Liquidations, leverages, value transfers and oracles?! Perpetual Pools can be very confusing to understand; so today we are taking a big step back from the technical stuff and explaining the underlying Perpetual Pools mechanism to an absolute beginner using simple language.

This is Perpetual Pools - Explained like I’m 5.

What are Perpetual Pools?

A Perpetual Pool market is basically a wager (or trade) between two groups of people who think something will either increase or decrease. The thing people are speculating might increase or decrease is typically the price of an asset like Bitcoin or Ethereum, but it can be anything - even the temperature.

We call the thing that people are making trades on the price feed, and the price feed is supplied by an oracle.

How does the mechanism work?

A Perpetual Pool market is split into two sides, the long side and short side. When you put your funds into the long side of the pool, you win if the price feed increases. When you put funds into the short side of a pool, you win if the price feed decreases.

Every hour, the Perpetual Pool checks the price feed to see which group was right and moves money from the people who were wrong, to those who were right.

The amount of money that is moved from the losers to the winners is determined by two different things:

1. how much the price feed increased or decreased since the last transfer; and
2. the leverage multiplier of the Perpetual Pool market.

What is leverage?

Leverage is a concept which we could replace with confidence. If you are really confident that you are making the correct trade, you will want to increase your leverage so that when you win, you win even more. However, leverage will also make you lose even more when you are wrong. Therefore, higher leverage is only a good thing if you are very confident.

Normally when people place trades with leverage, they risk being liquidated if their trade is wrong - this means they lose all of the funds they put in and they no longer have a chance to win even if they turn out to be right in the long run.

The cool thing about Perpetual Pool markets is that they make it impossible to be liquidated so people can continue to have exposure even if the market goes against them in the short term.

How are there no liquidations with Perpetual Pools?

The way the Perpetual Pool market calculates how much money to move from the losers to the winners prevents the loser from ever losing 100% of their money. The pool does this by, in extreme scenarios, sacrificing some of the gains of the winners in order to protect the loser’s from losing everything. This is why we say Perpetual Pool positions cannot be liquidated.

However; this does not mean you cannot lose money by trading with Perpetual Pools.

What makes a Perpetual Pool, perpetual?

A Perpetual Pool is “perpetual” because it will continue to check the price feed and move money between participants forever. Because you can not be liquidated, your position exists forever - although it is possible for it to get very very small if your trade is wrong consistently.

What if nobody is in the other side of the Pool?

Sometimes there will be more people who think something will increase than people who think it will decrease or vice versa. In this scenario, it pays to have the unpopular opinion as you will have better odds than if you were following the crowd. This is very similar to how in sports betting backing the favourite will pay less of a reward, with the same potential loss, as betting on the underdog.

How to get started with Perpetual Pools

Tracer is simple to use, and we’ve provided all the info you’ll need to get started in our docs. Find the user-guides here and mint your first leveraged token on the Perpetual Pools App.

• Find the docs here
• Find the user-guides here

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Legal and Financial Disclaimers:

The above description is an intentional oversimplification of the mechanism design for people starting to learn about Perpetual Pools. For more technical details about how the mechanism works consult the technical documents or ask our friendly community in the Tracer Discord.

The information provided in this article is for informational purposes only. Any material in this article should NOT be considered legal or financial advice.

The reader bears responsibility for their own investment research and decisions. The material found on in this article is not intended to be used as a basis for an investment decision nor is it to be construed as advice. No information is intended as securities brokerage, investment, tax, accounting, or legal advice.