DeFi Perpetual Contract Agreement
Perpetual contracts, also called perpetual swap contracts, are derivatives of futures contracts. From a trading perspective, perpetual contracts are similar to traditional futures contracts, but there are some differences. It has no expiry or settlement date and can be traded at any time. A perpetual contract is similar to a margin spot market, so its transaction price is close to the underlying reference index price (current price).
There is a centralized perpetual contract, why do we need a DeFi perpetual contract agreement? First, let us first understand the centralized perpetual contract platform, which is a prerequisite for decentralized contracts.
The cryptocurrency centralized perpetual contract started by BitMEX’s Arthur who was not satisfied with the current situation of arbitrage. In January 2014, he found Ben Delo, a computer scientist who graduated from Oxford University, and the other was from the United States. Senior programmer Samuel Reed (Samuel Reed), the three hit it off and co-founded BitMEX.
In October 2020, BitMEX, the pioneer of encrypted perpetual contracts, was investigated by the CFTC (Commodity Futures Commission), the world’s largest derivatives exchange, and then BitMex executives were directly arrested in the United States. Suspected of being suspected of malicious market manipulation, money laundering, and bribery of US officials overseas, the SEC investigation ended with a fine of 24 million U.S. dollars.
Unlucky after BitMEX was fined. Its rivals, Binance, Huobi, OK, etc., still often experience pin insertion. Under the big market, the app is down, the APP prompts various errors, and the contract users cannot close their positions. This is their most difficult time. I was able to watch the text messages prompting the expulsion of the warehouse, and then shed tears of hatred. I have a deep understanding.
They have long been suspected of malicious manipulation of the market, and these scandals have not affected them to continue to make money. Crypto users frequently speak out against centralized perpetual contracts. These helpless voices have attracted the attention of decentralized builders, and the crypto market has become more demanding for decentralized contracts than ever before.
Two months after BitMEX was investigated, Perpetual Protocol launched their product.
Introduction to Perpetual Protocol
The agreement is based on Ethereum’s decentralized perpetual contract trading platform, and it is also based on the XDAI side chain for perpetual contract transactions. The difference from the order book is that it uses the same x*y=k constant product formula of VAMM and Uniswap, which can be said to be a combination of Uniswap and BitMEX.
What is VAMM?
Perpetual Protocol improves the limitations of the previous AMM, uses a brand-new VAMM mechanism, expands the previous AMM application space, and has more possibilities, making AMM the first breakthrough in the use of perpetual contracts. The VAMM pool has no real assets. The actual assets are deposited in a vault, which supports all types of asset mortgages. Compared with traditional AMM, Perpetual Protocol uses vAMM as a price discovery mechanism, but it is not suitable for spot transactions.
The following is an example reference that will explain how VAMM works:
1. Before creating vAMM on the blockchain, the creator sets the number of virtual assets stored in vAMM. Assuming that the price of ETH is 400 DAI, the creator can set the initial amount of ETH and DAI at a ratio of 1 to 400 on vAMM. For the sake of simplicity, we assume that the creator sets the initial state of the vAMM to 100 vETH and 40,000 vDAI.
2. Trader Alice wants to use 100 DAI as collateral to make 10 times more ETH:
- Alice deposits 100 DAI in Perpetual Protocol’s vault. As mentioned above, this is a smart contract on Perpetual Protocol.
- Perpetual Protocol credits Alice’s 1,000 vDAI (10 times leverage of 100 DAI) into vAMM. In return, it calculates the amount of vETH received by Alice according to a constant function (x*y = k).
- Perpetual Protocol records that Alice now has 2.4390244 vETH, and the internal state of this vAMM becomes 97.5609756 vETH and 41000 vDAI.
3. Then the trader Bob uses 100 DAI as collateral and shorts ETH 10 times, which means:
- Bob deposits 100 DAI in the same vault.
- Perpetual Protocol credits Bob’s -1,000 vDAI into vAMM, and in return, it calculates the number of negative vETH Bob received based on a constant function (x*y = k).
- Perpetual Protocol records that Bob has now shorted 2.4390244 vETH, and the internal state of this vAMM has now become 100 vETH and 40,000 vDAI.
