Upcoming Perp Exchange — AMA Recap
On December 13th, 2022, we held an AMA in our telegram about our upcoming Perp Exchange product with HC, our Head of Product, and Samsara, Head of Marketing and Strategy. Below is the transcript from the session.
Ariel:
As some of you may know, recently, DEX versions of Perps have gained traction in the DeFi space especially after the collapse of FTX and other centralized platforms. The reason is that DEXs operate transparently on-chain and don’t keep custody of user funds, which protects the users. You can even say the collapse of FTX and centralized lenders has made a strong case for decentralized products.
On that note, two weeks ago, we introduced our upcoming Perpetual Futures Exchange, which will launch at great timing(within a few months) to take advantage of this trend.
Our goal is to launch a safer and cheaper platform than what’s currently on the market, and ideally, create synergies between perps and AVs & LYF to develop second-stage products. From your feedback so far, we know the Herd is excited about this, and today, our core team members, HC and Sam, are here to answer your questions about the Alpaca Perp Exchange :)
For those not familiar with what a perp does, it allows you to have leveraged long or short exposure on an asset without an expiration date. In place of expiration, users pay ongoing fees (as unrealized P/L in the positions) while the positions are open. Having the ability to keep a position open “perpetually” has the advantage of avoiding the cost and inconvenience of having to completely roll over a position when it expires. It also makes it simple to quickly adjust the position on the fly which is great for responsive hedging.
Now, we’ll start with questions collected from the community over the prior week about the perp product.
Q1
When has the team started the plan of launching a perp product and what’s the reason behind launching one now? Is there any project that inspired the team to do so?
HC:
Since the invention of perps by Bitmex in 2016, it has been very popular in the crypto space. Some of our team has been using them for years, and it’s an interesting product type we’ve been aware of and watching for a long time.
For the design of our product, we did a lot of research on the major competitors. We’ve certainly taken inspiration and the best ideas from various existing perp products, but we believe we’ve come up with better solutions to the various limitations and issues of other perp products, including those offered by CEXs.
As for why launch now? For one, as you said Ariel, decentralized products, and on-chain perps in particular, have been trending in recent quarters, so the timing is good. Furthermore, we believe one of the vital determinants of success to launching a product is having a competitive advantage over the competitors. It was only this year that we came up with such a product model for perps, which we believe will be the best perp product on BNB Chain, and so the opportunity presented itself.
A perp product also has synergistic benefits for Alpaca in particular. Given our user base’s high level of DeFi knowledge, and our developers’ deep experience with leveraged products, offering perps would be a natural extension of our current platform and will greatly complement our product suite.
Regarding specific dates, early conceptualization started in Q3, and the development has been underway since October. We are almost complete with the smart contract development and the front-end development already started in early November too. We are targeting launching in early Q1 2023 and will provide more details on the launch closer to the date.
Q2:
What are the benefits of using our Perp exchange for traders?
HC:
There are multiple benefits:
- No slippage: With the pool liquidity system instead of an order book, the liquidity will be reserved for positions as they open which allows users to execute their full trade at a fixed spot price.
- Low opening/closing costs: Besides the no-slippage design, we provide a volume-based tiered trading fees discount.
- No centralization risk: Everything will operate transparently on the audited smart contracts. Moreover, it cannot and will not open a position if the payout of its profit cannot be 100% guaranteed.
- High leverage: Up to 50x and it won’t add additional risk of bad debt to the platform.
- Advanced Order Types: We will support market, limit, stop-loss and take-profit order types.
- Swap without price impact- With oracle price feeds, our exchange will also act as a spot DEX so users will be able to swap between assets in the pool without price impact. We also incentivize traders to help “rebalance” assets in the pool to the desired target weight through fees and discounts.
- Funding rate: Based on the skew direction of Open Interest, the shorts pay longs or longs pay shorts and this will allow users to profit by doing carry trade strategy.
Q3
What are the benefits for liquidity providers to supply assets to the LP pool of the Perp product?
HC:
Providing liquidity can be considered as an investment into a type of index fund that holds a mix of major assets (BNB, BTCB, ETH) and stablecoins (BUSD, USDT) and earns yields from multiple sources:
- Position opening/closing fees
- Borrowing fees (accrued hourly based on utilization)
- Swap fees
- Liquidity pool deposit/withdrawal fees
- Counter-exposure profits (as market makers with counter-exposure to the aggregate perp positions, which is an additional earning layer on top of the exposure)
- Flash loan fees
In addition, a portion of unutilized assets in the LP pool will be deployed into the Alpaca lending vaults, generating further yields for LPs, while also making more assets available for LYF borrowing.
Q4
Will there be a new token for the perps exchange?
Sam:
Soon, we’ll submit a governance proposal to let the Herd discuss this possibility and the alternatives.
