V1 Major Update - reduction of K value

Background

While Perpetual Protocol v2 has performed well during the latest crash and optimism remains high for L2 Summer, v1 has been showing signs of stress and the team has been working hard to enhance stability and make v1 sustainable long term so we can be free to focus on v2 and the future of the protocol.

Since the increase in market volatility in May, the team has been working hard to keep v1 running and despite having stepped back from arbitrage, we returned to the fray and spent a considerable amount of funds to maintain mark prices, with the additional help of 3rd party arbitragers.

V1 Updates

Our first step was to introduce a 0.02% / hour funding cap on May 9. For now, this cap will remain in place. This cap is intended to limit outflows of funds from the insurance fund, which occur in certain market conditions due to the static design of v1.

The cap coincided with the recent crash, however, and v1 markets began to depeg. The key drivers for the decoupling were a high K value in many v1 markets, coupled with relatively low volume and restricted funding rates, making it difficult for arbitrageurs to keep prices aligned with spot.

Our second step therefore, effective immediately, was to reduce the K value for each market on v1 (see table below for new values). This will allow both team and 3rd party arbitragers to keep prices aligned with spot, and the team has allocated additional funds for this purpose as well as updated arb bot parameters.

Announcement timing

In order to prevent insider trading and to ensure fairness, the nature and timing of these updates was not shared in advance. Our ultimate goal is to serve our users as best as we can, and although we have a strong desire to be as open and transparent as possible, at certain critical times this is not practical.

What do you mean by reducing K?

Perp V1 is running on the same CFMM model as Uniswap V2 (The xyk model). Because there are no LPs in Perp V1, K is a constant and pre-set when we launch each market. You can think of Perp V1 as having one huge LP now, and reducing K means removing liquidity from that market.

It won’t change the behavior of Perp V1, but the downside is that all traders will have more slippage. The team has evaluated many different solutions and simulations over the past week. Adjusting K is the best option if we want to return mark prices to normal levels.

The good thing about reducing K values is the team can bring v1 markets back to peg much easier than before, and we will work on that right away.

Are you going to shutdown Perp V1 in the short term?

No, we don’t have any plan to shut it down. It’s a smart contract system and we believe shutting it down is the last option we should consider. The team is actively working on Perp V2 and we believe it’s a much better mechanism compared to Perp V1 and also other competitors in the space, but traders should have the choice of venue to trade on.

Future Updates

This is a unique situation because of the dramatic market movement. The solutions implemented so far might not be perfect and if the community has better ideas on how to update Perp V1, we are open to them. Please let us know in the comments here or on Discord, and we can all work together to build the best solution for the future of v1.

New K values

Removed because they were no longer accurate