Can Curie replicate Uniswap’s success in the derivatives sector?

Curie is another name for the latest V2 version of Perpetual Protocol.This article we will focus on its improvements in the latest V2 version.

Looking back on the recent upgrade plans for several major trading platforms, we found that the current platforms focus on improving the two directions, one is to improve the efficiency of the underlying transaction, and the other is to expand the versatility of the platform. After the successful verification of the basic transaction structure of the V1 version, Perpetual Protocol has also begun to make efforts in efficiency and versatility.

Brand new trading engine

1. How to solve the problem of setting K value

Although Perpetual Protocol used the zero-sum game principle in its V1 version, it created a vAMM platform with no real liquidity. However, this scheme has a serious drawback, that is, the value of k, which represents the size of virtual liquidity, needs to be manually set.

For a decentralized trading platform, whether it is relying on the active management of the project team or adjusting through governance, the setting of the value of k will undoubtedly bring considerable challenges to the security and efficiency of the protocol. How to solve the problem of setting the value of k is an important proposition in the V2 upgrade of Perpetual Protocol.

We know that in the spot AMM platform, the value of k is determined by the amount of real liquidity in the fund pool. If the role of LP can be restored in Curie, the problem of setting the value of k in the V1 version can naturally be solved. Curie directly uses the most advanced trading engine: Uniswap V3.

Many previous analysts believed that Curie switched to Uniswap V3 as a new trading engine, hoping to use its aggregate liquidity function to solve the problem of market-making efficiency. However, this understanding may not be comprehensive, because the k value representing liquidity in the V1 version of vAMM was originally set manually, so insufficient liquidity and efficiency are not the focus of Curie’s need to improve.

Therefore, the real meaning of the new trading engine is to further decentralize the setting of k value, and solve the problem of setting k value by the market through a market-making mechanism.

2. Leveraged market making

The liquidity providers in Curie also enter the market to participate in the game through pledged margin. The system will generate new virtual positions representing different risk exposures according to the amount of margin invested by LP, and LP can then use these positions to inject the corresponding liquidity pool. Since the mature Uni V3 trading engine is directly applied, various mature active market-making programs in the market can be directly invoked to help LP earn profits in this virtual gaming market.

Becoming an LP (also known as a Maker) in Curie and directly making a market on Uniswap, there is no essential difference in the operational logic. The only advantage is that the margin trading system in the derivatives market can be used to leverage market-making funds. This can greatly speed up the speed at which LPs can obtain profits. For professional market makers with mature profit strategies, this model undoubtedly provides a better stage.

Of course, because these are virtual positions generated by the Curie system, these virtual tokens will be held by Curie. Therefore, users do not directly hold these virtual tokens, but can only increase the margin balance after closing the position. , Enjoy the profits brought about by the appreciation of these virtual positions.

Of course, in order to achieve the above goals, Curie will abandon the previous side chain solution and deploy it directly on Layer 2 to help high-frequency trading and automated trading strategies better execute.

Higher financial efficiency

As a DeFi project, Perpetual Protocol also requires users to lock up funds. It’s just that these locked funds are no longer used to provide liquidity for the platform, but as a risk control method for derivative transactions and a settlement tool at the end of the game.

Therefore, if you want to further improve the overall efficiency of the platform, you must start with the utilization rate of the margin. Curie has made two important improvements to improve margin efficiency.

The first is to lift the restriction on the types of margin, and it is convenient for users who hold various positions to participate in transactions on the platform. Of course, the introduction of non-stable currency deposits has increased the difficulty of user risk management to a certain extent, and it also requires users to participate cautiously according to their own circumstances.

The second is the joint margin system. All positions established by the same address can share the balance of a margin account. It reduces the complexity of managing multiple deposits for users and increases the utilization efficiency of deposits at the same time.

A more open ecology

In the V1 version, users can only trade a few limited trading pairs, and Curie releases the user’s right to create new perpetual contract trading pairs to better release the potential of the long tail market.

For perpetual contract products, if you want to achieve the goal of freely creating a trading market without permission, the most critical problem is that you can obtain the target price of any trading pair without permission, that is, the spot transaction price, so the agreement is at the same time The oracle has also been upgraded.

In the V1 version, the mainstream Chainlink is used as the input source of the target price, but for the more long-tailed small currency trading pairs, Chainlink has been difficult to meet all the needs. Therefore, in Curie, it was changed to a combination of Uniswap oracle and Chainlink for price feed. For Uniswap that has trading pairs, directly call the oracle price, and for those that do not (such as off-chain assets, etc.), use Chainlink to enter the target price.

Comparing the history of Uniswap, what did Curie do right

Although Perpetual Protocol and Uniswap belong to two different tracks, comparing the development history of Uniswap, it seems that some similarities in the development direction of the two can be seen.

