Tracer Perpetual Pools ExplainedPerpetual Pools: A New Derivative Primitive
Introducing Perpetual Pools, a new derivative primitive developed by Mycelium on behalf of Tracer DAO. We’ll run you step-by-step through Perpetual Pools usage basics; then we’ll highlight a proposed liquidity mining incentive structure suitable for Perpetual Pools.
So, what are Perpetual Pools? Read the Tracer: Perpetual Pools Litepaper.
Perpetual Pools is a new financial primitive that enables anybody to take a short or long position on any underlying asset. These positions are non-liquidatable, fully collateralised, fully-fungible and can exist perpetually without upkeep. By taking a position, users mint fungible ERC20 tokens representing ownership of the pool of assets. These fungible positions allow users to interact with the DeFi economy seamlessly and sustain their leveraged exposure.
Perpetual Pools is a financial contract for the transfer of value between long and short sides of a collateral pool, based on an underlying price feed. For example, a long user places collateral into the long side to mint an L-token. A short user will have the same interaction with the short side, and mint an S-token.
The value of these tokens is determined by the proportion of collateral held in each side of the pool. Periodically (eg, each hour), value will transfer from one side to another based on a transfer function which mimics leveraged exposure. This is what we call power leverage. Denoted as p.
Take a 1-BTC/USDC pool. For this pool there is a long side and a short side. The long side is represented by an L-token, and the short side is represented by an S-token. Users who intend to take a long position on BTC/USDC will purchase an L-token. Users who intend to take a short position on BTC/USDC will purchase an S-token.
In the case where the BTC price goes up, the short side will transfer some of its USDC to the long side. As such, the L-token price appreciation will act like traditional leverage (1x in this case) for normal price movements. The S-token price depreciation will also act like traditional leverage (1x in this case) for normal price movements.
In the case where long and short collateral is at parity, an x% transfer from one side will equate to an x% gain for the other side. However, in the case where long and short collateral is not equal, an x% transfer from one side will not result in an x% gain for the other side. Instead, the side’s gain is adjusted by the rebalancing rate. A favourable rebalancing rate presents asymmetric upside for the less collateralised side.
The existence of this rebalancing rate will mean that liquidity providers on the under-collateralised side will have amplified leveraged gains while keeping their losses fixed. e.g., for a 1p pool with a rebalance rate of 10%, the short side will have a power leverage of 1.1p for gains while only 1p for their losses.
Here we detail basic use-cases for Perpetual Pools. We intend to provide more sophisticated strategies, both at an informational level as well as strategies for users to stake or earn yield:
Directional Positions: Take one side of a pool and indicate your beliefs to the market at varied leverages.
Rebalancing Rate Returns: Farming asymmetric returns that arise from the rebalancing rate.
Long Straddle Payout: Buy equal notional value of L/S-tokens, and profit if the price moves in one direction.
Liquidity Provision for Secondary Markets: Take both sides of the pool and generate revenue through secondary market (swap) fees.
Tracer DAO proposes to distribute TCR to liquidity miners based on an initial 5 year forecast. See the graph below. The 64.7% represents the current initiatives already passed and voted, or proposed and currently in the execution phase, leaving 35.3% remaining for distribution. We project that, from the Perpetual Pools liquidity mining distribution, 50% will be allocated within the first 6 months, while the remaining balance will be emitted over the remaining 4.5 years.
Perpetual Pools reimagine the way that derivative contracts function and position Tracer as a pioneering protocol on the bleeding edge of financial innovation. As Tracer DAO's beachhead contract type, Perpetual Pools must be tested and adopted by community members, builders and market participants. Accordingly, Tracer DAO will seek to incentivise these kinds of behaviour.
Sentiment among Tracer DAO community members (Discourse) is to introduce Liquidity Mining incentives for providers at market genesis. See below an example schedule projection of liquidity mining in the context of Tracer DAO’s Perpetual Pools contracts.
From the day of launch, liquidity providers will receive a concentrated distribution of TCR, where 57% (out of the allocated 5%) will be distributed in the first 4 weeks following launch. The alignment between TCR token holders and Tracer DAO stakeholder primacy is crucial for successful decentralised governance and it will ultimately deliver a stronger Tracer DAO.
How will it work?
There will be two methods of liquidity mining. One that incentivises Primary Market Liquidity (i.e. buying a pool token), and one that incentivises Secondary Market Liquidity (i.e. putting that pool token into an AMM liquidity pool).
TCR will be allocated to both Primary Market Liquidity and Secondary Market Liquidity. At genesis, 40% of TCR allocation will be given to Primary Market Liquidity, and 60% will be given to Secondary Market Liquidity.
- The TCR Allocation (Primary Market) and the TCR Allocation (Secondary Market) will be a configurable parameter which can be adjusted depending on market conditions.
To earn Primary Market Liquidity Rewards, users will stake a pool token(s). To earn Secondary Market Liquidity Rewards users will stake an appropriate AMM LP token(s) into the staking farm contract.
In this model, 2.85% of total TCR supply (1B TCR) will be distributed within the first 4 weeks of the liquidity mining scheme.
Please Note: Users will need to use the Arbitrum bridge https://bridge.arbitrum.io/ to move their assets from L1 to L2 when using the Perpetual Pools Interface. Also, noting the 7-day withdrawal timeframe back to main-chain (L2 to L1)
What is the allocation?
Liquidity mining rewards are calculated at the end of each Rebalance Period (60-minutes).
For Primary Market Liquidity Rewards, the liquidity mining rewards are determined by the proportion of pool tokens provided by the unique address in the staking farm contract.
- e.g. User deposits five 1L-ETH/USDC. There are a total of 100 1L-ETH/USDC. Therefore, this user has a 5% claim on the TCR rewards for that hour.
The same logic applies for staking AMM LP tokens.
What is the schedule?
No vesting for TCR rewards. Rewards will accrue continuously and can be claimed at any time. TCR is earned continuously.
- e.g. for the first week, the contract will release a total of 8,000,000 TCR. This will be released continuously.
A new rate is given weekly.
- e.g. for the second week, there will be 7,500,000 TCR emitted.
Markets at Launch
The initial Perpetual Pool markets proposed to be deployed will be 1-BTC/USDC, 3-BTC/USDC, 1-ETH/USDC and 3-ETH/USDC.
These are fungible tokens: positions in a Perpetual Pool can be used for further yield-bearing opportunities. For example, a long/short user can provide liquidity in a Balancer, SushiSwap or Uniswap AMM to earn returns from swap fees over time. We expect secondary markets to be naturally liquid as users seek these fees.
Here’s the current and forecast timeline for Tracer DAO:
What Happens Next?
Legal and Financial Advice Disclaimer:
The information provided in this article is for informational purposes only. Any material in this article should not be considered as legal or financial advice. Tracer DAO is not an investment advisor and this is not a place for the giving or receiving of financial, tax or legal advice or investment strategy. Tracer DAO is not regulated by any financial services authority. You should consult with a financial advisor, attorney or other professional to determine what may be best for your individual needs.
Accordingly, Tracer DAO will not be liable, whether in contract, tort (including negligence) or otherwise, in respect of any damage, expense or other loss you may suffer arising out of such information or any reliance you may place upon such information. Any arrangements between you and any third party contacted via Tracer DAO’s website are at your sole risk.