The unique property of vAMM does not require a liquidity provider.
Due to path independence, the vault will always have enough collateral to repay all traders who use vAMM for transactions (assuming that all under-collateralized assets have been successfully liquidated before bankruptcy). Unlike traditional AMM where liquidity comes from liquidity providers providing assets to facilitate transactions, the liquidity of vAMM comes directly from a vault located outside of vAMM. In other words, the existence of a liquidity provider is not required to bring liquidity to vAMM: traders provide liquidity for each order.
Since no liquidity provider is required in vAMM, there is no permanent loss from the beginning.
Regular price adjustment
vAMM itself serves as an independent cash settlement market. If we want the vAMM market price to be close to the underlying index, we need to add a funding rate, similar to the payment of funds in the Central Limit Order Book (CLOB) exchange permanent contract. For example, the following is FTX’s fund payment formula:
The payment of funds incentivizes arbitrageurs to make the market price as close to the underlying index as possible, and enables the vAMM market to track the underlying index.
Perpetual Protocol uses a funding rate formula similar to FTX, thus allowing new derivatives markets to trade with leverage while closely tracking the underlying index.
Similar to traditional AMM, when the K value of vAMM is higher, traders suffer less slippage, but the similarities end here.
For traditional AMM, the methods to increase the value of K are:
1. Encourage more liquidity providers to provide more liquidity.
2. Increase transaction costs and recover trading profits to provide more liquidity.
In contrast, in vAMM, since the K value is manually set by the vAMM operator at startup, even after the vAMM is created, K can be increased or decreased at any time, which helps the market to make changes to the latest situation. response. That being said, although the vAMM operator has this power, he/she cannot transfer user funds stored in the vault. The vAMM operator will be the Perpetual protocol team in the first version, and will transition to the DAO structure later.
Although the first version of the Perpetual protocol will manually set the K value, over time, we hope that the K value will be set by algorithm. For example, K can be set as a function of transaction volume, open interest rates, financing payments, volatility, and other variables.
The setting of the K value needs to maintain a delicate balance. If the K value is too low, the natural users of the agreement will have excessive slippage and inhibit their transactions in the system. However, if the K value is too high, then the arbitrageur will not have enough funds to maintain the vAMM price in line with the underlying index price.
Feng Yanwen, the founder of Perpetual Protocol, led his Taiwanese team in August 2020 and received the lead investment from Multicoin Capital. Together with Three Arrows Capital, CMS Holding, and Alameda Research, they received US$1.8 million in strategic financing. Earlier, it obtained Binance’s $500,000 seed round financing.
In September of the same year, Perpetual Protocol also held a smoothing round. For details on the smoothing, token distribution and its functions, please refer to the link: https://medium.com/perpetual-protocol/perp-token-distribution-2f1b6196744d
Perpetual Protocol data performance
Under the negative policy of 519, Perpetual Protocol’s governance token, PERP, moved as solid as a rock, and it only fell by 8% on Binance that day. The overall trend rebounded on May 20. PERP rebounded by 46%, followed by a decline in the market. After bottoming, the rebound trend of PERP became more intense. As of press time, it rose from a historical low of $3.6 to a high of $17.9.
Governance token holding address 5942 , the factor of the stable increase of PERP has a lot to do with the protocol staking pool. At present, the staking pool has locked PERP worth 300 million U.S. dollars, which reduces the selling pressure. The total token market value is only 720 million U.S. dollars. , Enough for its tokens to easily climb the peak.
Perpetual Protocol V1 was launched in December 2020, creating a virtual market maker model, and in less than a year, it contributed to more than $22.1 billion in transaction volume .
The 22.1 billion transaction volume of the agreement is insignificant for the centralized trading platform. For the decentralized contract market, Perpetual Protocol is already the leader. The data of THE BLOCK shows that not long after the agreement went live , it has occupied 80% of the decentralized derivatives market for a long time.
Debank showed that the total user addresses reached 3900 (the exact data should not stop there). The 24-hour trading volume was 79.68 million U.S. dollars, with 266 active user addresses and 22,552 transactions. The agreement revenue on the day was 79,680 U.S. dollars. According to the summary of previous data, the total revenue of the agreement reached 22 million U.S. dollars.
