PERPETUAL PROTOCOL - Next Level In Decentralized Trading? (Layer 2, Uniswap V3)

Summary

This video introduces Perpetual Protocol, a decentralized finance (DeFi) project focused on creating an accessible and secure exchange for perpetual futures. The video explains the concept of perpetual futures, a financial product without an expiry date, and highlights the recent improvements in Perpetual Protocol's Version 2, launched on Optimism Layer 2. It covers how the protocol leverages Uniswap V3 for liquidity and trading, the benefits of decentralized exchanges over centralized ones, and future plans to expand to non-crypto markets like forex and commodities.

Takeaways

• 🚀 Perpetual Protocol is a DeFi project aimed at creating the best decentralized exchange for perpetual futures.
• 🧑‍💻 Originally called 'Strike,' the project was founded in 2019 and pivoted to perpetual futures in 2020.
• 🌐 The protocol's first version launched on the xDai network in December 2020, while Version 2 (Curie) launched on Optimism in November 2021.
• 💡 Perpetual futures allow traders to gain exposure to an asset's price without holding the underlying asset, and they can be held indefinitely.
• ⚖️ Perpetual contracts use a funding rate to ensure prices stay close to the underlying asset's value, with longs paying shorts or vice versa depending on price divergences.
• 💰 Traders can use leverage to control larger positions, but this comes with the risk of liquidation if the market moves against them.
• 🧩 Version 2 of Perpetual Protocol leverages Uniswap V3's concentrated liquidity, enhancing trade execution and liquidity management.
• 📈 Makers provide liquidity and earn fees on the platform, but must manage risks like impermanent loss by choosing price ranges strategically.
• 🔗 The protocol uses USDC as collateral, with plans to expand to other collateral types and markets (including forex and commodities).
• 🌍 The launch of V2 on Optimism enables faster transactions with lower fees, and future plans include staking, limit orders, and multi-collateral support.

Q & A

What is Perpetual Protocol and what does it aim to achieve?

Perpetual Protocol is a DeFi project that aims to create the best, most accessible, and secure decentralized exchange for trading perpetual futures. It focuses on offering derivatives in a decentralized manner.

When was Perpetual Protocol founded and what was its original name?

Perpetual Protocol was founded in 2019 by a team of startup founders and software engineers. Initially, it was called 'Strike' but later changed its name in the summer of 2020 to focus on perpetual futures.

What is a perpetual future and how does it differ from standard futures?

A perpetual future is a derivative that allows exposure to an asset's price without holding the underlying asset. Unlike standard futures, perpetual futures have no expiration or settlement date, allowing them to be held indefinitely.

How does the funding rate help maintain the price of perpetual futures close to the underlying asset?

The funding rate is paid periodically and ensures that when the perpetual future's price diverges from the underlying asset, market participants with long or short positions are incentivized to align the prices, with longs paying shorts or vice versa.

What was a key improvement in Perpetual Protocol's Version 2?

Version 2, launched on Optimism, introduced a new model for managing positions and executing trades using Uniswap V3’s concentrated liquidity, improving scalability and reducing transaction fees.

How does Perpetual Protocol use Uniswap V3 in its operations?

Perpetual Protocol uses Uniswap V3 to handle liquidity for its perpetual futures trades. When users open or close positions, vTokens are traded in the corresponding Uniswap V3 liquidity pools, such as vUSD-vBTC pools.

What role does the clearinghouse smart contract play in Perpetual Protocol?

The clearinghouse smart contract is central to Perpetual Protocol's design. It mints and burns vTokens, which represent virtual tokens used for trades. It also handles collateral and facilitates interaction between traders and liquidity providers.

How does Perpetual Protocol allow for providing liquidity, and what risks are involved?

Liquidity providers, or 'makers,' deposit USDC into the clearinghouse, which mints vTokens and adds liquidity to Uniswap V3 pools. However, makers are exposed to impermanent loss, especially when prices fluctuate outside their selected range.

What are some features and markets that Perpetual Protocol plans to introduce in the future?

