Derivatives trading occupies a large market share in both traditional finance and centralized crypto trading platforms. Derivatives are an integral part of any financial system. However, in the current DeFi ecosystem, the majority of the trading volume in the entire market is still dominated by spot products.
Why is it difficult for derivative DeFi protocols to gain the same market share?
Looking back, we think the derivatives racetrack may have suffered the same problems as the spot trading platform. That is, the traditional spot transaction order book trading mechanism is not suitable for the development of the chain. With fundamental innovations to the underlying trading model (AMM), on-chain spot trading can compete with centralized trading platforms.
At present, there are many problems in the traditional form of derivatives which restrict their healthy development in the chain. For example, the trading engine based on order book, the liquidity fragmentation caused by different delivery dates and the performance bottleneck of the existing public chain platform led to many attempts failed to achieve good results. Therefore, only the bottom innovation of derivatives can withstand the test of users on the chain.
Among the many derivatives models currently available, we consider the coin circle to be primitiveSustainable contract, with the inherent structural advantages of its product model, is most likely to be the first to replicate the success of off-the-shelf products on the chain. Therefore, this article will focus on the basic principles of perpetual contracts and analyze in detail why perpetual contracts are a more efficient form of derivatives that are suitable for on-chain deployment.
The perpetual contract evolved from the futures contract, so before introducing perpetual, it is necessary to review the basic concepts of the futures contract.
Futures contract is one of the most simple financial derivatives, and the concept is most easily misunderstood by people. Many users are used to assuming that futures prices represent the future price of commodities and reflect people's judgment about the future value of commodities. Therefore, futures prices naturally do not equal spot prices.
On one level, this explanation is not entirely wrong. But this explanation unintentionally ignores the fact that:The market's expectation of the future value of a commodity is reflected not only in the futures price, but also in the spot price of the commodity at the same time.For example, if a listed company announces today that it plans to buy back its current $100 stock at a price of $120 a month later, the market's expectation of the future price of the company's stock will immediately change to $120. At the same time, this change in future expectations will also make the spot trading price of this stock immediately increase from 100 yuan to around 120 yuan, otherwise there will be a chance of risk-free arbitrage.
As a result,The futures price of a security carries almost exactly the same "exposure" as the spot price. In other words,Futures are not buying or selling commodities at "future prices," but "future commodities" at "present prices.
So why would anyone want to recreate a new derivative, out of spot, with exactly the same exposure?
In general, the easiest way to gain exposure to an asset is to buy and hold the physical portion of the product. butThere are two inherent defects in holding spot directly, one is that spot often has additional costs such as storage and transportation; The second is that money is really inefficient. In order to hold one unit of exposure, an investor must use the same amount of money to buy cash.
Therefore, after hundreds of years of development, people gradually found a new way to manage the spot risk exposure directly through derivatives. These are futures contracts and the accompanying margin trading system.
As a result,The purpose of futures contracts is to allow investors to trade and manage their exposure to cash without owning it. We can reduce it to one goalObjective function: y = x. Among them,yRepresents the price of the derivative (futures), andxRepresents the price of the original asset (spot). Therefore, for a futures contract, the core problem is how to design a mechanism so that the value of y is consistent with the value of x. And this mechanism is futures"Price anchoring Mechanism".
As any experienced trader will know, every futures contract in the market carries a definite delivery date. The holder of the contract may choose to make "physical delivery" on the delivery date. On the delivery date, the futures price is exactly the same as the spot price, so the futures price must be the same as the spot price on the delivery date.
The price anchor on the delivery date of an open futures contract provides a good basis for pricing. This is because if an unexpired contract deviates from the current spot price (" unanchoring "), a risk-free arbitrage activity will occur in the market. The arbitrager can buy the lower spot PRICE X and sell the higher futures price Y at the same time. If he continues to hold the spot until the expiry date for physical delivery, he can obtain arbitrage profits with almost no risk. This arbitrage will push the deviated futures price, Y, back closer to the spot price, X.
Physical delivery guarantees the parity of futures and spot prices on the delivery date, and risk-free arbitrage activities based on physical delivery, in turn, maintain the parity of futures and spot prices. So we can say,The physical delivery mechanism is at the heart of a futures contract that remains anchored to spot prices.
This mechanism, while generally effective, creates a lot of additional risk in the actual operation of futures contracts.
(1) The cost of capital occupied by current arbitrage will simultaneously affect the price of futures
Since the capital occupied by arbitrage has a time cost, the arbitrage activity cannot be carried out until the futures and spot prices are completely equal. As we can see from the chart below, the further away from the final maturity date, the greater the difference between the futures price and the spot price due to the cost of capital. This causes the futures price to deviate slightly from the target price before expiration, making the real constructor of the futures contract from the targety = xBecame practical.y = x + c(c stands for exposure to the risk-free rate).
(2) Physical delivery leads to liquidity fragmentation
Because the anchoring mechanism of futures contracts necessarily requires a delivery date, the same pair of futures contracts are divided into numerous independently traded products with different expiration dates. This not only leads to fragmentation of liquidity, but also to the need for investors to adjust their positions frequently across futures contracts with different delivery dates.