1. Through the innovation of the underlying transaction mechanism, cut into the largest market segment

Before the founding of Uniswap, the industry has been experimenting with on-chain trading platforms based on order books, such as the 0x protocol. These projects have been developing so tepid that people have begun to question whether there is a real demand for DEX. However, later facts proved that the problem was actually in the traditional trading engine. Once the new AMM trading engine was replaced, the long-suppressed demand began to explode.

Perpetual contracts with the largest trading volume on the derivatives track may encounter the same obstacles. The early agreement dYdX, which relied on the order book to build a perpetual contract, has not been able to detonate the market. Instead, the Perpetual Protocol, which relies on the vAMM mechanism, has achieved the highest transaction volume in the market segment in less than a year after it went online.

Of course, Perpetual Protocol has abandoned the verified vAMM engine to some extent in the latest upgrade. Whether the new model can continue to be successful requires verification in the real market.

2. Cancel all access restrictions to meet the needs of the long-tail market

Many people may not remember that Uniswap is not the earliest adopter of the AMM mechanism. The first to incorporate the AMM mechanism into spot trading was the Bancor project. However, unlike Uniswap we are now familiar with, Bancor has adopted a more closed currency listing strategy. If users want to create a new trading pair, they need to submit an application to the Bancor team for manual review. This closed and conservative mechanism directly stifled Bancor’s original good development momentum, and at the same time gave the latecomer Uniswap a chance to overtake.

Therefore, openness and sharing is not just a metaphysical blockchain spirit, but a truly feasible business strategy. After the initial model verification of the V1 version, Perpetual Protocol is also trying to gradually remove all access restrictions and become a more open and common underlying transaction protocol to better serve the needs of the long tail market.

3. Minimize governance

Uniswap’s currency listing and transactions do not require the participation of governance mechanisms, which greatly improves the operating efficiency of the agreement and reduces the negative impact of governance failures on the agreement. The Perpetual Protocol V2 version is also focusing on reducing the impact of the governance mechanism, from using the Uniswap V3 trading engine to cancel the manual setting of K values, to liberalizing the creation of trading pairs and canceling the restrictions on margin currencies. All measures are moving in the direction of reducing human influence.

What are the potential risks of Curie

Because derivatives have much higher requirements on risk control, product design and public chain performance than spot trading platforms. While acknowledging Curie’s improvement advantages, we cannot ignore the following risks.

1. Can the new trading engine attract sufficient liquidity?

After Perpetual Protocol abandoned the verified vAMM engine in the V2 version, it rejoined the LP market-making mechanism. In a more independent and closed margin trading market, whether or not to face the problem of insufficient liquidity again, and how to better encourage LPs to participate in market making, remains a big uncertainty for the success of the new platform.

2. Can Layer 2 meet the future development needs of derivatives?

With the overall development of the blockchain industry, we believe that the expansion of the public chain and the increase in computing demand for applications on the chain are likely to reproduce the relationship between the development of hardware and software in the computer field. That is, the increase in computing power brought about by hardware updates will quickly be consumed by software upgrades. Therefore, Layer 2 may still face transaction congestion in the future, which will affect the subsequent development of the Curie Agreement.

3. Can the new system withstand the test of extreme market conditions?

Whether the design of financial products is mature and stable cannot only rely on logical verification, but also needs to be verified by the real market. Especially under extreme market conditions, whether the overall risk control mechanism of the agreement can maintain the anchoring of prices and ensure immediate liquidation, all of which require actual stress testing in a real market environment.

4. Threats from competitors

In addition to the old perpetual contract agreement dYdX, which has been working on Ethereum for a long time, Curie’s current competitors also include new opponents such as the Injective agreement based on the independent application chain. They rely on different public chains and transaction engines and have their own unique advantages. The competitive landscape of the entire derivatives track is not yet clear, and it is difficult to judge which technology path will ultimately be verified by the market.

Some thoughts on the derivatives track

The trading volume of derivatives on the chain has been difficult to compete with the spot trading platform, so that many people have gradually forgotten this key track. However, the main problem restricting the development of derivatives may not be insufficient demand, but that its development has been constrained by two key bottlenecks.

First, the structural defects of traditional derivatives types make it difficult for their product models to adapt to the trading environment of low-performance public chains such as Ethereum. For example, the traditional delivery period system for futures and options products will cause the separation of liquidity and reduce the transaction efficiency of the agreement. Attempting to copy the derivative agreement of the off-chain model is more prone to dissatisfaction.

The second is that the transaction capacity and transaction speed of the blockchain are still difficult to meet the demand for high-frequency derivatives trading. It can be seen that various derivative projects are actively trying various expansion solutions, including application chains, Layer 2, side chains, and high-performance public chains. Although these expansion plans have been developed rapidly in the past year, it is still hard to say that they are fully mature at the moment.

Therefore, during this period of bottleneck in the industry, which project can first achieve breakthroughs in the above two key aspects will have the first-mover advantage. With the continuous improvement of infrastructure, the future demand for derivatives transactions will surely shift quickly to the chain. This is a large market with unprecedented scale, and new head DeFi projects may be born.


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