Future updates include features like limit and stop orders, staking, multi-collateral, liquidity mining, and permissionless market creation. Additionally, Perpetual Protocol plans to expand beyond cryptocurrencies to markets such as forex, commodities, and stocks.

What is the significance of Perpetual Protocol launching on Layer 2 solutions like Optimism?

Launching on Optimism, a Layer 2 Ethereum solution, allows Perpetual Protocol to scale effectively by reducing transaction fees and increasing throughput. This enables the platform to handle more trades efficiently and at a lower cost.

Outlines

00:00

🔍 Introduction to Perpetual Protocol and Perpetual Futures

This paragraph introduces Perpetual Protocol, a DeFi project aimed at creating a secure and accessible decentralized exchange for perpetual futures. It covers the project's origin, launch details, and emphasizes that the video will explain key aspects such as the use of Uniswap V3 and the concept of perpetual futures. The narrator also invites viewers to subscribe and follow the channel for more content on decentralized finance (DeFi).

05:03

💡 Understanding Perpetual Futures and Their Mechanics

This section explains the concept of perpetual futures, highlighting their key characteristic: they do not have an expiration date, unlike standard futures. It discusses the benefits, such as indefinite holding periods, and the role of funding rates in aligning the price of perpetual futures with their underlying assets. The paragraph outlines how perpetual futures allow traders to speculate on price, hedge, or engage in arbitrage, and also explains their importance in derivatives markets for price discovery.

10:04

📊 How Perpetual Protocol Differs from Centralized Exchanges

Perpetual Protocol's unique features are explored in this paragraph, including its use of decentralized infrastructure to offer perpetual futures on popular cryptocurrencies. The protocol ensures users retain full control of their assets without custody by the exchange, and all transactions occur transparently and permissionlessly. USDC is used as the primary collateral for trades, with more cryptocurrencies to be supported in the future. The narrator highlights the advantages of the decentralized model over centralized exchanges like Binance and Bybit.

⚙️ How Perpetual Protocol Uses Uniswap V3 for Liquidity and Leverage

This paragraph focuses on Perpetual Protocol's use of Uniswap V3 to manage trades and liquidity. It explains how the clearinghouse smart contract mints virtual tokens (v-tokens) for users and enables trading through Uniswap V3 pools. The protocol supports leveraging positions, and the design allows users to interact with liquidity pools either as traders or liquidity providers (makers). Liquidity providers benefit from earning fees but must carefully choose price ranges and strategies to avoid impermanent loss.

🔄 Uniswap V3 and Cross Margining in Perpetual Protocol

This section elaborates on the role of Uniswap V3 in facilitating liquidity provision within Perpetual Protocol. It describes how the protocol allows users to provide liquidity with leverage and explains the challenges of doing so in specific price ranges. The paragraph also covers the use of cross margin, where a single collateral pool backs all user positions, simplifying collateral management but introducing the risk of liquidation across multiple positions. The option for isolated margining through separate wallets is mentioned as a risk mitigation strategy.

🚀 The Benefits of Launching Perpetual Protocol on Layer 2 Solutions

Perpetual Protocol's move to Ethereum Layer 2 scaling solutions like Optimism is discussed in this paragraph. The benefits of lower transaction fees and higher throughput on rollups are emphasized as crucial for the success of perpetual futures trading. The protocol's potential future launch on Arbitrum and the continued use of xDai for V1 are mentioned, with a nod to how these advancements in scaling will benefit DeFi protocols over time.

🎯 V2 Enhancements: New Features and Market Expansion

This paragraph highlights the additional features planned for Perpetual Protocol's V2, including limit and stop orders, staking, multi-collateral support, liquidity mining, and permissionless market creation. The protocol's plans to expand beyond cryptocurrencies to include forex, commodities, and stocks are also mentioned. By leveraging decentralized oracles like Uniswap V3 TWAP and Chainlink, Perpetual aims to offer more diverse financial products, making the platform appealing to a broader range of traders and liquidity providers.

