Dive Into Winning Strategies to Earn Yield with Perpetual Protocol!
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DeFi Slate Fam,
Without a doubt, there is clearly a gap in info on how exactly a user would earn using Perp V2. Knowing how to navigate an interface is simply not enough. You must also know the basic functions of perpetual futures trading as well as how to leverage this in unison with other external protocols. This is where a winning strategy will come from.
Sounds a bit overwhelming, huh? It doesn’t have to be!
Our good friend Anwar Yahya at Perpetual has a great written piece on the basics of Perp V2’s two core products as well as plans for a financial strategy database to showcase different financial strategies to help you earn!
Read about this NOW:
Profiting with Perpetual Protocol – A Database of Strategies
By Anwar Yahya
Background and Analysis
There is a gap in information on how exactly a user would make money using Perp V2. A clear distinction must be made here between knowing how to use the interface and the basic functionality of perpetual futures trading and market making, versus knowing how to leverage these products together and in tandem with external protocols to be part of a broader financial strategy. It is only possible to unlock the true power of Perp V2 when approaching the subject in this manner.
Before diving in, here is a quick rundown of Perp V2’s two core products.
A Perpetual Futures Exchange
This side of Perp V2 is a leveraged trading platform allowing users to long and short with leverage up to 10x. Collateral to fund trades, currently, is only accepted in USDC with future plans to allow multi-asset collateral. Basic perpetual trading concepts apply, such as liquidations, funding rates, maintenance margins, trading fees, and mark/index price. However, instead of the more common Close Limit Order Book (CLOB) model seen in centralized exchanges (CEX), Perp V2 uses the more DeFi native Automated Market Maker (AMM) model, with implications such as slippage and no stop or limit orders.
For more info on this Perp V2 function, please visit – https://v2docs.perp.fi/for-traders
At no point is this an attempt to simply replicate a CEX experience in a decentralized manner. This side of Perp V2 is for traders/takers to speculate on future price action. However, in order to do this, there needs to be liquidity. This is where Perp V2’s other core product comes into play.
A Market Making/Liquidity Mining Interface
This side of Perp V2 allows users to provide liquidity to traders/takers for a share of fees collected. Following the Uniswap V3 model, users can then select a price range to “concentrate” their liquidity, thereby increasing (or decreasing) their share of fees collected. Concentrating liquidity into a smaller price range will result in higher fees collected, but will increase the risk of liquidation and vice versa. Collateral to provide liquidity, currently, is only accepted in USDC with future plans to allow multi-collateral.
For more info on this Perp V2 function please visit – https://v2docs.perp.fi/for-makers
Once again, at no point is this an attempt to replicate a Uniswap V3 experience either. This is the other side of the coin, allowing traders to speculate on price action through the incentivisation of others to provide liquidity. The end result is an Automated Market Maker system that allows leveraged trading and concentrated liquidity provision.
The design of this system is not simply for users to come and trade or market make. This system allows for the use of these functions in broader financial strategies; in tandem within Perp V2, with other DeFi protocols, with centralized exchanges or a combination of all three. You can trade AND market make at the very same time, all from the same UI. You can simultaneously hedge your position on another exchange, collect arbitrage on another protocol or even build something that will connect and form another part of your Perp V2 profit making chain. The possibilities are endless.
As amazing as it is to have a vast array of possibilities, a deep understanding of DeFi and financial systems is required to be able to unlock such capabilities. In an industry still in its infancy, the majority of users might even struggle to understand hedging, let alone a multifaceted financial strategy (which is a minimum requirement in the traditional finance world). This is where we can start to build a database of potential strategies, so that we may both educate and inspire users to take full advantage of Perp V2 and its vast array of possibilities.
This lack of understanding of financial strategies in the cryptocurrency industry is an obstacle that can be overcome. Starting in our own backyard with Perp V2, we can start to build this database. Sharing it with the wider community will;
- educate users
- give them much more reason to explore Perp V2
- provide a fresh take in a sea of repetitive crypto content
As time passes, there undoubtedly will be further strategies that will present themselves and these (once proven) will also be added into this database. This database will hopefully assist users in gaining maximum benefit from using Perp V2 and as a positive side effect, provide an intelligent way to further promote Perp V2. Going even deeper, this could also have a positive effect on the composability of Perpetual Protocol and incentivise builders to be part of our growing ecosystem.
“n00b Mode” will be the starting point for a Perp V2 strategy. It is an automatic strategy option housed within Perp V2’s Market Making UI. This allows the user to select a semi-passive liquidity management strategy pre-programmed into Perp V2. Users will have a choice of two strategies to select (Bullish and Bearish) and will be able to connect to Perp V2, deposit funds and simply start earning yield according to their selection. Under the hood, this strategy is aimed at minimizing impermanent loss. If the price goes in the direction you predicted, you will have close to zero impermanent loss on top of receiving fees and liquidity mining rewards.