Before the emergence of decentralized derivatives exchanges, there was an old saying in the domestic centralized derivatives exchange industry: “The contract trading platform has 30 users and can feed a small team.” Perpetual Protocol’s data can feed dozens of them. Small team.
petual Protocol’s competitor dydx
Introduction to dydx
The agreement was founded by Antonio Juliano and launched in 2017. The decentralized leverage order book and perpetual contract order book transactions built on Ethereum L1 & L2 (based on Starkware) provide 22 popular token trading pairs, which can be adjusted up to 25 times leverage. Link your little fox wallet to complete transactions in seconds on the second layer of dydx, without waiting, with the security level of the Ethereum network itself. The operation is very simple, decentralized application, centralized application operation experience .
A total of four rounds of financing have gone through:
- On December 22, 2017, Coinbase CEO participated in the dydx seed round of financing, and did not disclose the specific financing amount.
- On October 19, 2018, it received $10 million in Series A financing from individual investors such as Bain Capital Ventures, Abstract Ventures, and Craft Ventures.
- On January 27, 2021, Capital, Wintermute, GSR, Scalar, Capital, Andreessen Horowitz (A16z) , Polychain Capital, were awarded a round of US$10 million in financing.
- On June 16, 2021, Paradigm led a US$65 million Series C financing.
Dydx has obtained 75 million US dollars in financing this year alone, bringing together the world’s top venture capital institutions, and highlighting that capital is very keen on it. At present, as far as we can know, the total financing has reached 85 million US dollars.
On August 3, dydx announced the launch of governance tokens. The total amount of DYDX tokens is 1 billion, which will be distributed to all dYdX ecological participants within five years, including community users, investors and the dYdX team. Five years later, the community can vote to determine the inflation rate of DYDX tokens for additional issuance; the current maximum inflation rate is 2% per year.
According to Token terminal data, the total amount of dydx’s current asset lock-up is US$190 million. Starting from March 2020, the agreement has created a total of 36 million U.S. dollars in revenue within 18 months, with an average of 1.7 million U.S. dollars in monthly revenue from the agreement.
As a decentralized derivatives trading platform, the agreement shows that the number of dydx user addresses in Debank has reached 79,000, and there are 1,876 active addresses for trading 24 hours a day. These users contribute an average of $56,000 in revenue to the agreement every day.
According to the monthly data of Token terminal, dydx protocol income ranks about 10 in the DeFi field. After the market returns, it is believed that this set of data will undergo wonderful changes in the near future.
Summary of DeFi Perpetual Derivatives Agreement
Perpetual Protocol officially launched the perpetual contract agreement in December last year. During the transaction, users can get rewards of governance tokens at the same time, which stimulates user transactions. Guided the Perpetual Protocol’s transaction volume to continue to break new highs. In the past 9 months, the protocol income has reached 22 million US dollars, with an average monthly income of 2.44 million US dollars. The average monthly income of dydx is only 1.7 million US dollars. Perpetual Protocol The average monthly agreement revenue surpasses dydx. Due to the relatively long operating time of dydx, in terms of total agreement revenue, dydx was even better with 36 million US dollars.
Dydx, which has always been proud of, was overtaken quickly because they had no reward for governance tokens before, and Perpetual Protocol has always had governance tokens to stimulate user transactions.
dydx quickly discovered the reason for its backwardness and launched its governance token on August 3, which will be distributed to all dYdX ecological participants, including community users, investors and dYdX teams, within five years, 50 of which will be allocated to the community. Perpetual Protocol, which had maintained an 80% share in the past 6 months , surpassed Perpetual Protocol in transaction data within 24 hours until dydx released the governance token.
In terms of operations, dydx is more inclined to the direction of compliance, attracting top capitals such as Coinbase CEO & Brian Armstrong, A16z , Paradigm, and Bain Capital, which are listed on NASDAQ . These capitals can more easily help dydx to sprint in the direction of compliance. Even more noteworthy is Bain Capital, a diversified venture capital firm founded in 1984, with $140 billion in assets under management. With a strong background, dydx will achieve the goals planned by their CEO in the future, so that everyone can use high-quality decentralized financial tools.
