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Since the Perpetual Protocol was launched in December, the total transaction volume of the agreement has exceeded 20 billion U.S. dollars, and at the same time, it has created approximately 20 million U.S. dollars in agreement revenue. PERP V1 is clearly a success. So what are the changes and upgrades that are worth looking forward to in the recently announced V2?
Written by: Jonathan Erlich, Investment Manager, Delphi Digital
It is an indisputable fact that Perpetual Protocol v1 has achieved great success. Since its launch in December last year, the platform has driven a total transaction volume of 20 billion U.S. dollars and created 20 million U.S. dollars in agreement revenue.
From this level, Perpetual Protocol is currently the decentralized derivatives exchange with the largest trading volume. Since the beginning of June, Perpetual Protocol’s market share has reached 83%.
The important thing is that the transaction fees are directly included in the agreement. According to Token Terminal data, in the past 30 days, Perpetual Protocol ranked 7th in the revenue ranking of all protocols, as shown in the figure below. Not bad for an agreement that has been online for less than a year.
Having said that, the decentralized and sustainable market still has a long way to go before it can fully realize its potential. In order to understand the growth potential of a sustainable market, it is necessary to review the explosive growth experienced by decentralized spot trading platforms in 2020.
Although the entire spot trading market showed a growth trend last year, the growth rate of decentralized agreements far exceeds that of centralized agreements. Specifically, the total transaction volume of the top 10 centralized spot trading platforms increased by 285%, while the transaction volume of the top 9 decentralized exchanges increased by 17,989% (63 times the growth rate of centralized exchanges). Under the leadership of Uniswap, this trend has further realized the growth of the decentralized spot market share: from about 0.15% at the beginning of 2020 to about 5% at present (this indicator is an estimate, and there may be large deviations. It is well known that the false reporting of trading volume by chemical exchanges; in order to avoid this problem as much as possible, we only used the top 4 data on FTX Global Volume Monitor).
However, this vitality is not reflected in the decentralized and sustainable market. Although the decentralized spot trading platform has successfully grown to account for 5% of the entire market, the decentralized perpetual contract platform only accounts for 0.1% of the perpetual contract trading market. One of the reasons is that the maturity of the decentralized perpetual market is still significantly lower than that of the decentralized spot market; this is obvious from many different perspectives, including the number of competitors, the time since the listing, and the involved Transaction complexity. In a sense, the current state of the decentralized perpetual market is similar to the state of the spot market around January 2020, when there were some early signs of growth, but still lacked real traction (for example, Uniswap v2 in 2020 Launched in May, which marked the turning point of the decentralized spot trading market). Therefore, if we expect that the decentralized perpetual contract market will catch up with the spot market in terms of market share, then its current scale will have room for approximately 50 times growth. Of course, this assumes that the entire sustainable market will not maintain growth, and that decentralized alternative products will not exceed the growth of centralized similar products.
Although the above predictions are far from perfect, they help to understand the starting point of a decentralized and sustainable market and the opportunities faced by agreements that compete in this field.
The DeFi entrepreneurs must have noticed this, and several new platforms (or new versions) are expected to be launched in the next few months. Among them, Perpetual Protocol v2, codenamed “Curie” (Curie). In the following, we will discuss the working mechanism of Curie, as well as its upgrades and improvements compared to v1.
Perpetual Protocol v2: Curie
Perpetual Protocol v2 (Curie) is not just an improvement on the previous version, it represents a subversive design of the protocol. The most important difference between Curie and v1 is its brand new pricing mechanism.
In v1, the price is determined using an xyk-based model. More importantly, the market depth (k parameter) is manually set by the team on a market-by-market basis. In fact, for v1, this means that there is no need for liquidity providers (LPs) in the system, so it is very simple to start a new competitive market. Although this is a clever solution and contributes its value, it also places some limitations on the system. Specifically, this structure will limit the capacity expansion of the perpetual agreement:
- Considering that there is no liquidity provider in this system, Perpetual Protocol becomes the central counterparty of every transaction. In this sense, the size of the insurance fund will form a soft limit to the growth capacity of the system.
- There are two challenges in manually setting the parameter (k) for each market: 1) The protocol needs to continuously monitor the status of each market to maintain the health of the insurance fund; 2) Consider setting the parameter (k) to start a new market A necessary prerequisite, the creation of a de-licensing market will face great challenges.
Although these issues may be manageable when dealing with a limited number of markets, they may become a problem at the scale of Uniswap. And this is Curie’s goal: to create a solid foundation for the development of Perpetual Protocol. Considering the development of Perpetual Protocol to the current scale, it may sound counterintuitive to overthrow it, but as discussed above, the untapped potential of this market is still huge.
Curie solved the main pain points of v1 on the basis of Uniswap v3’s centralized liquidity model. Unlike v1, LPs are integrated into this new architecture and play a key role in the system. Like Uniswap v3, LPs will be able to provide liquidity to every market on Curie within a certain range. In turn, the trader who submits the order will get the liquidity provided by the market maker. In this sense, the counterparty is shifting from insurance funds to LPs. In addition, the addition of LPs eliminates the need to manually set any parameters, because the situation in each market now fluctuates in an organized manner based on the interaction between LPs and the protocol. Finally, it also makes it easier to create a license-free market on Curie, which is a necessary step before any perpetual market agreement can achieve Uniswap scale.
Another key point worth mentioning is that Curie will list Arbitrum. From a competitive point of view, this is especially important because other competitors such as MCDEX and Futureswap will also launch new versions on this L2 platform. Although the previous perpetual agreement was running on xDAI, while MCDEX and Futureswap were running on the Ethereum mainnet, this collision on L2 will provide a level playing field in this area. In this sense, any competitive advantage needs to come from other attributes, such as liquidity, number of assets, brand, blockchain economics, and user experience. Although the analysis of competing products is beyond the scope of this article, our previous research report provides more room for thinking about the competitive landscape that is emerging in this field.
In addition to the above changes, Curie expects to enable cross-margin and multi-collateral trading on its platform later this year, which will further enhance the user experience of the platform.
However, almost every decision is accompanied by trade-offs. The main disadvantage of this new pricing mechanism is that to open up new markets requires market makers to provide real liquidity. However, this problem may be alleviated in two ways: 1) Uniswap v3’s centralized liquidity model has higher capital efficiency than the xyk model; 2) Liquidity mining incentives can be used to guide new markets. We will wait and see how the key solution to this problem will evolve in the next few months.
The decentralized and sustainable market can be said to represent the largest potential opportunity in the DeFi field. In the next few months, as several different agreements will be launched one by one, competition in this area is expected to heat up significantly. In this environment, Curie represents the determination of the perpetual agreement to establish a strong underlying architecture to enable it to expand and move forward smoothly.
Information disclosure: Delphi and the Perpetual Protocol team are actively conducting consulting and cooperation, and our team members hold PERP tokens. Delphi Ventures also invested in dydx and MCDEX. This statement is intended to disclose any potential conflicts of interest and should not be construed as a recommendation for any tokens. This content is for reference only, and you should not make any decisions based on this alone. This article does not constitute investment advice.
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