A user would connect to n00b mode by selecting the option in Perp V2’s Market Making UI section and select either;
- Bullish – This is technically the more aggressive strategy of the two. For this strategy to function, there will need to be non-USD assets borrowed (ie. crypto assets) whose values increase as prices rise. This is how you will not be affected by impermanent loss, but will also result in tighter liquidation points. This strategy will allow for some downward price action before ultimately moving higher past the mark price.
- Bearish – The less risky strategy of the two but with similar profits, bearish mode will allow for some price action above the mark price before ultimately heading below.
Funding Rate Arbitrage Strategy
This is a classic Perpetual Protocol strategy. Basically, a user will Long/Short on Perp V2 and Long/Short an equal amount elsewhere (on a centralized exchange or another DEX) and take advantage of funding rates. You will gain from funding rates on one side or the other. As long as your exchanges are secure and you don’t use leverage, you could pursue this strategy indefinitely. When you are ready to take profit, you need to simultaneously end both trades. This is a “safe” strategy barring any security issues. You will end up with the same starting collateral, plus a positive funding payment. Additionally, users can select other exchanges that have further trading incentives, such as dYdX, GMX, or Futureswap, to sweeten the APR.
For a deep dive into the Funding Rate Arb. Strategy, please see;
Market Make + Leveraged Trade Strategy
This is a classic DeFi strategy and is very simple to execute. Buy an asset with USD, market make and simply long/short less than the calculated APR. Below is a simple example completely in house on Perp V2;
Start with $10,000 in collateral
Market Make in ETH/USDC ($8,000 worth) at 25% APR
10x Long ETH ($2,000 worth)
If you win your long, you make $$$
If you get liquidated, you will make back your starting APR in one year. ($2,000)
Adjust your long margin to suit your risk appetite and time sensitivity. In this scenario if you 10x Long $200, you can get liquidated and make your money back within 40 days. You can then repeat the process. Free 10x Long/Short every 40 days, anybody?
There is, of course, always a level of risk. In the case with liquidity provided in USD, market volatility will result in an impermanent loss on your market making capital. However, that volatility could also result in a HUGE win on your leveraged trade… if you predict the right direction.
On the other hand, once multi-collateral arrives at Perpetual Protocol, provide collateral in ETH for market making in Perp V2’s ETH/USDC pool for zero impermanent loss. 10x Long/Short your APR. Repeat.
Multi-Collateral Market Making Strategy
Upon the introduction of multi-collateral, it presents another interesting proposition. We will use ETH as collateral to present this case;
1ETH is your collateral
You Market Make in the ETH/USDC pool where your position value is calculated in USDC
If the ETH price rises in the pool resulting in impermanent loss, this will be offset by the rise in your collateral USDC value
I.e., If you deposit collateral of 1 ETH, you will only ever have 1 ETH
You collect fees with low risk
The risk here is if price moves out of your liquidity range, however, this you can actively control.
Options/Market Making Hedging Strategy
This is a hedging strategy for when multi-collateral is initiated. You will market make on Perp V2 and hedge by purchasing a Put Option from an options exchange (perhaps delta.exchange). This is best described in two example scenarios;
BTC Mark Price = USD45,000
Buy Put Option to sell 1 BTC at $40,000 (expiry in 6 months)
Cost of option is $5,000
Market Make on BTC Perp V2 with 1 BTC
Earn fees = $5,000
BTC price drops to $20,000 (but you still have 1 BTC)
Take 1 BTC and Sell your Put Option of $40,000 – $5,000 (cost of Put Option)
Total leftover = $35,000
Buy back BTC with USD = $35,000/$20,000 = 1.75 BTC
Profit = 0.75 BTC
BTC Mark Price = $45,000
Buy Put Option to sell 1 BTC at $40,000 (expiry in 6 months) + Cost of option $5,000
Market Make on BTC Perp V2 with 1 BTC
BTC pumps to $100,000
Earn fees = $10,000 (higher because of BTC pump)
Profit = $10,000 – $5,000 Put Option cost = $5,000, and you have protected yourself from any BTC losses
These are just five strategies that you can begin with. As time goes by, we will continue to share fresh strategies and ideas. Upgrading the protocol further will undoubtedly unlock even more potential and we will most definitely keep building. Keep an eye out on Perpetual Protocol for future updates.
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⚠️ DISCLAIMER: Investing in cryptocurrency and DeFi platforms comes with inherent risks including technical risk, human error, platform failure and more. At certain points throughout this post, we might get a commission for promoting certain projects, if this is the case we will always make sure it is clear. We are strictly an educational content platform, nothing we offer is financial advice. We are not professionals or licensed advisors.