In December 2019, Perpetual Protocol – a decentralized perpetual contract protocol for trading derivatives for every asset via a Virtual Automated Market Maker (vAMM) – was created by Yenwen Feng and Shao-Kang Lee.
Some months later in August 2020, the Perpetual Protocol name was officially established, changing from Strike Protocol. Then just one month after that, Perpetual Protocol launched and distributed its native cryptocurrency $PERP using a Balancer liquidity bootstrapping pool.
Most recently, Perpetual Protocol’s DEX went live on the Ethereum mainnet on December 14, 2020, and has been killing it with impressive growth:
Perpetual Protocol DEX Trading Volume - 1st month since launch
Now, as we move into February and the rest of 2021, we’re about to witness why Perpetual Protocol’s vAMM is such a big deal for the AMM space.
The Current Limitations of AMMs
Existing AMMs vs vAMMs with leverage
On-chain automated market makers (AMMs) have existed since 2017 with the launch of Bancor. There have since been several notable improvements on different aspects of AMMs brought to us by Uniswap, Curve, Balancer, Bancor V2, and Blackholeswap.
While these AMMs have pioneered a great deal of innovation and are quite successful, they still suffer from a variety of limitations being:
The existing AMM implementations mentioned above are all focused on serving simple token swaps and thus do not support other types of tradable products involving leverage. If they did try supporting products with leverage, they would run into two issues:
- Liquidity providers would suffer from high impermanent loss
- Open interest would be bound by the pool size
These problems effectively make tradeable products with leverage impossible on existing on-chain AMMs.
Existing AMMs require real users to provide liquidity which makes them susceptible to impermanent loss – the difference between holding tokens in an AMM and holding them in your wallet.
Impermanent loss occurs on existing AMMs because when token prices change on external markets, AMMs don’t automatically adjust their prices. Rather, AMMs rely on arbitrageurs to buy underpriced assets or sell overpriced assets, and the profit they make is effectively removed from the pockets of liquidity providers, resulting in impermanent loss.
Since existing AMMs rely on liquidity and arbitrageurs to balance the price of a pool’s tokens, slippage can occur when the pool becomes imbalanced. Generally speaking, the larger an order is for buying or selling a token, the greater the slippage will be.
Some AMM models implement different strategies or models to reduce slippage, but they often come with trade-offs that lead to other problems such as reduced liquidity and fewer arbitrage opportunities.
That said, all existing AMMs have some amount of slippage.
How Perpetual Protocol's vAMM Changes the Game
Perpetual Protocol vAMM diagram - Note that the Liquidity Reserve (smart contract vault) is separate from the vAMM. Therefore, liquidity in AMM is virtual.
Building on the chain of innovations offered by existing AMMs, Perpetual Protocol pioneered a new type of AMM: the Virtual Automated Market Maker (“virtual AMM”, “vAMM” or “vAMMs”).
Virtual AMMs radically expands the application space of AMMs by solving their limitations surrounding leverage, impermanent loss, and slippage.
With that, “virtual” AMMs change the AMM game with their first enabled product being: Perpetual Contracts.
A perpetual contract is a derivative similar to a futures contract but without an expiry date, allowing them to be held or traded for an indefinite amount of time.
Perpetual contracts are made possible with vAMMs because there is no real asset pool stored inside the vAMM itself, hence the “virtual” part of vAMM. Instead, the real assets are stored in a smart contract vault that manages all the collateral backing the vAMM.
As such, Perpetual Protocol uses a vAMM as a price discovery mechanism, but not for spot trading as seen with existing AMMs. This enables traders to trade with up to 20x leverage long or short, enjoy transparent fees, and 24/7 guaranteed liquidity.
Virtual AMMs DO NOT have Liquidity Providers, there is NO Impermanent Loss, and Slippage is Reduced
No liquidity providers are needed for vAMMs because the liquidity for vAMMs comes directly from the vault sitting outside of the vAMM. Therefore, traders provide liquidity to each other within the vAMM and with no liquidity providers, there is no impermanent loss.
Another thing, since the liquidity inside a vAMM is virtual, it is manually set by the vAMM operator at launch (the Perpetual Protocol team) and can be increased or decreased at will at any time, even after the vAMM is created. With this flexibility, the vAMM creator can better respond to the latest market conditions and thus reduce slippage in a big way.
Moreover, once Perpetual Protocol transitions to a DAO structure, instead of manually setting and changing the liquidity inside a vAMM, it’s expected to be set algorithmically as a function of volumes, open interest, funding payments, volatility, and other variables.
All in all, Perpetual Protocol’s vAMMs offer a variety of unique attributes that enable new derivative products to DeFi traders and it’s going to be exciting to see how they develop and grow throughout 2021.
How Community and Investors Reacted
If you’re not excited about Perpetual Protocol after reading what I’ve already written, that’s okay.
I’m not trying to hype it up here.
But know that there are reputable members of the crypto, fintech, and DeFi community who are ecstatic about what Perpetual Protocol is doing and are investing in its future.
For instance, Jeremy Allaire, CEO at Circle recently stated that he’s bullish on Perpetual Protocol:
Also, Multicoin Capital recently led a $1.8M strategic investment round with participation from Zee Prime Capital, Three Arrows Capital, CMS Holdings, LLC., and the firm behind FTCX, Alameda Research:
Other strategic investors backing Perpetual Protocol include Binance Labs, Andrew Kang, George Lambeth, Calvin Liu, Tony Sheng, Alex Pack, and Regan Bozman.
Apart from big name VCs and investment firms being bullish on Perpetual Protocol, investment analysts and DeFi enthusiasts alike are exploring the protocol and finding its growth to be extraordinary.
Joseph Young, a prominent crypto enthusiast with 100k+ followers on Twitter did a DeFi tweet thread showcasing the protocol’s explosive growth and key features:
Also, TokenTerminal, a prominent cryptoasset metrics website posted a popular thread of Perpetual Protocol’s growth as well:
Also, according to DEX metrics from Dune Analytics, Perpetual Protocol managed to make it into the top 10 DEX protocols by volume within 1 month:
All that said, Perpetual Protocol may be one to keep your eye on. Let’s see if it can maintain this growth.
Cheers guys, see you in the next one.