The vote to decide the method in which remaining Perp v1 funds are to be shared among remaining users of the v1 exchange following the shutdown on May 15 is now live. Holders of PERP and staked PERP on Ethereum Mainnet and the Optimism Rollup are eligible to vote.
On May 15 (UTC) Perp v1 was forced to halt trading as a consequence of market volatility that started on May 12. Late on May 15 (UTC), a very large position on the CREAM market was liquidated causing a large price deviation and subsequent bad debt. This triggered a flow of funds from the insurance fund to the clearinghouse, rendering the insurance fund empty. This put the exchange in a critical state, and an emergency decision was made to perform an immediate shutdown to prevent further loss of funds. The shutdown successfully prevented further liquidations of larger positions from completely draining the exchange, thus protecting a group of retail traders with smaller positions.
Importantly, Perp v1 represents the original build of the Perpetual Protocol, which was released some 18 months ago in December 2020. This build remained operational primarily to help traders bridge from Perp v1 to Perp v2, the latest build of the protocol, which still operates in its new and improved state today. The issues with Perp v1 have been known for over a year, and they were the prime motivation behind the upgrade to the new model in Perp v2. When Perp v2 launched, the team considered shutting down Perp v1, but there were still a few dozen active traders on Perp v1. Therefore, it was allowed to run; however, only with a clear and bold warning in the UI alerting Perp v1 traders that active maintenance had ended, but trading could continue at their own risk.
In sum, extreme market volatility caused the Perp v1 Insurance Fund (note: this should not be conflated with the Perp v2 Insurance Fund, which is a separate fund assigned to the traders of Perp v2) to be completely drained, as it was designed to do by covering unexpected losses in such extreme circumstances. However, a large part of these funds remain in the clearinghouse following an emergency trading halt.
After analysis of the positions and the remaining funds in the v1 exchange, as well as lengthy discussions with stakeholders, a proposed settlement plan will be put to vote to return the remaining funds (approx. 5.5M USDC) in the clearinghouse to Perp v1 users.
The Perp v1 Insurance Fund Settlement Plan puts forth four options for distributing remaining funds:
- Distribute remaining funds proportionally according to users’ remaining margin and unrealised PnL at the time of V1 being paused
- Distribute remaining funds and first cover 99% of our users starting from lowest margin and PnL up (this covers most retail users; excludes negative PnL). The remaining users then receive pro rata according to their margin and unrealised PnL.
- Distribute remaining funds to small position holders first ($100,000 unrealised PnL and margin or less; excludes negative PnL), and any remainder to larger position holders, proportionally according to users’ remaining margin and unrealised PnL.
- We will sort wallets from small to large according to the position size and then close positions sequentially by 1%. Once the largest account has had it’s 1% closed then we still start again at the bottom of the list
The Perp v1 Insurance Fund Settlement Plan vote will be posted on Snapshot on the 19th of May at 10am UTC+8 to vote on the final outcome.
With the complete depletion of the Perp v1 Insurance Fund, this event brings the gradual sunsetting of v1, a process that slowly began six months ago, to completion.
This decision came after an extended effort by the core developers and the community to keep it operational, but recent market conditions and v1’s long-standing design issues finally made it unsustainable.
The main problem with v1 was a high likelihood that funding would be paid from the insurance fund due to an imbalance in longs and shorts (e.g. as described here). This imbalance is unavoidable in a pure vAMM system like Perp v1. The need to pay funding from the insurance fund meant that over time, funds in the system were syphoned away, creating the possibility that the exchange could become insolvent given the right circumstances. Several attempts were made to shore up v1, including:
- Free Collateral Rules: earlier this year, the calculation for margin available for withdrawal was changed to use the method applied in v2. Previous to this, traders could withdraw more margin than initially deposited, allowing funds to be syphoned off.
- Funding Rate Cap: after a decline in insurance fund and clearinghouse balances in late April / early May, a funding rate cap was put in place to stem these outflows (which were primarily caused by funding payments being covered by the insurance fund).
- Update To K Values: a consequence of the market downturn, over-estimated k values for some key markets, and the funding rate cap, mark prices that were already lagging began to depart severely from spot. The decision was made to lower k values in order to allow arbitrageurs to return prices to normal.
Again, to make it abundantly clear, no funds in Perp v2 are presently at risk and the improved vAMM mechanism remains technically and economically sound. The issues above and this settlement plan are isolated to Perp v1 traders.
We now look to Perp v2 as the future of Perpetual Protocol, and during the recent market turmoil including a 99.99% reduction in the price of LUNA, the Perp v2 model has proven to be stable and profitable. Perp v2 has numerous advantages over Perp v1, including active liquidity providers who can respond to changing market conditions, as well as liquidity mining rewards to attract more liquidity, ensuring both ample liquidity and a responsive system.
As we bring the sunsetting of v1 to completion, we are able to allocate 100% of our resources to our v2. A lot of work has been done behind the scenes, including multi-collateral, limit orders, the upcoming vePERP release and OP Summer. We strongly encourage all Perp v1 users to try Perp v2 for a better experience and better performance during extreme volatility.
Please find data for each of the 4 team proposals at the link below:
- All amounts shown are expected refund under the respective proposal. Cells with - are dust positions.
- Amounts shown for options 1-3 assume price impact of a full close with no other trades occurring, using original v1 K values and index price at block 22169196, and assuming that your position was the first and only position to close.
- Option 4 models the actual functioning of an AMM system in a scenario where all traders gradually reduce their positions to zero.
- Data is not available for community proposals. Due to this, the vote will include a fifth option to fully evaluate and vote on community proposals in a separate vote, in favor of the four options presented by the team.