Perpetual Protocol – 20x Leverage Perpetuals Never Limited by Available Liquidity

Chaz Schmidt
Jul 14, 2021
|7 minutes read

Innovation happens at a head-spinning pace in decentralized finance. As the ecosystem continues to stack up brick after brick, our capabilities reach new heights and knock down old barriers. The protocol I have the pleasure of introducing to you in this week’s DeFi Pulse Drop has its eyes set on disrupting the existing futures and derivatives market by offering innovations that lower the barrier to entry for even low liquidity futures.

Perpetual Protocol is a decentralized perpetual contract protocol capable of supporting 20x leverage for any asset without being limited by available liquidity thanks to its virtual AMM (vAMM) design.

What is a Virtual AMM (vAMM)?

To get a better understanding of the differences between your average AMM like Uniswap or Curve and Perpetual’s vAMM, let’s take a step back. Automated Market Maker (AMM) exchanges you’ve likely encountered before swap tokens with a constant product function x*y=k. And while there has been a lot of innovation happening around AMMs in the past couple years to optimize swapping assets, Perpetual Protocol’s virtual AMM (vAMM) is something unique which enables perpetual contracts for any asset with lower slippage by design.

I know what you’re saying: “Aren’t all smart contracts virtual?” And, you’re not wrong, so let’s clear up what this means exactly by examining that function x*y=k from earlier. With most other AMMs, you deposit two assets into reserves represented as x and y. The available quantities of these two assets establishes the price you might pay to swap in either direction. As the supply of x increases, the supply of y decreases and vice versa. The result is that k remains constant and liquidity is always available albeit the price gets higher and higher as you approach the extremes in either direction. Perpetual Protocol’s vAMM functions similarly except it doesn’t actually store any tokens inside the AMM itself.

Perpetual Protocol’s virtual AMM (vAMM) gets its name from the fact that its doesn’t store, swap or spot trade any tokens and is only used for price discovery. Assets are instead sent to another smart contract referred to as the “Clearing House” which then stores the assets in the “Vault.” The Clearing House accepts deposits and records position ownership with the relevant info such as initial margin, level of leverage, and whether it is long or short.

This GIF illustrates a user entering a new position; Alice longs 2.439 ETH with 100 DAI as the collateral, subsequently changing the state inside this vAMM. As you can see, the initial state of this vAMM was 40000 vDAI and 100 vETH and now the vAMM’s state becomes 97.5609756 vETH and 41000 vDAI, but remember that the Vault still holds the 100 DAI Alice deposited. The Vault always has enough collateral to pay back every trader (given the assets are able to be liquidated) because one trader’s gain will cancel out another trader’s loss. Alice’s gains are Bob’s losses and so on and so on.

Funding Rate

In order to ensure vAMM markets follow the wider market, Perpetual Protocol utilizes an hourly funding rate similar to that of FTX Exchange. Each and every hour, funding payments are paid to traders as incentive to take up the unpopular side of the market bringing it back in line with the index price. For example, if the funding rate is positive, long positions pay short position holders,

Chainlink oracles are used for the index price because in the words of the Perpetual team, “it’s the most battle-tested Oracle solution on the market.”

Insurance Fund

50% of all transaction fees on Perpetual Protocol are deposited into an Insurance Fund, which is used as the first line of defense when the system faces unexpected losses such as losses in the liquidation process and funding payments.

What makes a vAMM unique?

Perpetual Protocol’s vAMM affords it a few key advantages over other AMM designs.

No liquidity providers = no liquidity restrictions or impermanent losses

Perpetual Protocol has no cap on the open interest in its markets. Separating token reserves from price discovery allows Perpetual Protocol to guarantee liquidity for any size trade. Perpetual Protocol doesn’t require large liquidity reserves or liquidity providers at all to function due to the fact no funds are stored in the vAMM. As previously mentioned, one trader’s losses are another’s gains. Each trade counteracts another and the funding rate creates incentives to keep the market moving in the right direction. And because there are no liquidity providers, there is no impermanent loss from price fluctuations.