🌐 A Glimpse into the Future of Perpetual Protocol and DeFi

In this final section, the narrator concludes by reflecting on the future of Perpetual Protocol and its position within DeFi derivatives. The paragraph notes that the team has learned from V1's shortcomings and designed a more sustainable model in V2, benefiting from Layer 2 scaling. The narrator expresses excitement for the protocol's potential to attract more users from centralized exchanges and invites viewers to explore Perpetual Protocol while emphasizing the importance of understanding the risks before trading.

Keywords

💡Perpetual Protocol

Perpetual Protocol is a decentralized finance (DeFi) project focused on creating a decentralized exchange for perpetual futures. The project aims to make perpetual futures trading more accessible, secure, and transparent by leveraging the Ethereum Layer 2 solutions like Optimism. It is designed to allow users to trade perpetual contracts without the need for intermediaries or centralized platforms.

💡Perpetual Futures

Perpetual futures are derivative contracts that allow traders to speculate on the price of assets without owning the underlying asset. Unlike standard futures contracts, perpetual futures have no expiration date and can be held indefinitely. In the context of Perpetual Protocol, these futures allow users to trade popular cryptocurrencies like Bitcoin and Ethereum in a decentralized, permissionless manner.

💡Funding Rate

The funding rate is a mechanism used in perpetual futures to ensure that the price of the contract stays close to the underlying asset's price. It periodically transfers payments between traders in long and short positions, depending on whether the contract price is above or below the asset's spot price. For example, if the perpetual contract price is higher than the asset price, traders in long positions pay those in short positions.

💡Uniswap V3

Uniswap V3 is a decentralized exchange protocol that allows for concentrated liquidity, enabling more efficient trading. Perpetual Protocol integrates Uniswap V3 to manage liquidity for perpetual futures trades. This partnership allows Perpetual Protocol to enhance trade execution while reducing slippage and transaction costs.

💡Layer 2 Scaling

Layer 2 scaling refers to solutions built on top of Layer 1 blockchain (such as Ethereum) to improve transaction speed and reduce fees. Perpetual Protocol utilizes Optimism, an Ethereum Layer 2 scaling solution, to achieve lower transaction costs and faster trade execution, which is crucial for handling high volumes of perpetual futures trading.

💡Clearinghouse Smart Contract

The clearinghouse smart contract in Perpetual Protocol is responsible for minting and burning virtual tokens (v-tokens) that represent the user's assets in the system. It manages user deposits, calculates available leverage, and facilitates trades on the platform. This smart contract enables decentralized control over user assets without requiring a centralized intermediary.

💡v-Tokens

v-Tokens are virtual tokens minted by the Perpetual Protocol's clearinghouse smart contract. These tokens represent the assets that traders and liquidity providers use within the system. For example, vUSD represents USDC deposited by users, which can then be used to open positions in perpetual futures markets or provide liquidity.

💡Liquidity Providers (Makers)

Liquidity providers, also known as makers, supply capital to the perpetual futures exchange by depositing USDC into the system. They earn trading fees whenever trades occur in the pool where they provide liquidity. Liquidity providers also have the option to use leverage and must carefully manage their exposure to price movements and impermanent loss.

💡Cross Margin

Cross margin refers to the system where all a user's funds are pooled together as collateral for their trades. This allows users to manage multiple positions from a single pool of funds, reducing the need for margin adjustments. However, it also increases the risk, as losses in one position can affect other positions held by the user.

💡Optimism

Optimism is a Layer 2 scaling solution for Ethereum that uses optimistic rollups to increase transaction throughput and reduce gas fees. Perpetual Protocol launched its V2 version on Optimism, which allows the protocol to handle more trades at a lower cost compared to running directly on Ethereum's Layer 1. This integration is key to making perpetual futures trading more scalable and accessible.

Highlights

Perpetual Protocol is a DeFi project aimed at creating a decentralized exchange for perpetual futures, founded in 2019.

Perpetual futures are financial derivatives allowing traders to speculate on price movements without holding the underlying asset, and they don’t have an expiry or settlement date.

