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PERPETUAL PROTOCOL - Next Level In Decentralized Trading? (Layer 2, Uniswap V3) - YouTube
Channel: Finematics
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so what is perpetual protocol all about
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what are some of the improvements that
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come with the recently launched version
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2 of the protocol how does it make use
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of uni swap v3 and what are perpetual
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features in the first place you'll find
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answers to these questions in this video
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before we begin if you want to learn
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more about decentralized finance and the
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technology behind it make sure you
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subscribe to my channel hit the bell
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icon and enable all notifications
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perpetual protocol is a d5 project with
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the main goal of creating the best most
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accessible and most secure decentralized
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exchange for perpetual futures perpetual
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protocol was founded in 2019 by a small
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team of startup founders and software
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engineers initially called strike the
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project pivoted to perpetual futures and
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changed its name in the summer of 2020.
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the first version of the protocol was
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launched on the xdi network in december
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2020 version 2 of the protocol named
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curie after the famous scientist and
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nobel prize winner mary curie launched
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on optimism on the 31st of november 2021
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the design of perpetual protocol that
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we're going to explain later is
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extremely interesting as it leverages
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the defined money legos ethos to both
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built upon other already existing defy
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projects as well as provide building
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blocks for other protocols in the future
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perpetual protocol is one of the
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projects that focus on derivatives in d5
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if you need a recap on what derivatives
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are and an overview of other interesting
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protocols in this space i highly
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recommend watching my other video first
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before we dive deeper into the design of
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perpetual let's fully understand the
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main derivative product that the
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protocol offers to trade perpetual
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futures perpetual futures are one of the
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most popular trading products in the
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cryptocurrency space initially offered
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by well-known centralized platforms such
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as bitmex binance or bybet they are now
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also making their way into design
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similarly to other derivatives perpetual
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futures allow for gaining exposure to a
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price of a particular financial
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instrument without holding the
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underlying asset this can be useful for
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multiple purposes including price
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speculation hedging or arbitrage in
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contrast to standard future contracts
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perpetual futures don't expire they
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don't have the settlement date hence
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they can be held and traded for an
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indefinite amount of time not having the
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settlement date can be quite beneficial
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for traders as they don't have to deal
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with multiple contracts with different
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settlement dates in standard futures the
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settlement date is quite important as it
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allows the price of future contracts to
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converge with the actual price of their
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underlying asset as the settlement date
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approaches to make sure the price of
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perpetual contracts doesn't diverge too
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much from the price of their underlying
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assets perpetual contracts use a funding
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rate
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the funding rate is paid periodically
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and provides incentives to one side of
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the market either market participant
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with open long positions longs or open
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short positions shorts
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in general when the price of the
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perpetual contract is trading above the
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price of its underlying assets the
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funding rate becomes positive and long
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stay short the opposite holds when the
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price of the perpetual contract is below
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the spot price in this case shards pay
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longs this allows the price of the
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perpetual contract for a specific asset
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to converge with the price of its
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underlying
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on top of the funding rate price
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speculators and arbi treasurers also
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help with making sure the prices between
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different derivatives or spot exchanges
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don't diverge too much perpetual futures
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also provide an easy way for shorting a
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particular asset where market
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participants can benefit from the price
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of that asset decreasing over time they
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also facilitate easy access to leverage
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which allows for controlling a bigger
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position than it would have been
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otherwise possible using the same amount
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of capital this can be useful in certain
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scenarios but it can also be quite
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dangerous as undercollateralized
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positions can be liquidated when the
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market moves against the trader's
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position
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in general the relatives markets help
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with the price discovery of different
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assets as they provide a place where all
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market participants can meet and easily
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trade usually in big sizes
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for certain financial instruments
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derivatives markets can even become
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their primary markets for price
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discovery i hope this gives a good basic
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overview of what perpetual contracts are
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time to dive into a protocol that
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provides easy access to these financial
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products perpetual protocol perpetual
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protocol allows for trading different
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perpetual contracts of the most popular
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cryptocurrencies like bitcoin or
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ethereum with multiple other coins that
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will be added to the protocol in the
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future in contrast to centralized
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exchanges offering similar products
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perpetual protocol doesn't hold custody
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over users funds so users are always in
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full control of their assets on top of
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this it allows its users to trade in a
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permissionless and fully transparent
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manner at the moment perpetual makes use
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of the usdc stablecoin as its primary
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collateral this can be expanded into
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other types of collateral in the future
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having usdc used across the platform
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also means that all trades are settled
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in usdc this means that if a user
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speculates on the price of ether and
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let's say doubles their money they'll
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end up with more usdc in their account
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after closing their position the v1 of
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the protocol was initially deployed on
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ethereum layer 1 but after experiencing
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problems with slow execution and high
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transaction fees the protocol was
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released on xdi at the end of 2021
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v2 iterated on the initial design and
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introduced a new model for managing
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positions and executing trades that
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makes use of uni swap v3 and its
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concentrated liquidity and by the way if
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you need a recap on how unisop v3 works
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you can check my other video here
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at the center of perpetual protocol
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design lies the clearinghouse smart
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contract clearinghouse is responsible
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for minting and burning virtual tokens
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called v tokens that are held by the
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contract on behalf of the user when the
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user deposits usdc to the exchange the
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clearinghouse contract means v tokens
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using the max available leverage this
