Research

What is Perpetual Protocol (PERP)

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In this issue we take a look at Perpetual Protocol.

Protocol purpose

Enable users to go leveraged long or short on any asset, only by interacting with one asset (the collateral asset).

Problem

Perpetual contracts (or “perps”) are already a highly sought-after retail product, but most of the perpetual trading volume is currently concentrated to centralized exchanges.

Solution

Perpetual Protocol enables users to create synthetic leveraged long or short positions (against USDC collateral) on any asset that is supported by the protocol. 

In order to support an asset, the protocol needs to have access to the underlying asset’s price to correctly determine the size of the recurring funding payments.  

Because the perpetual contracts don’t have an explicit expiration date (compared to e.g. futures), they use funding payments to keep the perpetual contract’s price in line with the underlying asset’s price.

Funding payments work as a price controller mechanism: 

  1. Perpetual’s price > underlying’s price → perpetual’s price needs to go down → longs pay shorts, which helps drive down the price
  2. Perpetual’s price < underlying’s price → perpetual’s price needs to go up → shorts pay longs, which helps drive up the price

Why now

With the continued growth of DeFi, it’s likely that products that have been successful on centralized exchanges will be recreated to fit the decentralized world. The trading volumes for perpetuals on centralized exchanges are multiples higher than spot volumes on those same exchanges. 

Further, the growing interest towards non-Ethereum assets makes perpetuals an attractive way for traders to easily gain exposure to assets that aren’t otherwise accessible on Ethereum today, e.g. Polkadot’s DOT. Perpetual Protocol might be well-positioned to attract traders interested of these non-Ethereum assets.

Competition

In addition to centralized exchanges, Perpetual Protocol is competing against order book -based perps protocols like dYdX, DerivaDEX, MCDEX. 

The difference between Perpetual Protocol and its competitors is the use of a virtual AMM to price trades and bootstrap liquidity. 

When a new asset is added to the protocol, a virtual AMM is created to enable trading with it. Unlike in Uniswap, where liquidity providers deposit real assets into a trading pool, in Perpetual Protocol the initial asset balances are virtual, set by the pool creator (currently the core team). 

When a user purchases a perpetual contract, the price of the asset is determined like it was traded on a traditional AMM like Uniswap, even if there are no “real” assets in the pool -- all trades are simply accounted against the user’s collateral balance.

Product

The exchange works on the xDai Chain, an Ethereum sidechain. For more on different Ethereum scaling solutions, check out our post here.

To start trading, users need to deposit USDC from Ethereum to the Perpetual Protocol exchange located on the sidechain. The USDC can then be used as collateral to buy synthetic assets (perpetual contracts).

Business model

The Perpetual Protocol charges a 0.1% trading fee (take rate) on each trade executed on the vAMM. 

Currently, the trading fees are directed to a separate insurance fund, which is used to cover potential shortfalls that result from failed liquidations, or the needs to pay funding payments from the vAMMs. Over time, 50% of the trading fees will be distributed to PERP tokenholders.

Charts

Market cap

What is a project valued at? Calculated based on a blockchain's or decentralized application's fully-diluted cryptocurrency or token supply.

  • Latest: $727,500,000 
  • 30-day change: +68.37%

It’s worth noting that the PERP token was released already in September, even if the exchange itself launched in December. PERP’s market cap seems to have correlated with the recent run-up of other DeFi tokens.

Price to sales ratio (P/S)

How is a project valued in relation to its revenues? Calculated as a blockchain’s or decentralized application’s market cap divided by its annualized revenue. Annualized revenue is a forward-looking revenue estimate that is calculated based on a simple 30-day moving average.

  • Latest: 83.38x
  • 30-day change: -66.94%

Having launched only a little over a month ago, Perpetual Protocol has already attracted significant volume to its exchange, which is also evident in its price-to-sales ratio. 

The steep fall in the price to sales ratio (along with the stable market cap in December and early January) shows that the trading volumes on Perpetual Protocol took off almost immediately after launch.  

Token trading volume to market cap ratio (VOL/MC).

How efficient is the price discovery for a project’s native token? Calculated as the daily trading volume for a blockchain’s or decentralized application’s cryptocurrency or token divided by its market cap.

  • Latest: 1.22%
  • 30-day change: +7.39%

The relatively low token trading volume to market cap ratio is natural for an early-stage project that has a relatively low supply of circulating tokens. It’s worth noting that a low ratio decreases the accuracy of the price discovery for the PERP token.

Gross merchandise volume (GMV)

What is the demand for a project’s service? Calculated as a blockchain’s transaction volume or a decentralized application’s trading (exchange) or borrowing (lending) volume.

  • Total since launch: $765,507,771
  • 30-day change: +692.13%

The chart shows that the trading volumes on Perpetual Protocol have been increasing exponentially over the last few weeks. The low trading fees on the sidechain offer a compelling alternative for those interested in trading perps. 

The protocol currently supports perpetuals for ETH, BTC, YFI and DOT. It’s interesting to see how quickly the trading volumes for BTC, DOT, and other non-Ethereum assets will grow in the future. 

Revenue (fees paid)

How much are users paying to use a project’s service? Revenue refers to the total fees paid by a blockchain’s or decentralized application’s end users. Calculated as: GMV * Take Rate = Revenue.

  • Total since launch: $764,411
  • 30-day change: +691.93%

Given the fixed 0.1% trading fee, we can see that the revenue pattern for Perpetual Protocol is proportional to the trading volume pattern.

The protocol currently supports perpetuals for ETH, BTC, YFI and DOT. It’s interesting to see how quickly the trading fees paid for BTC, DOT, and other non-Ethereum assets will grow in the future. 

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