase rises to (2x)², or 4 times to $400. On the contrary, if SOL drops by 50% to 100, Squol still drops less than the normal 2x leverage.
The reason why you want to power the price of something is that it gives you a convexity curve and when you compare the payoff of a Long Squol versus a typical 2x leverage, you make more money if the price goes up or lose less if it goes down.
Part 2. Squol Trading Strategies
Longing Squol
Gives trader a leveraged position with exponential SOL² upside, protect downside and no liquidations! Squol will make more when the price of SOL goes up and loss less when SOL goes down. However, Long Squol trader have to pay a much higher funding fee for getting this convexity exposure. Squol give buyers an SOL² payoff, which is similar to always holding an at the money call option.
Shorting Squol
Trader uses SOL as a collateral and trader sells Squol to the Long Squol trader and in return they receive a funding rate for taking the position but there is a risk of being liquidated. A trader’s exposure to the price of SOL depends on the amount of collateral they have deposited, as well as if they own the collateral or have borrowed it with stablecoins elsewhere.
Vaults
Similar to DeFi options vaults (DOVs), Powers open multiple applications for delta neutral vaults. Any investor can enter into a vault and earn yield from multiple strategies the same way centralized venues offer yield through structured products.
These vaults allow investors to stake their assets in a vault which will then deploy their stake to a specific options strategy through smart contracts. The investors then earn yield from the premiums that options buyers are paying, and by earning native tokens through the vault itself which they can later choose to re-stake.
Part 3. Concluding Thoughts
Despite the conditions of the bear market and a decline in overall market confidence in cryptocurrencies, crypto derivatives remain strong and continue to grow in popularity. In DeFi, the potential to create new derivatives that offer unique opportunities for investors to hedge and speculate is stronger than ever. 01 Exchange’s Squol are one of many proposed derivatives that may soon become commonly traded in the market.
However, please always bear in mind that there is no such thing as a free lunch in DeFi, while 01 Exchange’s Squol provides a significantly higher upside than other instruments, it also charges a relatively high funding rate. Holding a long Squol position for an extended period (> 1 year) during which SOL trades sideways or goes down in value will likely cause a loss in SOL-squared exposure of the long Squol position due to in-kind funding paid to short Squol sellers. So user need to DYOR before apeing in.
Disclaimer:
This article is for educational purposes only. We have no relationship to these projects, and there is no endorsement for these projects. The information provided through Oasians does not constitute advice or recommendation of investment or trading. Oasians does not take responsibility for any of your investment decisions. Please seek professional advice before taking financial risks.
Joe signing out~
Source
https://01exchange.medium.com/01-exchange-introduces-power-perpetuals-squol-1c8aa1dbc1d8
https://medium.com/@thiccythot_/hedging-impermanent-loss-for-liquidity-providers-6f18856e8392
https://.twitter.com/wadepros/status/1466165414354989064
https://youtu.be/_gie-YWcrCQ