Perpetual contracts use a funding rate to ensure the contract price remains close to the spot price of the underlying asset.

The second version of Perpetual Protocol, named Curie, was launched on Optimism Layer 2 in November 2021 to improve scalability and reduce transaction costs.

Perpetual Protocol leverages Uniswap V3 for managing positions and liquidity, utilizing concentrated liquidity pools.

The protocol uses USDC stablecoin as the main collateral for trading and liquidity provision, ensuring that trades are settled in USDC.

A key component of Perpetual Protocol's design is the clearinghouse smart contract, which mints and burns virtual tokens (v-tokens) for user positions.

Perpetual Protocol supports both cross-margin and isolated-margin models, giving users flexibility in how they manage their collateral.

In V2, liquidity providers (makers) can accrue fees by adding liquidity to Uniswap V3 pools while being exposed to potential risks like impermanent loss.

Perpetual Protocol plans to expand beyond cryptocurrency, enabling perpetual markets for assets like forex, commodities, and stocks in the future.

V2 introduces new features like limit and stop orders, staking, multi-collateral options, and permissionless market creation for a wider range of assets.

The project emphasizes the benefits of Layer 2 scaling solutions like Optimism, enabling faster and cheaper transactions compared to Ethereum Layer 1.

Perpetual Protocol works with other DeFi protocols like Popsicle Finance and Visor to make liquidity provision more efficient and less risky.

The protocol’s v-token system allows users to control leverage by minting the maximum number of virtual tokens based on their USDC deposit.

Perpetual Protocol is a key player in the DeFi derivatives space, providing users with a decentralized, transparent, and non-custodial platform for trading perpetual futures.

Transcripts

So what is Perpetual Protocol all about? What are some of the improvements that come with

the recently launched version 2 of the protocol? How does it make use of Uniswap V3? And what

are perpetual futures in the first place? You’ll find answers to these questions in

this video.

Before we begin, if you want to learn more about decentralized finance and the technology

behind it make sure you subscribe to my channel, hit the bell icon and enable all notifications.

Perpetual Protocol is a DeFi project with the main goal of creating the best, most accessible

and most secure decentralized exchange for perpetual futures.

Perpetual Protocol was founded in 2019 by a small team of startup founders and software

engineers. Initially called “Strike”, the project pivoted to perpetual futures and

changed its name in the summer of 2020.

The first version of the protocol was launched on the xDai network in December 2020. Version

2 of the protocol named Curie after the famous scientist and a Noble Prize winner - Marie

Curie, launched on Optimism on the 31st of November 2021.

The design of Perpetual Protocol that we’re going to explain later is extremely interesting

as it leverages the DeFi “money legos” ethos to both build upon other already existing

DeFi projects as well as provide building blocks for other protocols in the future.

Perpetual Protocol is one of the projects that focus on derivatives in DeFi. If you

need a recap on what derivatives are and an overview of other protocols in this space

I highly recommend watching my other video first.

Before we dive deeper into the design of Perpetual, let’s fully understand the main derivative

product that the protocol offers to trade - perpetual futures.

Perpetual futures are one of the most popular trading products in the cryptocurrency space.

Initially offered by well-known centralized platforms such as Bitmex, Binance or Bybit

they are now also making their way into DeFi.

Similarly to other derivatives, perpetual futures allow for gaining exposure to a price

of a particular financial instrument without holding the underlying asset. This can be

useful for multiple purposes including price speculation, hedging or arbitrage.

In contrast to standard future contracts, perpetual futures don’t expire and they

don’t have the settlement date, hence they can be held and traded for an indefinite amount

of time.

Not having the settlement date can be quite beneficial for traders as they don’t have

to deal with multiple contracts with different settlement dates. In standard futures, the

settlement date is quite important as it allows the price of future contracts to converge

with the actual price of their underlying asset as the settlement date approaches.

