¶ What are Perpetual Futures?
Sovryn Perpetual Futures are trading contracts that provide flexible options for taking a position within a given market. For example, with a BTCUSD trading pair, you can take a leveraged long or short position on BTC relative to USD. You can take on the risks and rewards of the spot price movement without actually buying or selling spot. You cover the risk by supplying margin assets that cover any losses you experience if the price moves against your position. Perpetual futures use an incentive mechanism that causes the contract price to track the spot price closely. Sovryn perpetual futures are similar to traditional futures contracts but without any expiration date.
Sovryn is launching perpetual futures, beginning with a BTCUSD contract. Sovryn plans to add more contracts as this product matures. The system allows users to gain exposure to other assets without selling BTC or buying a different asset. This opens the possibility for trading on basically any asset that has a publicly trackable price using a perpetual futures contract.
¶ How it works
Perpetual futures offer a straightforward way to take a leveraged long or short position relative to an asset but without having to buy or sell the asset itself. This is similar to traditional futures contracts. However, traditional futures have an expiration date, which forces the price to track the spot price due to arbitrage between the contract and spot with the settlement date in view.
Perpetual futures use a different mechanism—called a funding rate—to keep the price aligned to the asset reference price. The funding rate specifies the rate at which a long or short position pays for the privilege of holding that position. If the contract price is higher than the reference price, then long positions pay a premium to short positions. This premium incentivizes longs to sell to avoid the premium and for traders to short to collect the premium being paid by longs. The selling pressure on the contract created by the premium moves the price back toward the reference price. Likewise, if the contract price falls below the spot price, then the funding rate goes negative and shorts pay the premium to longs. This creates upward pressure on the contract price that moves it back in line with the reference price. The funding rate changes as the contract price and reference price change relative to one another as a way to adjust the incentive.
¶ Perpetual Futures use cases
Perpetual futures can be used in a number of different ways:
- Traders can easily take leveraged long or short positions on BTC.
- BTC holders can diversify their BTC exposure. You can take a position in other assets without liquidating the notional (full) value of the asset in BTC so that you can purchase the asset outright.
- BTC holders can hedge their exposure to BTC by entering an unleveraged short position of the same size, which will offset losses or gains in BTC without requiring that BTC be sold. This avoids a taxable event in some jurisdictions.
¶ Advantages of Perpetual Futures
Perpetual Futures have a number of specific advantages over perpetual futures on centralized exchanges and other DeFi platforms:
- Traders can participate in leveraged DeFi trading—noncustodial, fully decentralized, and without KYC requirements.
- Traders and investors can get leveraged exposure to another asset without selling BTC. For example, you could go long on a BNBUSD perpetual future if you believe BNB will rise relative to USD. Margin collateral could be held in BTC without selling it to buy BNB. If the BNB price goes up, you earn BTC rather than BNB or USD. If the price goes down, you pay BTC.
- Liquidity providers can participate in the Sovryn Perpetuals AMM (automated market maker) pool, which has no impermanent loss as standard AMM pools do. Instead, liquidity providers take on the risk of the system and participate in its profits and losses.
- The Sovryn Perpetuals AMM is a unique, capital-efficient design. It can offer lower slippage to traders than other DeFi perpetual AMMs with comparable capital reserves.
- The Sovryn Perpetuals AMM is designed so that any asset can serve as margin collateral. Margin does not have to be one of the assets in the trading pair.
¶ Perpetual Futures interface
¶ Walkthrough video
¶ Terms
Index Price: The current spot price is based on a bucket of distributed price sources provided by the Chainlink oracle.
Mid Price: The current nominal contract price of the perpetual contract, midway between the prices a buyer and a seller would receive for a given size order when slippage is taken into account. If the AMM is in balance, the mid-price is equal to the index price.
Mark Price: Moving average of the mid-price. The Mark Price smooths out rapid variations in the mid-price to provide a steadier estimate of the current contract price. The Mark Price is used to calculate unrealized PnL and to determine ongoing margin requirements. The use of the Mark Price rather than the instantaneous mid-price prevents price manipulation.
