Introducing V2 MechanismExploring the Perpetual Pools V2 Mechanism - The Voyage Week 1
What’s new with V2!
As we embark upon The Voyage, we would like to give you a quick tour through our Perpetual Pool V2 contracts as they will be the vessel through which we explore an entire new frontier of opportunities.
To gain a better understanding of the underlying Perpetual Pools mechanism which V2 inherits from V1, you can read our Perpetual Pools Explained article or our Perpetual Pools Explained Like I’m 5 article. So what’s new with V2? Let’s have a look at what’s on the table.
1. No more minimums!
In V1 of Perpetual Pools, to protect against attacks, a minimum commit size to mint or burn tokens was implemented. With the launch of V2, users now have the ability to mint/burn positions using any collateral commitment size.
This is achieved by batching our mint and burns for each pool. The result is that Pool Tokens will no long automatically appear in your wallet after the front-running interval has elapsed and they are minted. Instead your tokens will be contained within the Perpetual Pool smart contract and be visible as “Escrow” positions on the Portfolio tab of the Perpetual Pools dApp. From this page you can choose to have your tokens sent to your wallet for use in the wider DeFi ecosystem or you can simply leave them within the Perpetual Pools V2 contract and track your position on the Portfolio interface.
2. More predictable value transfers = better hedging
The way Perpetual Pools calculate how much to transfer from the losers to the winners at each rebalance event is designed to prevent the losers from ever being liquidated and having to transfer 100% of their collateral in the pool. This is achieved by compressing large value transfers - so that the winners sacrifice some of their winning to keep the losers in the game.
In V1 when the price of BTC increased by 5% in a single hour the actual value transfer in a 3x leverage market was 13.6%, not 15%. This compression effect becomes more dramatic the larger the underlying price movement, and is hardly noticeable for smaller movements.
In V2 we have adjusted the value transfer formula so that the impact of this compression is smaller for most price movements and only comes into play during rare circumstances of heightened market volatility. Effectively making the V2 product a more suitable hedging instrument for a wider range of price moves while still protecting pool token holders from liquidation during extreme price swings.
3. Hold your tokens for longer thanks to SMA price feeds
The V1 of our product was a reliable swing trade product, however much like other leveraged tokens, V1 experienced a phenomenon known as ‘Volatility Decay’. Volatility decay makes it sub-optimal to hold these positions for long periods of time.
A simple way to reduce the volatility decay experienced by holders is to reduce the volatility of the underlying feed. The V2 markets achieve this by taking the Simple Moving Average (SMA) of a price feed as opposed to the spot price feed. SMA feeds are inherently less volatile.
This makes the Perpetual Pool far more suitable for a long term hold product; however it does impede the ability of the markets to be used for swing trading.
4. Hold your tokens for longer thanks to mint fees
Our extensive modelling and research of the V1 product made us realize that the volatility decay experienced by Pool Token holders were actually the profits of new entrants to the pool who rebalance and take advantage of the skew.
In order to further mitigate the impact of volatility decay we have introduced a variable mint fee. This size of the fee a percentage of collateral deposited will depend on the leverage of the market. Our 3x BTC and ETH markets will start off with a 1% mint fee.
The mint fee is not taken by the protocol, but is instead deposited into the collateral pool of the market to be shared by existing token holders. In this way, new entrants to the pool reduce the volatility decay felt by long term holders by paying a small fee to those already holding tokens. This in theory moves the balance back towards token holders and away from skew farming arbitragers for a more fairly balanced ecosystem.
Our core team will monitor the effects of the mint fee closely - if it turns out the fee is not behaving as intended we have the ability to remove it entirely.
For the Voyagers
It’s time to get involved in this weeks Voyage. There’s currently 2 markets available to mint your leveraged tokens from:
3x BTC/USD market settled in USDC
3x ETH/USD market settled in USDC
Take a position in the pools and complete the weekly quiz here.