Curie, Perpetual Protocol’s v2 brings a fresh feel to the decentralized derivatives space
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The derivatives sector has seen immense growth as China’s efforts to ban crypto has resulted in more centralized exchanges users being pushed towards decentralized exchange alternatives. Aside from that, the release of various Layer 2 scaling solutions has solved the persistent problem of high gas costs and low throughput that plague most Ethereum applications. One of these projects seeking to benefit from the DEX growth, is Perpetual Protocol, a platform that offers perpetual contract trading on every asset and supports up to 10x leverage.
Read on to learn more about Perpetual Protocol’s v2, dubbed Curie and how it aims to provide users a seamless trading experience while also offering a few additional features that its centralized exchange competitors cannot provide.
Overview of Improvements to Perpetual Protocol v2 ‘Curie’
Guest Post by Makena Walsh, Content Marketing Specialist of Perpetual Protocol
The Trending Topic of Derivative DEXs
The derivative DEX space is trending, and for good reason. The DEX derivative pump is due to a number of factors, including the current regulatory landscape in the US and China. The heavy regulatory hand of both these nation states has created a very bullish narrative for DeFi in general, and derivative DEXs in particular.
On-chain metrics show that China’s banning of crypto and shutting down of centralized exchanges has only served to push users to decentralized alternatives. This is an example of the water hose analogy at work–where a government or other institutional entity tries to stem innovation through regulation and restriction (plugging the hose) it only ends up creating more pressure that leaks out elsewhere. While DeFi still has a lot of work to do to become fully decentralized and censorship resistant, so far government attempts to curtail it seem to have only made it stronger.
The other source of wind in derivative DEXs’ sails is the recent release of various layer 2 scaling solutions. Timing plays an important factor here. Previous attempts to create decentralized derivative protocols (particularly those offering options) were hampered by Ethereum’s persistent scaling problem. High gas costs and low throughput made it difficult to compete with the superior user experience of centralized exchanges.
Fortunately, solutions to this problem have recently arrived from a number of angles. With the recent release of optimistic and zk-rollup scaling solutions comes an opportunity to create decentralized derivative alternatives that achieve (and surpass) parity with their centralized counterparts.
The goal of derivative DEX Perpetual Protocol’s v2, dubbed Curie, is to take advantage of these cutting edge technologies to give traders a seamless trading experience while also offering a few additional features that CEXs, due to limitations imposed by their centralized design, cannot provide.
The rest of this article will touch on those features, and how Curie has changed and improved from Perpetual Protocol v1.
Virtual Market Maker Model and the Long Short Skew Dilemma
While Perpetual Protocol v1 provided unprecedented on-chain access to Perpetual Futures products in a permissionless, decentralized model, it was far from perfect. Of chief concern was the long short skew caused by the design of the Virtual Automated Market Maker model which led to funding rate bleed.
To understand this issue, a basic understanding of the AMM model is necessary. For our purposes specifically, it’s important to understand how price moves in the AMM model. To put it simply, in the AMM model, a trader is trading against a pool, rather than against another trader in the central limit order book (CLOB) model. This means that in the AMM Mode, the price doesn’t move until a trade is made against the pool. When this occurs, it changes the ratio of tokens in the pool, creating a price impact. The size of this impact is determined by the size of the trade and the depth of the pool’s liquidity.
Perpetual Protocol’s v1’s chief innovation was a twist on the AMM: the Virtual Automated Market Maker (vAMM). With the vAMM, instead of liquidity providers providing real assets inside the pool, virtual assets are minted and used as a sort of accounting system. The vAMM provided several benefits, including the ability to short and trade with leverage.
This system works well enough until the price of an asset experiences significant change, such as in a crypto bull market. When this happens, 1. new positions must open to move the price, and 2. positions must remain open in order to hold the price at the new level. Continuing the bull market example, if an asset doubles in price, a huge number of longs need to open, and funding rates are very likely to pay out to this large group of long position holders, since all it takes is a few long positions to close to move the price back below spot.
