Perpetual Protocol is an on-chain decentralized drivatives exchange (DEX) with deep liquidity and builder-ready composability deployed on Optimism. Perpetual Protocol's primary products are perpetual contracts. Currently, Perpetual Protocol supports market orders, limit orders, and stop orders. It supports perpetual contract trading with up to 10x leverage and slippage tolerance setting.
Perpetual Protocol uses the virtual AMM (vAMM) trading model as its core trading mechanism. While vAMM also uses the same constant function used by AMM model, unlike the traditional AMM model, vAMM acts as a price discovery tool only, with no real liquidity and no counterparties during the trade. However, vAMM v1 might suffer from the long-short skew problem caused by open positions and the high slippage problem. To address the high slippage issue, Perpetual Protocol introduced its v2 version, which uses Uniswap v3 as the execution layer to provide centralized liquidity to reduce trading slippage. In addition, v2 adds a cross-margin mechanism and multiple collaterals, while allowing permissionless market creation.
$PERP is the native utility token of Perpetual Protocol. The primary function of $PERP is governance. Holders of $PERP can participate in governance voting or stake tokens for rewards.
Perpetual Protocol (previously known as Strike) is a decentralized derivatives trading protocol co-founded by Yenwen Feng and Shao-Kang Lee. Perpetual Protocol was originally launched on Gnosis Chain (formerly xDai) in December 2020. Its v2 version, Curie, was launched on Arbitrum in November 2021.
vAMM uses the same constant function used by AMM model, unlike the traditional AMM model, vAMM acts as a price discovery tool only, with no real liquidity and no counterparties during the trade.
The AMM mechanism proposed by Uniswap uses a constant function of x*y=k to implement token swaps, but this mechanism is not suitable for derivatives trading and suffers from high slippage and impermanent loss. To address the limitations of AMM, Perpetual Protocol proposed virtual AMM (vAMM). Although implemented using the same formula, there is no actual storage pool of assets (k). Tokens are eventually stored in a vault via a clearing house, and vAMM is only used for price discovery. Since liquidity does not need to be provided by the liquidity providers but by the traders themselves, there is no impermanent loss. Combined with the fact that the k value is set manually by the operator according to market conditions, vAMM achieves slippage management to a certain extent.
However, vAMM v1 is not suitable for highly volatile markets, relying on insurance funds when open interest is heavily skewed, and traders still face high slippage. In order to solve these issues, vAMM v2 is combined with Uniswap v3 as the execution layer, which introduces liquidity providers that allow each transaction to occur directly between the trader and market maker via a liquidity pool, reducing the involvement of the insurance fund in skewed markets and making the protocol more secure. In response to slippage, Uniswap v3 allows liquidity providers to provide liquidity within a custom range, and each position is then aggregated into the pool, so that large transactions will be spread across multiple positions, thereby reducing slippage. However, the new problem is that the liquidity provider has no losses only in the initial state (when the price has not deviated), which is very unfriendly to them and makes vAMM v2 unattractive to LPs. The Perpetual Protocol team is currently providing liquidity to the market itself to promote liquidity depth and activity.
A transaction fee of 0.1% is charged on every transaction on Perpetual Protocol v2. Compared with v1, v2 has broadened the fee sources: while v1 fee income comes only from the public market, v2 includes private markets on top of that, as well as rehypothecation (Funds in the insurance fund may be utilized in low-risk interest protocols to increase staker earnings). There are two scenarios for fee allocation: when the insurance balance is less than the insurance threshold, 20% of the fees are deposited into the insurance fund and 80% are allocated to liquidity providers (Market Makers); if the insurance balance is greater than the insurance threshold, the fees flowing into the insurance will be evenly distributed to DAO Treasury and $vePREP holders.
$PREP tokens are available for governance and staking on the Perpetual Protocol. Holders of $PREP can stake it in the staking pool for a fixed period of time to mint $vePREP. The risk is that if the insurance fund is exhausted in extreme market conditions, the staked tokens will be sold through the protocol; and as compensation, the stakers can receive weekly rewards (fee allocation).
Liquidation
The liquidation mechanism of Perpetual is in that the margin ratio is obtained by dividing the collateral value by the nominal value. Only if the ratio is greater than 6.25% can it avoid being liquidated. If liquidation is triggered, the maximum liquidation percentage varies depending on the margin ratio: when the margin ratio is between 6.25% and 3.125%, 50% of the trader's position is liquidated, while when the margin ratio is less than 3.125%, 100% of the position is liquidated.
In addition, Perpetual Protocol's insurance funds are also used to protect the perpetual market. When the perpetual market is heavily skewed, the insurance funds will be used to pay high funding rates. If the insurance fund is depleted, a smart contract is triggered that mints new PERP and subsequently sell them for collateral in the vault to protect the system’s solvency.
Investors of Perpetual Protocol are Binance Labs, Alameda Research, CMS, Divergence Ventures, Three Arrows Capital, Mechanism Capital, Multicoin Capital, Zee Prime Capital.
