Analysis and solutions to the insurance fund problem and growth of Perp exchange

@yenwen @tongnk @weiting @LeeKB

Inspite of the longs getting the full funding in this bull market, why don’t more longs come in to lift the Mark Price above the Index Price?

I think it’s because the K in the vAMM is set for quite low slippage, so, much more longs are required to lift the price and the bots are also using this situation to their benefit.

Low prices in Perpetual Protocol, helps the arbitrage bots by buying low/longing in perp exchange and selling/shorting in some other exchange, so the bots don’t put in more longs. This is because putting in more longs will only lift the price, which means the arbitrage opportunity will be lost. So, they won’t put in more longs.

Market Neutral bots Short in eg. FTX and long in Perp to get funding from both places. In a bull market getting funding on longs is an opportunity only available in perp exchange, so if the longs go above the Index price, the market neutral bots won’t receive funding. This is why they won’t take more longs.

Some solutions are
. The K can be adjusted for higher slippage (reduced liquidity) in the vAMM. This will increase Mark price much more easily. But, the arbitrage bots will proportionately decrease their positions since their profits will reduce from not being able to buy lower. The market neutral bots who were longing on perp and shorting on eg. FTX, will still not buy much beyond index price since they cannot get funding from the longs, rather they will have to start paying funding. In this situation they will switch their strategy to Short on eg. FTX and longing in the spot market.

. The K can be kept as it is or can be adjusted for even lower slippage (higher liquidity) in the vAMM. If K is adjusted for even lower slippage, this will put pressure on the Mark price to stay at lower levels. This means both the arbitrage and market neutral bots, will take even larger positions. This will increase trading volume even more. But it will sometimes eat more into the insurance fund and sometimes pay more into the insurance fund. A short term solution to this is what shumwhere proposed. Cap the funding to 50% of the trading fees or proportionately reduce
the funding . Since trading volume is more than OI, using 50% of trading fees is an APY of 18.25% or more on the OI. The arbitrage bots won’t care as their profit is not from funding. Market Neutral bots will be ok with it, as there is no where else they can get funding on their longs in a bull market. Use the time gained from this to solve the problem for the long term.

Imo the long term solution and what I propose is

. The market participants that will long in a bull market(or short during bear sentiment) and would be willing to pay funding are the speculators. In a bull market, Speculators will take sufficient longs to lift the Mark Price above the Index Price and vice versa. They do this as they can gain much more from winning trades than the funding they pay. So, in a bull market, Speculators will go long to cause positive funding and Market Neutral bots will go short to earn the funding. Vice versa in a bear market. This will maintain the balance and very much reduce paying out from the insurance fund.

. So, effort needs to be taken to bring in sufficient Speculators/traders. This can be done using a combination of the following methods

  • Limit order & Stop loss/Take profit features which is already being worked on.

  • A influencer referral program is being worked on. Give it a lot of importance. Most speculators/traders don’t know perp exchange enough to try it out. The influencers and influencer traders can help with that.

  • Open Interest mining. Pay out Perp token rewards to a tune of 100% or more APY of the open interest. The rewarded Perp tokens can be locked for a year or so, if needed. This in combination with the influencer program could introduce Perp exchange to the traders in an influential way and incentivize the speculators to trade and stay on it.

  • Leverage tokens and partnerships with Yearn, Alpha, etc. for them to utilise it in their strategies. The team has said it is in the research stage. This can be combined with OI mining, if beneficial.

  • Reach out to whale traders and or influential whale traders to trade on it. OI mining could get them interested. Also eliminate flash crashes and ensure their funds are SAFU.

  • Engage in awareness creation efforts, get listed on Binance, etc. which will get people to notice.

A big thanks to Shumwhere for the discussions that helped in understanding various aspects.

1 Like

I don´t really see a big problem currently. It´s not like the prices would be vastly different than on other exchanges so the arbitragers do their job considerably well.

However, I do like your focus on the long term “solution” which is to bring in more traders and increase awareness.
Open interest mining sounds interesting and we could go into details quite a bit. Like shall we incentivice both, long and short, or only one side? (probably long because of the lower mark price than index)
Is there a target APY on OI or do we just set a certain budget per week/day and the market figures out how much the interest should be? How large is the budget? etc., there is a lot to consider.

However, as you mentioned Limit and Stop orders are the first stepping stone. We shouldn´t try any expansion before these tools are implemented.

When the limit and stop function is there, it makes a lot of sense to reach out to influencers. MMCrypto and The Moon immediately come to my mind (youtube influencers). They already promote exchanges like ByBit so if we match the functionality and can offer a good deal I can not see why they wouldn´t promote perp.