Layer2 expansion plan
Layer2 pursues the ultimate performance. As a “layer two network”, it can undertake most of the calculation work for Layer1, such as separating Ethereum transactions from the main chain, reducing the burden on the first layer of the network, improving transaction processing efficiency, and achieving expansion. Layer2 can only achieve partial consensus, but it can meet the needs of various scenarios.
The Layer 2 expansion plan of the four camps includes:
1. ZK Rollup
2. Optimistic Rollup
Unicorn Polygon (Matic)
Among the many Layer 2 expansion solutions, the most valuable one is Polygon (Matic). Polygon is based on Ethereum’s expanded sidechain and infrastructure development. Developers can use the Polygon software development kit (SDK) to quickly deploy and be compatible with the Ethereum EVM (virtual machine). Here is the Polygon data for everyone .
Polygon’s data performance
In the fierce expansion competition, Polygon quickly rose to become a superstar in the expansion plan, gradually gaining a foothold in Ethereum and embarking on a further journey.
Since its launch in October 2020, Binance has shown that Polygon’s governance token is $0.01898, which rose to a maximum of $2.7 in May of this year. It took 8 months to achieve a 142-fold increase. Such an astonishing increase is inseparable from the important support behind the data.
After a major downturn, the Polygon governance token fell from the highest value of US$2.7 to US$1, and its market value has also fallen from US$16 billion to today’s US$6.9 billion.
Today, Polygon Twitter has 570,000 followers, attracting not only followers, but also their DAPP developers Aave, SushiSwap, Curve, Balancer, 1inch, BadgerDAO, DODO and other famous decentralized applications vying to join the Polygon ecosystem. .
According to statistics from its official website, there are already 350+ applications running in the ecosystem, and they are still increasing. The ecology includes 7 major sectors, DEFI, NTFT, games, DAO, and B2B.
The following figure shows. Polygon ecology has more than 660,000 wallet addresses, 150,000 currency holding addresses, pledged USD 1.78 billion worth of MATIC, and active transaction address 11868. According to statistics L2bea, Polygon ecological alone QuickswapDEX daily trading volume has reached US $ 73,826,685 million.
Comparison of Ethereum L1 and Polygon transaction fees
With the blessing of many applications, Polygon’s capital volume is also increasing. Since the lock-up volume of 5 million US dollars in October 2020, and the current lock-up volume of US$4.7 billion, the lock-up volume has increased by nearly 1,000 times. The amazing growth allowed Polygon to win perfectly in the first stage of expansion and crush all opponents.
In the expansion competition , L2bea counts that the sum of the lock- ups of 17 expansion plans totals only 522 million US dollars. Optimism, ZKSync, Arbitrum, they used to be in the development path of L2, the media’s promotion of them can be described as powerful, but it is a pity that only waves have been shot. The calm Polygon has set off stormy waves, and rivals that can rival it have not really appeared yet.
Polygon expansion plan summary
Although Polygon is powerful, it also has flaws and is not inherently perfect. Thousands of users are willing to accept its advantages and disadvantages.
Disadvantages: Polygon currently only has 100 nodes to ensure the security and verification of the network. The security and verification of the network does not rely on Ethereum, and relies on Polygon’s own nodes to maintain network security. Three months ago, the Reddit community discussed the problem with the network. The first 3 addresses of these 100 verification nodes control 54% of MATIC, and Binance holds more than half of these 54%. If this centralized address Launching a 51% attack will be a breeze.
It is possible to launch a 51% attack. Users believe that they will not do such a stupid thing, because it destroys their life-long reputation and their long-term business.
Advantages: Since Ethereum has long been in a state of expensive handling fees, Polygon has provided a good solution to solve the needs of users. In the above transaction fee comparison , the picture shows that Polygon’s transaction and transfer fees are also quite low. It can process 1,000 to 9,000 transactions per second. Polygon claims that after Ethereum 2.0 is launched, it can process up to 65,000 transactions per second.