Adjusting k to manage slippage

Another major difference with the design of virtual AMMs is Perpetual Protocol’s ability to adjust k in the equation to respond to market conditions i.e. reducing price slippage for traders. At first, k will be manually set by governance but the ultimate goal is to algorithmically adjust it based on a number of potential factors such as volumes, open interest, funding payments, volatility, etc.

PERP token

PERP tokens have three major functions: governance, staking, and acting as the asset of last resort.

Asset of Last Resort

PERP acts as the ultimate backstop of the system. In the case where the Insurance Fund is unable to cover unexpected losses, PERP tokens are minted and sold to cover the rest.


The Perpetual Protocol team has laid out a governance plan with a timeline for transitioning control of the protocol to an on-chain governance system ran by PERP token stakers. The plan details future updates including on-chain voting with delegation, bug bounty programs, ecosystem grants, and eventually proposals will only be executable code, much like Compound’s current governance. In the immediate term, you can visit to propose and discuss governance proposals.


PERP holders can stake their tokens for a fixed amount of time known as an “epoch” to receive staking rewards in PERP as well as a portion of the transaction fees in stablecoins. At launch, epochs last 7 days but can be adjusted by protocol governance. Although you may stake at anytime during an epoch, staking rewards are time-weighted meaning that staking earlier in the epoch yields a greater portion of rewards. Staked PERP tokens continue to rollover into the next epoch unless unstaked in the present epoch.

50% of Perpetual Protocol fees are awarded to PERP stakers for taking on the risk of being the backstop to the Insurance Fund and properly governing the protocol. At the end of each epoch, stakers can claim their portion of transaction fees paid in stablecoins immediately; however, PERP earned via staking is locked until the first day of the same month in the subsequent year.

PERP Distribution

According to Perpetual Protocol’s distribution overview found in their docs, the initial total supply is distributed as follows:

  • 7,500,000 PERP tokens: Balancer LBP.
  • 36,000,000 PERP tokens: Team and advisors.
  • 6,250,000 PERP tokens: Binance Labs, invested in the development of the Perpetual Protocol approximately 2 years ago.
  • 22,500,000 PERP tokens: Strategic investors to the extent they fully exercise their rights to purchase PERP tokens.
  • 77,750,000 PERP tokens: Ecosystem and rewards, which will benefit traders, stakers, and developers who participate in the Perpetual Protocol ecosystem. As Perpetual Protocol transits to community governance, the Perpetual Protocol community will make all decisions regarding the distribution of ecosystem rewards.

It’s worth noting that only 10% of the PERP tokens allotted to ecosystem and rewards will be unlocked until the community governs the protocol on-chain. Additionally, protocol governance or an emergency minting of PERP tokens to backstop the system could result in the max supply of 150,000,000 PERP being altered.

The Perpetual Protocol team plans to make 7.5M PERP tokens available on Balancer around Sep 7, 2020 at 6:00 am UTC. This first Balancer pool will be a liquidity bootstrapping pool designed to disincentivize price speculation and front running. Check here for more details and also stay tuned to Perpetual’s twitter. There are also plans to have a liquidity mining rewards program to further bootstrap the system.


It’s been truly exciting to watch DeFi grow recently. And to me, projects like Perpetual Protocol mark a new level of maturity for decentralized finance. The Perpetual team has put together some interesting new concepts with existing money legos to expand the DeFi ecosystem’s toolbox. I recommend you check out Perpetual Protocol’s trading interface, dive into their documentation if you’d like more information, or even join the discussions happening in their gov. forum.

Disclosure: This post is part of our DeFi Pulse Drops promotional series; We’ve been paid by Perpetual Protocol to inform readers about their platform and perpetual contracts. As always, we’re committed to providing the entire community with quality, objective information, and any opinions we express are our own.