(3) Physical delivery may induce market manipulation
The use of physical delivery mechanism to manipulate the market, is we often hear of empty or even more. When the futures volume of a commodity exceeds the spot volume, it is possible that some futures contracts have no corresponding spot delivery on the delivery date, leading to violent price fluctuations on the delivery date. Such manipulation disrupts not only the order of trading but also the anchoring relationship between futures and spot prices.
It can be seen that the anchoring mechanism of futures contracts is not only cumbersome to operate, but also brings many additional risks. As a result, the BitMEX trading platform in 2016 completely redesigned the anchoring mechanism for futures products, which led to the invention of the derivatives that are now widely used in the currency world: perpetual contracts.
Perpetual contractThe objective function(y = x) is identical to a futures contract, the only difference between it and a futures product is that it uses a new price anchoring mechanism.
As can be seen from the many shortcomings of futures contracts mentioned above, almost all of the problems that affect the effectiveness of futures anchoring are caused by the ancient anchoring mechanism of physical delivery. In order to solve these problems thoroughly, the anchoring mechanism must be fundamentally innovated. Perpetual contracts completely abandon the physical delivery mechanism, and instead anchor the target price by paying a capital fee to achieve the binding of the contract price and spot price.
The anchoring mechanism for perpetuity contracts can be simplified into the following three steps:
First, an explicit target price X is input from the outside (usually the spot transaction price of other spot markets).
Second, through the perpetual contract's own independent margin market (order book or AMM), a free trade produces a contract price Y independent of the target price X.
Third, add a set of incentives and penalties that penalize long positions in the contract market if the contract price Y is higher than the target price X, and pay a penalty as a reward to users for holding short positions, and the more the price deviates.
This model, in which the one who deviates from the target price pays a penalty to the one who maintains the target price, is the capital fee system of the perpetual contract we mentioned at the beginning. Through this incentive and punishment, the designer of the perpetual contract causes the price deviation in the contract market to adjust, and finally makes the contract price converge with the target price. From the results of practical application in recent years, this new anchoring mechanism can guarantee the anchoring of perpetual contract and target price very well.
In addition, there are several obvious advantages to a perpetual contract.
(1) Unified market liquidity
The liquidity fragmentation of derivatives has always been a key obstacle to the healthy development of derivatives in the chain.Traditional futures and options are subject to the structural defects of delivery period and exercise period. A futures product can be artificially split into several or even dozens of independent liquid markets due to different delivery dates, and the fragmentation of option market is even more obvious.Liquidity fragmentation greatly reduces the trading efficiency of the on-chain derivatives platform, making it difficult for the corresponding products to be promoted and applied on a large scale.
With the new anchoring mechanism, perpetual contracts no longer need to create separate trading markets for each anchoring date, so all the contract trading requirements of a trading pair can be aggregated into one place.A trading pair corresponds to only one perpetual contract productIt not only solves the problem that the liquidity of the traditional futures market is divided by the delivery date, but also ensures that the perpetual contract traders can enjoy the most adequate liquidity support in the market.
(2) With the same margin system, the trading experience is similar to the traditional futures
The perpetual contract still follows the margin trading model, and the trading experience hasn't changed much for the traditional futures trader. As a result, the trading strategies of traditional futures traders can be used almost seamlessly.
(3) The perpetual contract reduces the impact of the risk-free rate and better reflects the target price
Since the anchoring mechanism of the perpetual contract is no longer absolutely dependent on the futures arbitrage, the risk-free interest rate has a correspondingly lower impact on the contract price, which makes the perpetual contract better reflect the target price, namely the spot price.
(4) Create permanent contracts that no longer rely on the spot market
The target price of a perpetual contract is often derived from the spot price, but there is no longer necessarily a need for an immediate spot exchange to complete physical delivery. The perpetual contract trading platform can only rely on the input of external information (such as predictive machines) to create the corresponding contract trading products, greatly simplifying the construction cost of the perpetual contract trading platform.
For the above reasons, the perpetual contract originally created by the coin circle is undoubtedly a more efficient choice to replicate spot exposure on the chain. For a derivative track whose potential has not yet been fully developed,Perpetual contracts are not only simpler in terms of product structure, but also have a great market demand that has been proven by centralized trading platforms. Therefore, an on-chain perpetual contract trading platform may be the next breakthrough in DeFi's innovation.
In the future, we also plan to continue to observe several mainstream Perpetual contract trading platforms in the current market, such as dYdX, Injective Protocol, Perpetual Protocol, Bonfida, etc., and bring readers more detailed analysis.
律动 BlockBeats 提醒，根据银保监会等五部门于 2018 年 8 月发布《关于防范以「虚拟货币」「区块链」名义进行非法集资的风险提示》的文件，请广大公众理性看待区块链，不要盲目相信天花乱坠的承诺，树立正确的货币观念和投资理念，切实提高风险意识；对发现的违法犯罪线索，可积极向有关部门举报反映。