If partners need to join the ecosystem, they can directly deploy and run in the ecosystem through the SDK, saving partners more development costs and time. 350+ partners, with a huge volume of more than 1 million users, are enough to continue to promote the development of Polygon.
The road ahead:
A few quarters ago, the team changed the name of the original MATIC to ” Polygon ” when various data soared . In the future update iteration, Polygon will support all Layer 2 network connections, such as Optimistic Rollups, zk-Rollups, Plasma and other Ethereum expansion technologies, which the team calls “Poka on Ethereum”, In addition, link Polygon to other blockchains, using broad and profound Chinese words to understand: Integrating the world .
DeFi algorithm stablecoin
In June 2020, AMPL, known as the originator of algorithmic stablecoins, was born, creating the concept of algorithmic stablecoins and was smashed into the sky. In the following months, the sudden imitation of ESD, Basis, Mith, ONS, they came and went in a hurry, leaving only the sad and broken K-line.
AMPL, which has been quiet for a long time, issued their governance tokens on April 22. As long as users who have traded AMPL, they can obtain FORTH governance tokens worth about 100,000. As if AMPL was back in the spring, this feeling did not last long before it disappeared.
Strictly speaking, AMPL is not a real algorithmic stable currency. The meaning of algorithmic stable currency is to maintain the stability of the target in a certain price range through algorithms.
The official definition of AMPL is: AMPL agreement will automatically adjust the supply according to demand. When the price is high, the wallet balance increases. When the price is low, the wallet balance will decrease . This is a deflation and inflation algorithm. The algorithm is easy to generate arbitrageurs’ circular arbitrage. They sell tokens when they are inflation and buy tokens when they are deflation, in a continuous cycle.
If you need to go to the supermarket to buy daily necessities for 1 yuan, when you pay at the cashier, your wallet only has 1 AMPL. At this time, if you encounter deflation, your AMPL will decrease. At this time, there must be insufficient funds. If you pay for the purchase, the product will not follow AMPL’s deflation or inflation. Of course, AMPL will not be used in life.
AMPL is the prelude to algorithmic stablecoins,
Fei Protocol is more worth mentioning
Fei Protocol is a completely decentralized algorithmic stable currency. First of all, we know that the existing USDT, USDC, and PAI are controlled by the central bank. These do not have the characteristics of decentralization and face great review and regulatory risks.
Secondly, the popular DeFi stablecoin DAI on the market, using Ethereum as an example, the collateral rate of Ethereum in DAI’s vault is 150%, and at least 10,000 DAI must be generated to use its vault, which means that users need to mortgage more than 10,000 USD worth of Ethereum. The DAI method has severely reduced the utilization rate of funds. Fei Protocol can also use ETH 1:1 to generate FEI (stable coins) while improving the efficiency of funds .
Fei Protocol capital injection
On March 9, Fei Labs raised $19 million from Andreessen Horowitz (a16z), Framework Ventures, Coinbase Ventures, and AngelList founder Naval Ravikant.
With the blessing of top venture capital institutions, it has received a lot of attention. Fei Protocol ended its creation on April 3, and it lasted 3 days, raising a total of 639,000 ETH. Within 3 days of fundraising, Ethereum was raised, and the ETH/FEI trading pair added 2.5 billion US dollars of liquidity to Uniswap, which became a moment in DeFi history.
Although Fei Protocol received huge financial support, FEI did not stabilize FEI at $1 as the team envisioned. Due to algorithmic loopholes and arbitrage attacks, the lowest fell to 0.6 US dollars. Until June 19, FEI returned to a relatively stable price of 0.99 to 1.001 floating.
How does FEI keep its value stable
First of all, market behavior. When FEI is less than $1, everyone can buy to return its value to a healthy state, and if the price is higher than $1, it can be sold to generate arbitrage. Today’s OTC merchants are the same, withdrawing USDT at a low price and then selling it at a high price, earning the intermediate price difference and gaining profits.
Protocol controller (PCV) behavior
When the price of FEI is less than $1, there is no buy order in the market, which triggers the action of PCV to repurchase FEI. Users who sell FEI for less than $1 will be punished by 4% loss, and users who buy can get a 2% reward.