To make sure the price of perpetual contracts doesn’t diverge too much from the price

of their underlying assets, perpetual contracts use a funding rate. The funding rate is paid

periodically and provides incentives to one side of the market - either market participants

with open long positions (longs) or open short positions (shorts).

In general, when the price of the perpetual contract is trading above the price of its

underlying asset, the funding rate becomes positive and longs pay shorts. The opposite

holds when the price of the perpetual contract is below the spot price. In this case, shorts

pay longs.

This allows the price of the perpetual contract for a specific asset to converge with the

price of its underlying. On top of the funding rate, price speculators and arbitrageurs also

help with making sure the prices between different derivatives or spot exchanges don’t diverge

too much.

Perpetual futures also provide an easy way for shorting a particular asset where market

participants can benefit from the price of that asset decreasing over time.

They also facilitate easy access to leverage which allows for controlling a bigger position

than it would’ve been otherwise possible using the same amount of capital. This can

be useful in certain scenarios but it can also be quite dangerous as undercollateralized

positions can be liquidated when the market moves against the trader’s position.

In general, derivatives markets help with the price discovery of different assets as

they provide a place where all market participants can meet and easily trade, usually in big

sizes. For certain financial instruments, derivatives markets can even become their

primary markets for price discovery.

I hope this gives a good basic overview of what perpetual contracts are. Time to dive

into a protocol that provides easy access to these financial products - Perpetual Protocol.

Perpetual Protocol allows for trading different perpetual contracts of the most popular cryptocurrencies

like Bitcoin or Ethereum with multiple other coins that will be added to the protocol in

the future.

In contrast to centralized exchanges offering similar products, Perpetual Protocol doesn’t

hold custody over users’ funds, so users are always in full control of their assets.

On top of this, it allows its users to trade in a permissionless and fully transparent

manner.

At the moment, Perpetual makes use of the USDC stablecoin as its primary collateral.

This can be expanded into other types of collateral in the future.

Having USDC used across the platform also means that all trades are settled in USDC.

This means that if a user speculates on the price of Ether and, let’s say, doubles their

money they’ll end up with more USDC in their account after closing their position.

The V1 of the protocol was initially deployed on Ethereum Layer 1, but after experiencing

problems with slow execution and high transaction fees, the protocol was released on xDai at

the end of 2020. V2 iterated on the initial design and introduced

a new model for managing positions and executing trades that makes use of Uniswap V3 and its

concentrated liquidity.

And, by the way, if you need a recap on how Uniswap V3 works you can check my other video

here.

At the centre of the Perpetual Protocol design lies the clearinghouse smart contract. Clearinghouse

is responsible for minting and burning virtual tokens called v-tokens that are held by the

contract on behalf of the user.

When a user deposits USDC to the exchange, the clearinghouse contract mints v-tokens

using the max available leverage. This doesn’t mean the user has to use the maximum leverage

when opening a position and it only gives the users the opportunity to do so by issuing

the maximum number of tokens that the user may or may not use.

As an example, if the user decides to deposit 1000 USDC, the protocol would issue 10,000

v-tokens, in this case, vUSD.

To create a particular position, the user can select the product they want to trade

and use v-tokens to enter the position.

For example, if the user wants to go long on BTC, they can instruct the clearninghouse

to trade their vUSD tokens for v-BTC. In this case, the protocol would use a Uniswap V3

vUSD-vBTC pool.

As mentioned earlier, depending on the leverage ratio that the user selects, they can be using

either some or all of their vUSD tokens.

Whenever the user decides to close their BTC position they can trade their vBTC tokens

back to vUSD, securing their profit or loss depending on what happened to the Bitcoin

price since they opened the position.

On top of being used by the traders, the clearinghouse contract is used by makers.

In Perpetual, makers are market participants that provide liquidity to the perpetual futures

exchange. By doing so, makers make money by accruing trading fees whenever someone trades

against the pool where they provide liquidity. Makers can also use leverage when providing

liquidity.

Due to the Uniswap V3 design, providing liquidity is a bit more tricky than on other AMMs. In

particular, makers have to decide in which price range they want to provide liquidity.

