What Is Perpetual Protocol (PERP)? A Beginner’s Guide

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Ethereum is one of the oldest and most established blockchain platforms. One of its downsides is that it often comes with exorbitant gas fees. What if we told you there’s a platform that not only offers cheaper fees, but also lets you leverage your capital by up to 20x? Look no further. In this article, we’ll examine Perpetual Protocol.

What Is Perpetual Protocol? 

Created in 2018 by Yenwen Feng and Shao-Kang Lee, Perpetual Protocol was originally called “Strike” before it changed its name over a year ago. Perpetual Protocol is built on the Ethereum blockchain. Like Uniswap or PancakeSwap, Perpetual Protocol is a decentralized exchange (DEX) that allows users to trade with leverage, short positions and  low slippage. It’s a smart contract that uses automated market makers (AMMs) instead of people or institutions to complete trades. Perpetual Protocol doesn’t offer spot trading.

What Is PERP?

PERP is the native token of Perpetual Protocol and is critical to its governance. Still in its early phases, Perpetual Protocol is currently managed by a team. However, the ultimate plan is reportedly to transfer power to PERP holders, with developments and improvements falling onto the shoulders of the community.

In addition to being a fundamental aspect of the network, PERP can also be staked. Stakers are rewarded with unallocated or newly minted token supply, as well as half the trading fees in the network. 

How Does the Perpetual Protocol Work? 

Perpetual Protocol tries to mirror traditional exchanges in the trading of perpetual contracts via two mechanisms: AMM and insurance fund.

Automated Market Maker

Perpetual Protocol created a new variant of the popular automated market maker (AMM) known as the virtual automated market maker (vAMM). Automated market makers have been tested on decentralized platforms like Uniswap and Balancer and have proven to be good substitutes for centralized means of crypto exchange. 

With typical AMMs, assets are deposited in liquidity pools that have two tokens as a trading pair. Liquidity providers (LPs) earn fees from the pools. These fees are obtained from users who trade against assets in the pools. The vAMM is made for price discovery, and not spot exchange.

Like the AMMs of Uniswap, Curve or Balancer, Perpetual Protocol’s vAMM uses mathematical functions to determine the prices of tokens. Unlike these other AMMs, however, there is no liquidity pool, and no real asset is stored here (hence the “v” for “virtual” in vAMM). Currently, the markets on the protocol have been manually added by the Perpetual Protocol team. Nevertheless, future developments will be approved by the community as Perpetual Protocol moves to become a DAO (decentralized autonomous organization) in the future. 

Perpetual Protocol’s smart chain serves two functions:

  1. Clearinghouse
  2. Collateralization Vault

The clearinghouse is important in accepting deposits from traders, and for recording both the margin amount and amount of leverage to be taken. It then passes the deposits to the other half of the smart contract — the collateralization vault.

Meanwhile, the collateralization vault secures trading positions and sends signals to the vAMM to update the prices of tokens.

Insurance Fund

Liquidation or unexpected events involve significant risks and could potentially leave traders unable to fund their leveraged positions. When this happens, an insurance fund comes into play.

Remember that half of the trading fees go into rewarding staking. You might wonder where the other half goes. In fact, the insurance fund is derived from the remaining half of transaction fees. The more people who use the network, the more the insurance fund grows. 

A smart contract designed to mint new PERP tokens has been put in place in order to mitigate the risk of depletion when the insurance fund is diminished. These new tokens are then sold for collateral in the vault, in a bid to prevent insolvency of the system. 

Key Features

Here are the three key features of Perpetual Protocol.

Up to 20x leverage 

The protocol doesn’t have any hidden fees, and traders can leverage long or short with up to 20x on their capital at any time.

24/7 Liquidity 

So far,Perpetual Protocol hasn’t lacked liquidity. Its team claims this won’t change. Apart from crypto assets such as Bitcoin, Bitcoin Cash, Ethereum and Ethereum–based tokens, you can also leverage your fiat or gold on the Perpetual Protocol platform. 

No Impermanent Loss 

One major issue in the DeFi staking space is impermanent loss, which can occur when you deposit your money in a pool to earn passively. Due to volatility, your investments may take a hit. Even if you don’t lose money, your gains can be significantly reduced.

Unlike with other DeFi projects, price fluctuations don’t affect stakers on Perpetual Protocol, so impermanent loss does not occur.

PERP Tokenomics

Perpetual Protocol has distributed 178 million PERP via different private investment rounds and liquidity mining campaigns, most notably by Balancer, Alameda Research and Three Arrows Capital. The figures below are accurate as of this writing.

  • Market Cap: $1.1 billion
  • Fully Diluted Market Cap: $2.4 billion
  • Circulating Supply: 68 million PERP
  • Total Supply: Unknown

Pros and Cons of Perpetual Protocol (PERP) 

Pros

Apart from the aforementioned benefits, a few other things differentiate Perpetual Protocol from its peers.

High Security Levels: Perhaps one of the biggest selling points of the platform, Perpetual Protocol is very secure. It’s open-sourced, so anyone can check for red flags. Apart from this, it has undergone external audits from renowned crypto firms ConsenSys and PeckShield, receiving recommendations from both. In order to secure users’ funds, it also has insurance coverage from Unslashed Finance and Nexus Mutual, two companies specializing in DeFi-related protection.

Low Fees: Ethereum-based Layer 2 protocols are known to charge high fees due to network congestion. Perpetual Protocol offers speedy transactions at a low cost. 

Cons

Having understood Perpetual Protocol’s strengths, let’s take a look at some demerits.

Flash Crashes: Perpetual Protocol has experienced latency issues and flash crashes during periods of very high volatility. This problem stems from arbitrageurs not being able to step in to take positions on the other side of large liquidated positions, and individual traders not being able to adjust their margins. [Editor’s note: As of this writing, this issue seems to be resolved, as recent volatility has not affected the protocol. However, further observation is required.] 

Low Fees: We know this is supposed to be an advantage, but the fact is it has posed problems for the protocol. There’s usually an imbalance between long and short open interest, placing responsibility for the funding rate on the insurance fund, not the traders themselves. This arrangement doesn’t seem sustainable in the long term.

Is Perpetual Protocol (PERP) a Good Investment? 

From what we’ve gathered so far, PERP could make it big. The crypto ban in China seems to work in their favor, as this shift from centralized to decentralized exchanges has caused more traders to take interest in PERP. A 20x leverage is hard to come by, and it’s mathematically impossible for Perpetual Protocol to run out of liquidity, thanks to its insurance fund. Overall, Perpetual Protocol is poised for great growth.

How To Buy Perpetual Protocol (PERP)

Bybit is one of the safest platforms to buy PERP. PERP cannot be purchased directly; you need to own Ethereum or ERC tokens, then swap them for PERP.

Source: Bybit PERP/USDT

Closing Thoughts

The DeFi space has made incredible progress in recent years. Although numerous protocols are trying to make cryptocurrency mainstream, not all of them have or will become successful. Perpetual Protocol (PERP), a unique proposition under Ethereum, could make tremendous gains when the team relinquishes complete control of their DAO. More importantly, both platform and token are gaining attention on social media, as more traders begin believing in their potential. Perpetual Protocol is unquestionably a DEX worth watching.

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