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doesn't mean the user has to use the
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maximum leverage when opening a position
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and it only gives the user the
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opportunity to do so by issuing the
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maximum number of tokens that the user
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may or may not use
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as an example if the user decides to
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deposit 1000 usdc the protocol would
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issue 10 000 v tokens in this case vusdc
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to create a particular position the user
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can select the product they want to
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trade and use v tokens to enter the
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position for example if the user wants
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to go long on btc they can instruct the
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clearinghouse to trade your vusdc tokens
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for vbtc in this case the protocol would
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use a unisop v3 vusd vbtc pool as
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mentioned earlier depending on the
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leverage ratio that the user selects
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they can be using either some or all of
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their vusdc tokens
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whenever the user decides to close their
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btc position they can trade the dbtc
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tokens back to vusd securing their
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profit or loss depending on what
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happened to the bitcoin price since they
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opened the position on top of being used
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by traders the clearinghouse contract is
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used by makers in perpetual makers are
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market participants that provide
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liquidity to the perpetual futures
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exchange by doing so makers make money
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by accruing trading fees whenever
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someone trades against the pool where
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they provide liquidity makers can also
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use leverage when providing liquidity
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due to the unisopv3 design providing
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liquidity is a bit more tricky than on
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other amms in particular makers have to
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decide in which price range they want to
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provide liquidity they also only accrue
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fees from trades that go through the
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range where their liquidity is present
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makers similarly to traders can use usdc
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to interact with the perpetual futures
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exchange when makers decide to provide
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liquidity in certain assets they deposit
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usdc to the clearinghouse contract that
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in turn means v tokens and automatically
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adds liquidity to the selected unisopv3
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pool as an example if a maker decides to
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provide liquidity in the btc usdc market
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their usdc is used to mean a correct
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ratio of vusd and vbdc that are in turn
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added to the vusd vbtc unisop v3 pool as
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makers are exposed to the price of the
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underlying tokens in a liquidity pool
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they can be impacted by impermanent loss
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hence they have to be careful with the
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ranges they provide liquidity in and in
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general they should have sustainable
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strategies for providing liquidity to
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make providing liquidity on unison v3
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easier perpetual works with protocols
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such as popsicle finance visor and
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others what is interesting is that
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perpetual protocol builds on top of
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unisob v3 leveraging the previously
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mentioned manual legos ethos in a
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completely permissionless way when it
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comes to the margin model perpetual
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protocol uses cross margin which means
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that the user's funds are kept in one
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pool and all of their positions use this
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pool as collateral this makes managing
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collateral easier since the user doesn't
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need to add or remove margin for each
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position but has to be used with caution
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as in this mode one position can affect
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other positions if the user has several
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highly leveraged positions one position
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that goes against the user can cause
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others to be at risk and face possible
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liquidations
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the users also have a way of using
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isolated margin mode by creating
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separate wallets for each of their
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positions
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the v2 of the protocol has just recently
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launched an optimism an optimistic
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roll-up ethereum layer 2 scaling
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solution launching on rollups allows
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perpetual protocol to scale and achieve
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both low transaction fees and high
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transaction throughput this is extremely
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important for running a successful
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perpetual futures exchange the benefits
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of roll apps should be more and more
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obvious with time as the existing
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solutions mature and become cheaper and
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cheaper v1 will remain on x die v2 can
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also launch on xday if unisop v3 also
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launches there perpetual is also
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planning on launching on our beatrim in
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the near future if you'd like to learn
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more about drawlaps you can watch my
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video about this topic here
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rolaps and other l2 solutions will
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benefit a lot of defy protocols
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including perpetual
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v2 of perpetual is not only limited to
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the initial launch in fact during the
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full v2 rollout the protocol is planning
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on bringing additional features some of
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them include limit and stop orders
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staking multi-collateral liquidity
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mining and even permissionless market
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creation when it comes to the latter
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anyone will be able to create a
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perpetual market for any assets as long
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as there is a price feed for them via
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either unisob v3 tu-up or channeling
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oracles both of them supported in v2
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also in the future updates the protocol
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will no longer be limited to crypto and
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it will expand to markets such as forex
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commodities and stocks
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perpetual protocol is clearly one of the
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most interesting protocols focusing on
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derivatives in dthi it looks like the
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team learned a few important lessons
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from the first version of the protocol
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and came up with a new improved design
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that should make the perpetual futures
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exchange more sustainable and more
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appealing to both the traders and
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liquidity providers perpetual protocol
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is a great example of a project that
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massively benefits from launching on
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ethereum layer 2 solution such as
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optimism or arbitrary it shows that
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there will be a set of protocols that
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are better off launching directly on
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layer 2 without even deploying on layer
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1. it would be amazing to see other
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protocols following this approach and
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trying new designs that couldn't
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previously work due to the limitations
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of layer 1 ethereum
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it will also be interesting to see
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perpetual protocol gaining traction and
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convincing more and more people to use
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trading products outside of the
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well-known centralized exchanges
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if you'd like to check out perpetual
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protocol you can find my link in the
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description box below and always
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remember to make sure you fully
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understand how a trading product you are
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interacting with works before using it
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and remember to always trade with fans
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that you're willing to lose so what do
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you think about perpetual protocol what
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are some of your favorite d5 protocols
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in derivatives category comment down
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below and as always if you enjoyed this
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video smash the like button subscribe to
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my channel and check out cinematics on
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patreon to join our community thanks for
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watching
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