Decentralized exchanges are allowing people all over the world to trade cryptocurrencies without the permission of traditional financial institutions. Decentralized exchanges rely on blockchain technology to automatically match cryptocurrency traders with the coin or token they want.
The problem is that Defi exchanges generally lack powerful trading tools that centralized exchanges have, such as leverage (multiplying losses or gains) and shorting (betting against an asset).
This is where Perpetual protocol comes in. It allows users to make leveraged trades and shorts on synthetic digital assets which are pegged to real digital assets. This means that anybody can now benefit from the same trading techniques the pros use while gaining exposure to the burgeoning world of decentralized finance.
The Perpetual protocol is exploding in popularity and its innovative PERP token is a key requirement to participate.
What is PERP?
PERP is the utility and governance token of the Perpetual protocol. The Perpetual protocol is a decentralized exchange that allows users to put high leverage long and short trades on synthetic versions of digital assets.
Synthetic assets allow traders to represent the value of any asset without using the asset itself. This has tremendous implications for stocks, bonds, and cryptocurrencies.
For stocks and bonds, synthetic assets give investors access to a whole range of new investments from which they would otherwise be barred from participating due to strict requirements like minimum net worth and registered investor status in the traditional financial world.
For cryptocurrencies, Perpetual protocol users can now make leveraged trades within the decentralized finance ecosystem. Leverage means that all price movement of an asset is multiplied by a chosen amount (for example 5). In such a case the assets price movements up and down will each be multiplied by five for the holder of the synthetic asset.
Previously leverage trades in crypto were confined to centralized exchanges due to the limitations of running such complex contracts on a blockchain asset. Through synthetic assets, Perpetual protocol brings this risky but powerful technology to DeFi users.
Users of the Perpetual protocol use USDC to create synthetic assets (not PERP), however, this does not mean that PERP is without its own unique and powerful use cases.
As we will explore in this guide, PERP contains three unique use cases: staking, governance, and insurance. Each of which will be explained in the following sections.
PERP Use Case: Staking
Decentralized exchanges require liquidity and collateral. In other words, they need access to tokens and value so that they can fill orders and operate as desired. The primary way to achieve this in a decentralized way is to allow individual token holders to lend their tokens in exchange for interest, or income on top of their original holdings. This is often called staking.
The primary use case for the PERP token is to provide a passive income to investors who stake the token on the platform. These staking pools in turn provide the liquidity and collateral necessary to create synthetic assets that are based on real value.
How Staking on Perpetual Protocol Works
In the PERP staking pool, epochs (periods required to stake) last seven days, after which 50% of all fees collected on the protocol during that time period are redistributed amongst stakers. The other 50% of fees go towards the insurance fund, which will be explained later in this guide.
The fee received by each staking participant is proportionate to the percent of the total staking pool that they own. Currently, the average return for staking in the PERP pool stands at 33% of the initial investment. This rate is subject to fluctuation over time, however.
After staking for at least seven days, users can withdraw their initial funds, however, if they have participated in a governance vote they are subject to a cooldown period when they want to withdraw their tokens. This means that users must wait at least six months after requesting their initial funds before they can receive them. The reason for this is related to governance which will be expounded on in the next section.
Further, the staking pool creates added demand for the PERP token, by incentivizing the collection and storing of tokens over a set time period.
PERP Use Case: Governance
Due to the nascent state of the protocol, Perpetual’s governance is currently mostly handled by the core development team. However, several governance decisions in the past have been left up to token holders and the perpetual team has made it clear that soon, governance will be a primary use case for the PERP token.
By managing governance decisions in a distributed way via token holder voting, Perpetual protocol hopes to effectively become a DAO (decentralized autonomous organization).
Those who stake their PERP tokens on the platform will be able to vote on proposals aimed at improving and upgrading the protocol. These voting proposals will include decisions such as which token to list next, or whether a new protocol implementation should occur. Voting rights and voting power will be proportionate to the number of tokens that a participant holds.
One unique rule that the Perpetual team has already emphasized is that those who vote on the platform will need to continue to hold their tokens on the platform for at least six months after voting. This incentivizes those with voting rights to vote with the long-term benefit of the protocol in mind, and not for quick gains to cash out on.
PERP Use Case: Insurance
In addition to staking and governance, PERP tokens also provide insurance and act as a backstop should an unlikely disaster fall upon the protocol. This is not a primary use case, since token holders do not actively control these tokens. It is, however, an interesting and novel use case for the tokens nonetheless.
As mentioned previously, after an epoch (seven-day period) 50% of all fees collected by the protocol during that epoch are stored as PERP tokens in an insurance fund. This insurance fund is to be used only in extreme cases. Examples of extreme cases would be a hack of the platform itself or even a major deflationary force in the broader crypto markets.
In such a situation, The PERP tokens in this fund can be sold at market value to offset losses. PERP stakers who have been negatively affected by the situation can receive a proportionate amount of the insurance fund to make up for their losses.
This default insurance fund and method is unique in the crypto space, providing stakers in the protocol extra assurance that their investment will be protected in the case of an emergency. However, since this method is still relatively new it has not yet been stress-tested or proven to work in such a situation.
As we have seen the PERP token has three unique use cases which make it an innovative and exciting token to keep an eye on.
In addition to these use cases, we would be remiss to neglect to mention that a primary reason people buy the PERP token is to speculate on the price rising in the future. As the use of the protocol increases, demand for the token could drive the token price up. Thus, holding PERP is also bet on the continued growth of the protocol.
If you are bullish on the future of decentralized finance and want to own a token with many unique use cases unseen anywhere (such as a default insurance fund), then PERP is worth taking a look at.