This quirk of Perpetual v1’s vAMM made it one of the most profitable places in DeFi to long ETH and BTC for virtually all of 2021. Since most traders were long, there were very few shorts to help pay funding, meaning the exchange insurance fund picked up the tab.
To summarise, unlike in the CLOB model, where long and short OI maintain equilibrium, in v1 the funding rate mechanism created a long interest imbalance. Because in the vAMM model there is not an equal amount of short interest to pay funding, the insurance fund was employed.
This situation was not tenable for the future longevity of the project. Perpetual Protocol v2’s primary innovation and response to it is the introduction of liquidity providers (AKA Makers) who provide concentrated liquidity to markets.
Improved Liquidity and Capital Efficiency
Perpetual Protocol Curie introduces the concept of Makers: traders who create orders by acting as liquidity providers providing capital to markets in specific price ranges. This allows Curie to be far more flexible than the static v1 vAMM model, while benefiting from a quantum leap in capital efficiency.
Curie accomplishes this by building on top of another legendary innovator in the DeFi space: Uniswap. Uniswap’s version 3 introduced the concept of concentrated liquidity, where instead of distributing capital along the whole price curve, LPs are able to deploy it at specific and predetermined ranges. This allows for a massive improvement over the old x * y = k model, where capital is diffused by being spread out along the entire price curve.
This brings two advantages: highly efficient use of liquidity, and flexible trading dynamics to achieve balanced open interest.
This change to Perpetual Protocol’s vAMM model is perhaps its biggest improvement. However, there are a number of other changes/improvements as well–some of which will be released along with v2, and some which will be added later along the roadmap.
Additional Improvements Coming with Curie
• Better User Experience
Low cost and high speed are crucial for DEXs to achieve UX parity with centralized exchanges. Curie will launch on Arbitrum, an Ethereum layer 2 optimistic roll-up scaling solution. Arbitrum will enable Curie to operate with significantly higher speed as well as lower cost than currently available on Ethereum’s Layer 1. This improvement, coupled with an all-new mobile responsive UI, will seriously improve the experience of trading on the protocol.
In further pursuit of this goal, and of achieving parity with popular centralized exchanges like FTX, Curie will also feature cross-margining. This will grant traders much more flexibility in regards to their position management.
• Better Liquidity and New Design Space for LPs
As a result of Curie using Uniswap v3 under the hood, Curie will provide much better liquidity and lower spreads. It also opens up a whole new design space for liquidity providers, who will be able to design custom liquidity provision strategies based on current and expected market conditions.
Not only will LPs have an enormous amount of say and flexibility in how they provide their capital, but they can also do so with leverage (currently up to 10x).
In the spirit of DeFi and the future of finance, Curie is built to allow for a high level of interoperability—especially with other projects integrating with Uniswap v3. This ability to integrate and partner with others is a multiplier for growth, innovation, and community collaboration.
For a start, Perpetual Protocol will partner with Popsicle Finance to bootstrap liquidity. Popsicle will be using their own customized liquidity provision strategy in maker pools, with yields on ETH estimated at anywhere from 150%-200%.
• Decentralized Long Tail Markets
One of the most exciting prospects of Curie is the permissionless and decentralized creation of virtually any market. While other derivatives platforms may use the term ‘decentralized’ to describe themselves, markets often must pass ‘regulatory analysis’ and other hurdles to be approved by the team before being added to the platform.
The plan for Perpetual Protocol v2 meanwhile, is a totally decentralized, on-chain process for adding markets, similar to Uniswap itself.
What’s Up Next For Curie?
Curie is currently undergoing audits from two of the most respected firms in the Ethereum ecosystem. The unknown results of these audits make it difficult to say exactly when Perpetual Protocol v2 will launch, but it’ll likely be some time in Q4 of 2021.
Curie’s unique and innovative solutions to the problems posed by decentralized derivatives have retail and institutional traders alike excited to see what it can do. Talks with institutional traders are in development.
Rather than just recreate the CLOB model on chain, Perpetual Protocol v2 Curie brings a new and innovative approach to decentralized derivatives trading. It will be interesting to see how the market reacts to these novel improvements.
One thing is for sure: the future looks bright, permissionless, and decentralized.
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