What is Perpetual Protocol (PERP) and how does it work? A comprehensive guide

What is Perpetual Protocol? (PERP)

Perpetual Protocol is a decentralized software that encourages a network of computers to run an exchange for buying and selling derivative contracts. Built on Ethereum, it operates through smart contracts, eliminating the need for intermediaries. Users rely on the code's execution rather than trust in any specific entity. Inspired by Uniswap and Synthetix, Perpetual Protocol focuses on leverage trading, short positions, and minimal slippage, facilitated by a virtual automated market maker (vAMM) and collateralization vault. Its native token, PERP, plays roles in staking, governance, and securing the platform's operations.

How does Perpetual Protocol work?

Perpetual Protocol was designed to facilitate perpetual contracts trading in a manner akin to traditional exchanges. It achieves this through a novel iteration of an Automated Market Maker (AMM), a mechanism using mathematical formulas to ascertain asset prices and facilitate asset exchanges. For further insights into how other protocols implement this technique, explore platforms like Uniswap, Balancer, or Curve.

Perpetual Protocol’s Virtual Automated Market Maker (vAMM) serves primarily for price discovery rather than spot exchange. Unlike conventional AMMs, it does not hold actual crypto assets within its system, hence the term "virtual" AMM. Instead, it employs smart contracts acting as a Clearing House and Collateralization Vault to enable leveraged long and short trades. The Clearing House manages traders' initial deposits and positions, while the Collateralization Vault safeguards trading positions and prompts the vAMM to adjust prices.

Notably, market selections on Perpetual Protocol are currently curated by the team but are expected to transition to a Decentralized Autonomous Organization (DAO) structure in the future.

In terms of risk management, an Insurance Fund acts as a safeguard against unexpected losses from liquidation or trader defaults. This fund accumulates 50% of transaction fees, and if depleted, a smart contract initiates the issuance of new PERP tokens sold for collateral in the Vault to maintain system solvency.