To learn more about Fei Protocol, please check the following link: https://medium.com/fei-protocol/introducing-fei-protocol-2db79bd7a82b
Governance token distribution: https://medium.com/fei-protocol/the-tribe-token-distribution-887f26169e44
Fei Protocol data performance
Among the many algorithmic stablecoins, Fei Protocol has the best data at present. A stablecoin needs more people to adopt and accept it to be valuable.
The Messari stablecoin section shows that the current price of FEI is stable at 0.998, with a total market value of US$2 billion and a 24-hour trading volume of US$48.3 million.
ETH/FEI in Uniswap locked up a value of 370 million U.S. dollars, a 24-hour trading volume of 27.74 million U.S. dollars, and created a fee income of 83,239 U.S. dollars.
The usage rate of stablecoins needs to be accumulated slowly and let them go online on more platforms. FEI is currently online on 14 exchanges. FEI has more than 20,000 token addresses. The more people use it, the more stable it will be.
Before Coinbase announced the launch of Fei Protocol’s governance token TRIBE, the lock-up increased from US$200 million to US$7.76, and the lock-up instantly doubled by 2.5 times. On August 12, Coinbase officially announced the launch of TRIBE.
Fei Protocol’s competitors
It was once known as the three heroes of stablecoins: Fei, Float, and Reflexer.
Whether FLOAT and Reflexer are really heroes of stablecoins, we can find out from the data performance.
The first is Float Protocol
Unlike Fei Protocol, Float does not have any financing, an anonymous team is established, and the distribution of governance tokens is completely community-based.
Float Protocol is a completely different stable currency. Rather than fixing a value, it is better to design it to “float” as the demand for itself and cryptocurrency changes. The goal is to reduce short-term volatility. In the long run, its value will increase with the growth of cryptocurrency to protect the purchasing power of users.
FLOAT’s 24-hour lock-up volume at Sushiswap is US$3.26 million, and the 24-hour trading volume is only US$97,981, creating a fee income of US$293. It only launched a decentralized exchange in Sushiswap. This method obviously cannot make the public use it frequently. .
Reflexer is also an algorithmic stablecoin that has attracted many venture capital companies. Pantera Capital, Lemniscap, Paradigm, MetaCartel Ventures, Divergence Ventures, Standard Crypto, The LAO and other institutions, as well as team members from Compound, a16z, Synthetix, and Aave, participated Reflexer’s investment.
Its stable RAI is relatively close to DAI, which also makes over-collateralized algorithmic stablecoins. Unlike other stable currencies, RAI is anchored at $3 for a long time. Due to the use of over-collateralization, FEI is more stable than FEI.
RAI shows on Uniswap that the total locked position is 53.2 million U.S. dollars, the 24-hour transaction volume is 2.29 million U.S. dollars, and it has created a handling fee income of 6,883 U.S. dollars.
RAI has passed many institutions to help, and has launched 5 exchanges. The trading volume is not satisfactory, which is slightly inferior to FLOAT.
Algorithmic stablecoin protocol summary
For centralized stablecoins, the current algorithmic stablecoins are not stable.
Algorithmic stablecoin From the data point of view, Fei Protocol is most likely to become an algorithmic stablecoin accepted by the public in the future. Stability is like the renminbi we usually use. The more people use a certain stable currency or reserve a certain stable currency, and expand more financial use cases, it will become stable and valuable.
Just like the US dollar, the global currency, the world uses it as a reserve currency, which can be circulated in every corner of the world. The purchase of oil in the Middle East requires US dollars as a settlement. Owning US dollars can make more financial investment choices around the world. This is what the stablecoin needs to do, do more things with it, and let more people accept it.
Among the many algorithmic stablecoins, it seems that Fei Protocol knows better how to let others use FEI frequently. Its community also strongly recommends the FEI team to talk to more exchanges to list its stablecoins and expand the frequency of use. This approach is very reasonable. This approach has indeed increased the FEI trading volume. Objective data shows that the total amount of all algorithmic stablecoin transactions now add up to less than one FEI.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/how-defi-unicorns-lead-the-development-of-the-industry-2/
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