Q5
What advantages does Alpaca’s perpetual contract have over those of protocols like GMX or PCS? How are you planning on attracting users?
HC:
There are a number of things we are doing differently from what’s on GMX and PancakeSwap.
First, PCS actually doesn’t operate their own platform, it’s through ApolloX, so that has double the counterparty risk since there are two protocols attached.
Pancake is different from us because it works on an orderbook. As a result, traders using perps on Pancake can find it a lot more expensive than with our exchange because they will have price impact on entering and exiting positions. The larger the position, the bigger the problem. As for LPs, they don’t have access to the same kind of LP product on an orderbook, that role there requires professional market makers with bots.
As for advantages over GMX. First, they don’t have BNB perps.
Obviously, we’re also on BNB Chain while they are on an L1 of Ethereum. So it’s a lot easier for users of BNB Chain and Binance to use us.
We have higher max leverage–50x versus their 30x.
Then, in terms of overall security, Alpaca is one of the most secure protocols in DeFi, particularly with on-chain leveraged products. While the GMX team is doing well, they also suffered a noteworthy exploit recently on the AVAX token. Meanwhile at Alpaca, we can say that no team will be as obsessive about the security of user funds as us, and that’s proven by our track record.
Then, we have a funding rate implementation which helps to keep the long/short skew balanced, safeguarding against one-sided exposure for the LPs. This is one of the hidden risks of LPing at GMX.
And finally, our LP assets if unutilized will rehypo into Alpaca’s lending, which will improve the capital efficiency and boost LP APYs.
Q6
Will there be any referral program plan for Alpaca perps exchange, and will the team approach/sponsor KOLs or big accounts to share their referral link as a marketing strategy?
Sam:
Yes, we will create a referral program that rewards KOLs and community members who onboard new users. Referrers will receive cash rewards, paid weekly in BUSD, as a percentage of trading fees paid by their referred users. Anyone will be able to sign up and generate their referral code directly on the website when it goes live.
Q7
On GMX, they provide the tokens other than mainstream ones such as UNI, LINK and FRAX, so I’m wondering if it’s possible for Alpaca’s perp exchange to include AUSD and ALPACA in the liquidity pool? If yes, any discount on the fees to open perp positions with AUSD and ALPACA? Or discount for xAlpaca/Alpies holders?
HC:
One of the key criteria that determines which assets we can support is the asset’s liquidity and trading volume. Without sufficient depth on those, we could risk opening up attack vectors if including them. Unfortunately, AUSD and ALPACA do not currently have enough liquidity and trading volume for us to be able to support them safely. We will reevaluate it if things change in the future.
As for the second question, we can consider providing a trading fees discount to xALPACA holders. Depending on what happens in upcoming governance discussions, they could also earn protocol revenue from the perp exchange.
Q8
What are the main difficulties or challenges with developing a perp product?
HC:
For any product that deals with leverage, the main challenge is probably maximizing security. This is true of the smart contracts internally, and within the system with all stakeholders in mind. Otherwise, a tiny problem can be amplified into a big problem.
In the case of perps on centralized exchanges, verifiable security is little to none. You’re just playing with imaginary numbers on screen, without being able to know if there is any money behind it, even after you send your money to the exchange. So it’s fully dependent on your level of trust in the exchange itself. A lot of people trusted FTX, and we unfortunately saw what happened with that.
That’s why our perp product is fully decentralized. It’s trustless and fully verifiable on-chain. Having said that, this kind of product is harder to build and maintain, and to constantly stay on top of the security. That’s more work for us but it’s worth it, and fortunately, Alpaca is an industry leader in understanding DeFi security, especially on leveraged products.
Q9
How is the dev team handling the workload, knowing that we have both Alpaca perps and V2 coming up soon?
HC:
We have multiple dev squads, so different initiatives can be worked on in parallel. I know many of you have been waiting for the details of Alpaca V2. Please stay tuned, we will have more info to share with the community on that very shortly.
Q10
Could the zero-slippage feature of Alpaca’s Perpetual Contracts be subject to price manipulation, potentially becoming a liability? How would you handle that situation?
HC:
We have multiple safeguards in place to prevent any potential manipulation. First of all, we will only list large and liquid assets on our platform. Specifically, at launch, we will support BTCB, ETH, and BNB. We have also devised a method to prevent any potential front-running by always updating the price from our internal feed first as part of the transaction. Our price feed will be taken from a combination of large reference exchanges such as Binance, Coinbase, etc. We have a lot of experience in this area from operating a similar leveraged product in Alpaca’s LYF.
Q11
How different is providing liquidity for Perp DEX and regular DEX? Will Leverage Yield Farming be involved for supplying liquidity to Perp exchange?
