What is Perpetual Protocol (PERP)? How Does It Work?

What is Perpetual Protocol?

Perpetual Protocol is a decentralized exchange platform that allows users to trade perpetual futures contracts. While the pioneering DEXs like Uniswap allows you to trade cryptocurrencies and stablecoins with the help of automated market-makers, Perpetual Protocol relies on virtual automated market-makers (vAMM) to offer perpetual future contracts trading.

Understanding Perpetual Future Contracts

In general, futures contracts are the agreements between two parties to buy or sell an asset when its price reaches a predetermined price by predetermined time. When it comes to perpetual futures contracts, they will not have any specific settlement dates and are held infinitely. The Perpetual Protocol allows users to trade these types of contracts in a decentralized manner.

How Does Perpetual Protocol Work?

As we mentioned previously, Perpetual Protocol works based on a virtual automated market-making model (vAMM). In the case of DEXs that enable crypto trading, liquidity pools exist which hold funds in pairs of cryptocurrencies and make the trading of those coins simple. Since the Perpetual Protocol contains vAMMs, its liquidity pools hold assets like vETH (virtual ETH), vDAI (virtual DAI), etc. These funds contain a predetermined ratio set by the vAMM operator beforehand.

Let us understand how vAMMs work in detail. Users first deposit and lock some funds into the vAMM pool for perpetual contracts. The locked funds ensure that there is enough liquidity to cater to traders. To determine the price of perpetual future contracts, vAMMs depend on a constant product formula so that the product of the underlying asset’s price and liquidity in the pool remains constant.

Additionally, by allowing users to open long or short trading positions, Perpetual Protocol also offers to borrow funds for trading. This is a part of leverage trading and involves collaterals to cover any potential loss. Another important factor to highlight is the funding mechanism of the  Perpetual Protocol. It ensures price stability, regular settlements of long or short positions, and no discrepancies between perpetual future contracts price and market prices.

Benefits of Perpetual Protocol

Being one-of-its-kind perpetual future contracts trading platform, Perpetual Protocol brings multiple advantages with it. Its decentralized nature combined with leveraged trading options allow traders to make the most of their trades.

• Decentralization – Since Perpetual Protocol is a decentralized exchange, no central authority has power over it. Adding to that, there is no single point of failure, ensuring the security of the platform. It further promotes transparency and censorship resistance.
• Non-custodial Nature – Since it is a decentralized platform and no one is there to control or monitor what is happening on the platform, it gives users complete custody of their funds. It is similar to how non-custodial wallets give complete ownership and freedom to users to access their funds.
• Leveraged Trading – Leveraged trading helps traders to amplify whatever they could make in normal trading. While this is definitely an advantage when it comes to users making profits, it can also amplify losses in cases when the market prices move in opposite directions.
• Deep Liquidity – vAMMs used by the Perpetual Protocol give deep liquidity for trading compared to usual AMMs. As a result, they reduce slippage and allow smooth trading of perpetual future contracts.

Risks of Perpetual Protocol

Similar to any other decentralized platform, the Perpetual Protocol also has some inherent risks. Let us have a look at them here so that you can prepare beforehand on how to avoid them.

• High Volatility – The crypto market is known for its extreme volatile nature. It also increases further when it comes to leveraged trading of these assets.
• Smart Contract Risk – Any decentralized finance (DeFi) platform works based on smart contracts on blockchain networks, including Perpetual protocol. So, there is a possibility of smart contract risk such as bugs and exploits.
• Liquidation Risk – Collaterals are an important part of leveraged trading. When the value of your collateral falls below a certain threshold for any reason, there is a chance that your trading position will be liquidated. The liquidation risk could result in significant losses.