Research Summary
The report explores the concept of power perps, or assets that target the power of an index price, and their prevalence in the world of decentralized finance (DeFi). It argues that many financial instruments, including crypto-collateralized stablecoins, margined futures, and constant product automated market makers (AMMs), can be viewed as power perps.
Key Takeaways
Understanding Power Perps
- Definition of Power Perps: Power perps are contracts that track and give exposure to an index, and exchange regular payments that are larger the further the traded price is away from the target price. A power perpetual is a perpetual with index price^p for some power p.
Stablecoins as 0-Perps
- Stablecoins as Power Perps: The report argues that crypto-collateralized stablecoins, such as DAI or RAI, can be viewed as 0-perps. This is because they are essentially loans of a minted token against reliably priced collateral, which is a characteristic of power perps.
Margined Futures as 1-Perps
- Margined Futures as Power Perps: The report also suggests that margined futures, like those traded on dYdX, can be seen as 1-perps. This is because they involve putting down collateral in one asset (e.g., USD) to get exposure to the price of another asset (e.g., ETH), which is a feature of power perps.
AMMs as 0.5-Perps
- AMMs as Power Perps: The report posits that constant product AMMs, like Uniswap, can be viewed as a replicating portfolio for a 0.5-perp. This is because the value of a liquidity position in a Uniswap pool is proportional to the square root of the relative price of the two assets, which mirrors the payoff of a 0.5 perp.
Power Perps in DeFi
- Power Perps in DeFi: The report concludes that power perps are prevalent in DeFi, with many of the main primitives in the space resembling power perps in some way. It suggests that a world that allows power perps, collateral assets, and Uniswap LPs to interact could be very interesting.
Actionable Insights
- Explore the Potential of Power Perps: Given the prevalence of power perps in DeFi, there may be opportunities to develop new financial instruments or strategies based on this concept.
- Consider the Implications for Stablecoins: The view of stablecoins as 0-perps could have implications for how these assets are used and regulated.
- Investigate the Role of AMMs: The idea that AMMs can be seen as 0.5-perps could lead to new insights about how these platforms function and how they can be optimized.