Slippage: The difference between the current quoted price (the mid-price) and the price a buyer or seller would get for a given transaction. Slippage occurs because buying or selling actually moves the price as the complete quantity of the trade is transacted.
24hr Volume: Total volume of transactions of the contract within the last 24 hours.
Open Interest: The total amount of contracts held by longs or shorts, whichever is larger.
Funding Rate: Rate at which longs pay shorts for the privilege of holding a long position (negative means shorts pay longs). The funding rate is quoted in an 8h rate and is refreshed with every contract interaction or block, whichever comes first. The AMM calculates and charges the funding rate continuously but uses a time average to produce the 8h rate. The funding rate provides an economic incentive that drives the contract price toward the index price.
Lot Size: Minimum incremental amount of the asset that can be traded (currently 0.0005 BTC for BTCUSD).
Minimum Trade Amount: Minimum position that can be traded (currently 0.0005 BTC for BTCUSD).
AMM Depth: Indicates how the price will change for a given size order. If the AMM pool contains a large amount of collateral, the price will be smaller for a given order size.
Position Leverage: The multiplier on the margin (the order cost) a buyer or seller supplies that will determine the order value, which is the size of the position established by a buy or sell order.
¶ How to trade Perpetual Futures
Note that the perpetual futures interface was temporarily made available on testnet for the competition. It will be released on mainnet once all the feedback and improvements have been implemented.
¶ Step-by-step guide
The following step-by-step guide will walk you through the process of buying and selling perpetual futures on the Sovryn platform.
¶ 1. Access the Perpetual Futures interface
- URL to access the interface of the perpetual futures will be provided here once perpetual futures are released on mainnet.
¶ 2. Connect your MetaMask wallet
Currently only MetaMask and Liquality wallets are supported when connecting to the Perpetual Futures interface.
- A MetaMask wallet is required to connect with the interface of the perpetual futures. If you do not already have a MetaMask wallet configured to connect to Sovryn, visit the MetaMask Wallet Setup Guide section before proceeding further. Connect your wallet by clicking the Connect Wallet button in the center-right of the interface.
- Sovryn perpetual futures will operate on BSC Mainnet at the beginning since BSC is currently faster than RSK and has very low fees. Once rollups are ready on RSK, Sovryn perpetual futures will move to RSK.
¶ 3. Choose Gas Station Network (GSN) settings
- The GSN setting in the top right determines whether you will pay gas fees in BNB (off), the native token of BSC, or in BTC (on).
- GSN is used for meta-transactions or fee payments in BTC even if the chain has another native token.
Note that multiple approvals might be required when trading with GSN enabled.
¶ 4. Select Buy or Sell
- Click the Buy button to go long or the Sell button to go short.
¶ 5. Select market or limit order
- Currently, only market orders are enabled.
¶ 6. Select order value
- This specifies the position size your order will establish.
¶ 7. Specify position leverage
- The order cost will be calculated so that the leverage times the order cost equals the order value.
- The maximum allowable leverage varies depending on trade size but is always at least 10X. Higher leverage is possible for smaller position sizes. The maximum allowable leverage for your particular trade is indicated by the max value displayed.
¶ 8. Set slippage tolerance (optional)
- If you wish, adjust the slippage tolerance setting using the gear wheel icon.
- The default slippage tolerance is 0.5%. This means that if the trade is too large to get within 0.5% of the quoted mid-price or the market moves quickly so that the current price is no longer within 0.5% of the quoted mid-price, then the trade will not be executed. In such cases, the user may need to try again or adjust the slippage tolerance.
¶ 9. Execute the buy or sell order
- Click the Buy or Sell button.
¶ 10. Review and confirm
- Review and confirm the transaction.
Please note: You may be asked to sign the transaction twice. This occurs if the first ‘relay-worker’ does not respond to the request.
Rest assured, both confirmations will result in only one transaction.
- For information about your Current position, closed positions, order history, and funding payments, observe the trading details section at the bottom of the perpetual futures page for information about your current position, closed positions, order history, and funding payments.
Congratulations! You have successfully completed a perpetual future trade on the Sovryn platform.