They also only accrue fees from trades that go through the range where their liquidity

is present.

Makers, similarly to traders, can use USDC to interact with the perpetual futures exchange.

When makers decide to provide liquidity in certain assets they deposit USDC to the clearinghouse

contract that in turn mints vTokens and automatically adds liquidity to the selected Uniswap V3

pool.

As an example, if a maker decides to provide liquidity in the BTC-USDC market, their USDC

is used to mint a correct ratio of vUSD and vBTC that are in turn added to the vUSD-vBTC

Uniswap V3 pool.

As makers are exposed to the price of the underlying tokens in a liquidity pool they

can be impacted by impermanent loss, hence they have to be careful with the ranges they

provide liquidity in and in general they should have sustainable strategies for providing

liquidity.

To make providing liquidity on Uniswap V3 easier, Perpetual works with protocols such

as Popsicle Finance, Visor and others.

What is interesting is that Perpetual Protocol builds on top of Uniswap V3, leveraging the

previously mentioned “money legos” ethos in a completely permissionless way.

When it comes to the margin model, Perpetual Protocol uses cross margin, which means that

the user’s funds are kept in one pool and all of their positions use this pool as collateral.

This makes managing collateral easier since the user doesn't need to add or remove margin

for each position, but has to be used with caution as in this mode one position can affect

other positions. If the user has several highly leveraged positions, one position that goes

against the user can cause others to be at risk and face possible liquidations.

The users also have a way of using isolated margin mode by creating separate wallets for

each of their positions. The V2 of the protocol has just recently launched

on Optimism - an optimistic rollup Ethereum Layer 2 scaling solution.

Launching on rollups allows Perpetual Protocol to scale and achieve both low transaction

fees and high transaction throughput. This is extremely important for running a successful

perpetual futures exchange. The benefits of rollups should be more and more obvious with

time as the existing solutions mature and become cheaper and cheaper.

V1 will remain on xDai. V2 can also launch on xDai if Uniswap v3 also launches there.

Perpetual is also planning on launching on Arbitrum in the near future.

If you’d like to learn more about rollups you can watch my video about this topic here.

Rollups and other L2 solutions will benefit a lot of DeFi protocols including Perpetual.

V2 of Perpetual is not only limited to the initial launch. In fact, during the full V2

rollout, the protocol is planning on bringing additional features. Some of them include

limit and stop orders, staking, multi-collateral, liquidity mining and even permissionless market

creation.

When it comes to the latter, anyone will be able to create a perpetual market for any

assets as long as there is a price feed for them via either Uniswap v3 TWAP or Chainlink

oracles - both of them supported in V2.

Also, in future updates, the protocol will no longer be limited to crypto and it will

expand to markets such as forex, commodities and stocks.

Perpetual Protocol is clearly one of the most interesting protocols focusing on derivatives

in DeFi.

It looks like the team learned a few important lessons from the first version of the protocol

and came up with a new, improved design that should make the perpetual futures exchange

more sustainable and more appealing to both the traders and liquidity providers.

Perpetual Protocol is a great example of a project that massively benefits from launching

on an Ethereum Layer 2 solution such as Optimism or Arbitrum.

It shows that there will be a set of protocols that are better off launching directly on

Layer 2 without even deploying on Layer 1. It will be amazing to see other protocols

following this approach and trying new designs that couldn’t previously work due to the

limitations of Layer 1 Ethereum.

It will also be interesting to see Perpetual Protocol gaining traction and convincing more

and more people to use trading products outside of the well-known centralized exchanges.

If you’d like to check out Perpetual Protocol you can find my link in the description box

below.

And always remember to make sure you fully understand how a trading product you’re

interacting with works before using it and remember to always trade with funds that you’re

willing to lose.

So what do you think about Perpetual Protocol? What are some of your favourite DeFi protocols

in derivatives category? Comment down below.

And as always, if you enjoyed this video, smash the like button, subscribe to my channel

and check out Finematics on Patreon to join our community.

Thanks for watching!