Clear DefinitionsPerpetual Protocol
1 min read
Pronunciation
[per-pech-oo-uhl proh-tuh-kol]
Analogy
Perpetual Protocol is like a decentralized betting platform where you can make leveraged bets on whether a cryptocurrency's price will go up or down, and you can keep your bet open indefinitely as long as you maintain enough collateral. There's no fixed end date for your bet like there is with a traditional sports season future.
Definition
A decentralized finance (DeFi) protocol that enables the trading of perpetual contracts (also known as perpetual swaps). These are derivative instruments similar to futures contracts but without an expiry date, allowing traders to speculate on asset prices with leverage.
Key Points Intro
Perpetual Protocol facilitates decentralized trading of perpetual swaps, offering leveraged exposure to crypto assets without expiry dates.
Key Points
Enables trading of perpetual contracts on a decentralized exchange (DEX).
Uses a virtual Automated Market Maker (vAMM) or similar mechanism for price discovery.
Employs funding rates to keep the contract price tethered to the underlying asset's spot price.
Allows traders to take long or short leveraged positions.
Example
A trader believes ETH price will rise, so they use Perpetual Protocol to open a 5x leveraged long position on ETH. They deposit collateral (e.g., USDC), and the protocol allows them to control a position five times larger. They will pay or receive a funding rate periodically to maintain this position.
Technical Deep Dive
Perpetual Protocol (and similar platforms) often use a vAMM, where the AMM operates with virtual liquidity; actual assets are held in a collateral vault. Traders deposit collateral to open positions. The vAMM determines the entry/exit price of trades. To ensure the perpetual contract price tracks the index price (spot price of the underlying asset), a funding rate mechanism is used. If the perpetual price is above the index price, longs pay shorts, incentivizing selling. If below, shorts pay longs, incentivizing buying. Liquidations occur if a trader's collateral falls below a maintenance margin.
Security Warning
Trading perpetual contracts with leverage is highly risky and can lead to rapid liquidation of your collateral. Understand the funding rate mechanism, liquidation process, and smart contract risks associated with the specific protocol before trading. Ensure the protocol is well-audited.
Caveat
The vAMM model can have different characteristics and risks compared to traditional order book based exchanges. Impermanent loss is not a direct risk for liquidity providers in the same way as traditional AMMs, as there aren't LPs in the vAMM itself, but the collateral vault and insurance fund have their own risk dynamics.
Perpetual Protocol - Related Articles
No related articles for this term.