The Role of Perpetual Protocol in Promoting Decentralized Finance
Hi Fren,
Perpetual Protocol is a decentralized exchange which facilitates the trading of perpetual contracts on the Ethereum blockchain through vAMMs (virtual Automated Market Makers). Unlike the traditional trading of futures, Perpetual Protocol trades futures contracts alongside the adoption of a price discovery medium. It has certain qualities that align with DeFi: permissionless, trustless, and a supporting ecosystem. The features and how it promotes DeFi are explained below.
1. Decentralization
Perpetual Protocol, a decentralized exchange, is in line with the DeFi ethos as one of the major blockchain-based applications for financial services. DeFi protocols are decentralized; non-custodial and do not require KYC (Know Your Customer). Some exchanges do not adopt the key feature of DeFi, decentralization, but Perpetual Protocol does because it eliminates intermediaries contrary to the traditional rendering of financial services through third parties. Instead, users interact with smart contracts to get automated services. The elimination of intermediaries means users have control of their funds at any time. Also, users enjoy anonymity in the absence of KYC, providing privacy protection. The qualities found in Perpetual Protocol make it a leader in the DeFi ecosystem.
2. DeFi-Supported Ecosystem
Most DeFi applications are built on the Ethereum blockchain network. Perpetual Protocol is built on Ethereum’s layer 2 scaling solution powered by optimistic rollups, Optimism, making trades cheaper and faster than mainnet yet benefitting from Ethereum's security. While the Ethereum blockchain carries high fees in times of increased demand, Perpetual Protocol offers speedy transactions with low fees due to being built on Optimism.
One risk DeFi users face is security. Perpetual Protocol is open-sourced, so anyone can check the underlying code for red flags. Apart from this, the protocol has undergone external audits from renowned crypto firms like ConsenSys, ABDK, HashCloak, Dedaub and Trail of Bits receiving recommendations from both. To secure users’ funds, it also has insurance coverage from Unslashed Finance and Nexus Mutual, two companies specializing in DeFi-related protection. This gives users assurance of safety as they interact with the DEX while it solves security issues.
3. The Use of vAMMs mechanism for Trading Perpetual Contracts
Perpetual contracts are like traditional futures but differ in that there is no expiry date. This, coupled with the advantage of speculating on price discovery without holding the asset in addition to the use of vAMMs makes Perpetual Protocol a unique DEX. Perpetual Protocol was the first DEX to pioneer vAMMs to trade perpetual contracts contrary to the traditional AMMs like Uniswap. Although there is no liquidity pool in the same sense as Uniswap, therefore the AMM is referred to as ‘virtualized’. Funds are not stored in the vAMM, rather, they are stored in the smart contract's vault. vAMMs aid the trading of perpetual contracts with good liquidity and low spillage, therefore they are used for price discovery so that traders can gain leverage either long or short, however, they can't be used for spot trading. Perpetual Protocol is closing the gap between derivatives DEXes and centralized venues that currently dominate the market, with the upcoming release of advanced order types and eventually permissionless markets on Perp v2. DeFi thrives with a good tool like Perpetual Protocol that promotes this movement through its unique features.
Writer: Tunmise Olaoluwa (Apostle of Finance)
Disclaimer: Information provided here does not constitute intended investment or financial advice. Please, DYOR.