Sam:
Not much different. LPing for the Perp product has many similarities with LPing in a DEX pool with the corresponding assets (BTC, ETH, BNB, etc.). The user experience is similar.
The big difference is the Perp LP will have more sources of revenue. There is also the counter-exposure P/L, which can be considered an extra source of volatility but also an extra source of profits, as has been the case historically. All in all, if I’m comfortable LPing in a regular DEX, I would be comfortable LPing those same assets in a perp DEX.
Q12
Will there be any options to trigger orders over API? Will trading automations be allowed on the exchange?
HC:
While there won’t be an API, users will be able to interact directly with the Perp’s smart contract. We will allow non-EOA addresses to interact with the Perp’s smart contracts.
Q13
Can you share an example of a complementary strategy that could be executed between Alpaca Finance’s existing products and the Perp DEX?
Sam:
In the immediate future, one such strategy could be opening up an ALPACA LYF position to farm yields, and hedging the LYF’s long or short exposure using a perp position.
You could also do a partial hedge on time, with the perp as the leading side. For example, take out a 5x perp, and a 3x LYF position to partially hedge that, so you can earn some yields on the LYF position to lower the risk of the perp position staying open longer than your ideal time horizon (countering the fees).
Going forward, we will certainly evaluate designing additional products utilizing a combination of products, such as with AVs.
Ariel:
Thank you! So now we’ll unmute the chat for the live question session. Please give HC and Sam some time to respond to the questions 😀
Live Questions
Q1
Binance has a lot of FUD today, is there any willingness to put perpetual contracts on other chains?
Sam:
FUD is like rain. It comes and it goes. The key question is whether it’s justifiable. If you can identify it as FUD, I wouldn’t worry about it until circumstances change.
As for other chains, there’s not much going on there atm, not much liquidity. One of the advantages of our Perp exchange is that it’s BNB Chain focused and thus convenient for BNB Chain users
Q2
Do we plan to go live on other chains with the perp product after our first launch on BSC or do we need our whole LYF infrastructure to be effective?
Sam:
We don’t need the LYF infrastructure but the typical infrastructure is required; oracles, etc. We don’t have plans for perp to go multi-chain in the short-term.
Q3
About AVs using perps strategies, what could be an example?
Sam:
Immediate ideas
-You could have an AV that only creates positions on the perp when there is positive carry to earn from the funding rate
-The rebalancing or hedging could happen on the perp exchange if it is more cost-effective than CEXs (assuming there is enough liquidity)
Q4
Will perps add value to ALPACA buybacks? Or it is TBA?
HC:
The exact parameters are to be announced, but revenue from Perp product will go towards buyback & burn / Governance stakers.
Q5
Some stablecoin protocols offer loans against glp, we can have something similar with AUSD and Alp?
HC:
We can support it from a technical standpoint. We can consider this in the future.
Q6
Did we get any direct request for a perp product from institutionals investing with Alpaca Finance?
Sam:
It’s been mentioned from time to time
Q7
About the new token possibility, what would be its use if we are using alpaca for governance? Also, when proposal?
Sam:
It’ll all be covered in the governance post 🤐
Q8
Will the UI for perps be geofenced?
Sam:
There’s no such plan at the moment
Q9
How does liquidations work with DEX perps?
HC:
Similar to LYF where it will be based on the debt ratio of the position. However, the key difference is that all assets are already reserved in the liquidity pool, so there is no need for an external swaps / trades. Here is an example: https://docs.google.com/spreadsheets/d/1GIrjBj4_HSCYA7ozmeF3ea5GOXRcbLAh7A5sGe6P17k/edit#gid=678426863
Q10
Will perps be protected by alpaca guard? Also how are we protected from bad debt with our perps product?
HC:
Alpaca Guard protects against price manipulation on DEX. It kicks in when Oracle price and DEX prices deviate beyond a set threshold.
For Perp, our prices will be from reference exchanges — Binance, Coinbase, etc. and Oracle price only. We also don’t rely on DEX for swap or any transaction, so Alpaca Guard is not applicable here.
As for bad debt, there is no risk which is also explained here why that is the case: https://docs.google.com/spreadsheets/d/1GIrjBj4_HSCYA7ozmeF3ea5GOXRcbLAh7A5sGe6P17k/edit#gid=678426863
Conclusion (Ariel):
Thank you everyone for joining us. For more info on the Perp exchange, please read our article about it: https://medium.com/alpaca-finance/introducing-alpaca-finances-perpetual-futures-exchange-acf868be8bc0
We also have a feedback form for all kinds of topics. https://forms.gle/pDgRrH1koRgktSDd9
Thank you for your support, and meanwhile–stay tuned for our upcoming Alpaca V2 announcement!
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