What is Perpetual Protocol? (PERP)
Perpetual Protocol (PERP) Explained
Perpetual Protocol is a software that seeks to incentivize a distributed network of computers to operate an exchange where users can buy and sell derivative contracts.
Perpetual Protocol is a decentralized finance (DeFi) project that enables this service through written code, without the need for financial intermediaries. Moreover, Perpetual Protocol is simply a collection of programs (smart contracts) running on the Ethereum blockchain that were composed to communicate and replicate services offered in derivatives markets.
This means Perpetual Protocol users do not need to trust a particular institution or collection of people to execute trades, they need only to trust the code will execute as written.
Perpetual Protocol was inspired by popular decentralized exchange Uniswap and synthetic asset platform Synthetix. However, Perpetual Protocol isn’t meant for spot trading or gaining exposure to real-world assets, rather it’s designed for leverage trading, short positions, and low levels of slippage.
To achieve this, Perpetual Protocol uses a process that includes a virtual automated market maker (vAMM) and collateralization vault. These structures are designed to settle trades and enable anyone access to complex financial instruments such as perpetual contracts.
Notably, a perpetual contract is a derivative similar to a futures contract but without an expiry date. In conventional markets, a futures contract enables people to speculate on the price of an underlying asset until a specific date in the future when that asset is delivered [in-kind or cash-equivalent]. Comparatively, perpetual contracts are permanent where the underlying is never delivered and traders pay certain fees to maintain their position.
Additionally, the native cryptocurrency of Perpetual Protocol, PERP, is used in staking and governance. More specifically, PERP tokens are used in securing its marketplace and influencing the future direction of the project.
To stay up to date on new features, markets, and community recaps, you can bookmark Perpetual Protocol’s Medium page.
Who Created Perpetual Protocol?
Originating in Taiwan, Perpetual Protocol is led by founders Yenwen Feng and Shao-Kang. The project was started in 2018 under its former name “Strike” and later launched its mainnet in December 2020 under its new alias.
In all, the project raised roughly $10.65 million in exchange for near 25% of the max 150 million supply of PERP. Additionally, the founding team and its advisors retained 21% of the supply (36 million) in the token’s creation event.
The project was originally funded by an investment fund in a seed round that released 6.25 million PERP. Later in August 2020, the project distributed 22.5 million PERP in a private round led by Multicoin Capital along with others including Alameda Research and Three Arrows Capital. The following month, the project publicly launched via a liquidity mining campaign on Balancer, releasing seven and a half million PERP to a bootstrapping pool.
While Perpetual Protocol plans on transitioning governance of the protocol to the community, it’s currently controlled by the core developing team as it remains in the early stages of the project.
How Does Perpetual Protocol Work?
Perpetual Protocol was designed to facilitate the buying and selling of perpetual contracts in a way that mirrors a traditional exchange.
It does this by creating a new version of an Automated Market Maker (AMM), a technique that utilizes a math function to determine the price of an asset and facilitate the exchange of two or more assets. To learn more about how other protocols implement this technique, check out Uniswap, Balancer, or Curve.
Virtual Automated Market Maker (vAMM)
In the most common AMM setups, users deposit crypto assets into liquidity pools that represent certain trading pairs. Then, users who trade against assets in the pool pay a fee that is distributed to all liquidity providers proportionally, based on their contribution to the pool. In this setup, the DeFi protocol providers and traders engage with are both determining the price for each pair and facilitating the actual exchange of assets.
In contrast, Perpetual Protocol’s vAMM is designed only for price discovery, not for spot exchange. While it uses the same mathematical function as other DeFi projects like Uniswap to determine prices, there are no real crypto assets stored within the vAMM. This is why it’s called a “virtual” Automated Market Maker.
In practice, Perpetual Protocol maintains smart contracts that act as a ‘Clearing House’ and ‘Collateralization Vault’ to enable leverage on both long and short trades. The Clearing House accepts the initial deposits of traders and records the nature of their position (margin amount, direction, and the amount of leverage). Subsequently, the Clearing House sends the deposits to the ‘Collateralization Vault,’ which helps backstop and secure trading positions, and notifies the vAMM to update prices.
It may also be worth noting that the Perpetual Protocol team has manually chosen the different markets available for traders while they expect this process to be carried out by their Decentralized Autonomous Organization (DAO) structure in the future.
In the event of unexpected losses from either losses in the liquidation process or the inability of traders to fund position payments, the insurance fund is the first line of defense. This fund accrues through the protocol’s usage as this is where 50% of transactions fees are deposited.
In the event of the Insurance Fund being depleted, a smart contract is triggered that mints new PERP and subsequently sells them for collateral in the Vault to protect the system’s solvency.
Why Does PERP Have Value?
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Why Use PERP?
Traders may find Perpetual Protocol appealing based on its ability to provide access to perpetual contracts outside of a centralized exchange.
It may also be useful if you can identify arbitrage opportunities between pools offered in Perpetual Protocol and those offered in other markets.
Users can also invest in PERP should they believe that decentralized trading of cryptocurrencies will gain in popularity in the future.