Introducing Multi-collateral on Perpetual Protocol
We’re pleased to announce that our multi-collateral feature is now live, check it out at app.perp.com!
What is Collateral/Multi-collateral?
The multi-collateral feature will allow traders on Perp v2 to use tokens other than USDC as margin. Maintain exposure to ETH (and other tokens in the future!) while trading on-chain derivatives with up to 10x leverage.
Our multi-collateral vaults have been audited by Dedaub and HashCloak.
Read more about the concept of multi-collateral with our learn article and our implementation of it via our help centre.
How Perp Worked Prior to the Multi-collateral Release
Prior to the multi-collateral release, only USDC could be used as margin to open positions or provide liquidity. In this case, the buying power is equal to the product of your USDC balance and 10. For example, if you have $1,000 in USDC on Perp, you can open a position size of up to $10,000.
Liquidation happens whenever the margin ratio approaches 6.25%.
Holders of primarily ETH or other cryptocurrencies may not want to convert their assets into stablecoins or may not have any USDC to trade on Perp. Traders are limited in expressing their market views, i.e., they cannot get leveraged exposure to other assets or provide liquidity across different markets using the assets they own.
Introduction of Multi-collateral on Perp
With the introduction of multi-collateral, traders can now use crypto-assets other than USDC to cover the margin requirements for opening positions and providing liquidity for the various markets on Perp.
At first, we’ll be accepting ETH and WETH as collateral, with more assets to be added in the near future (FRAX, PERP and UST are the next potential choices). Note that you’ll still need to bridge ETH or WETH to the Optimism network.
The trading instruments are still linear derivatives, since the payouts are still denominated in USDC. Nothing changes with respect to the profit profile of a trader or maker. In the following, non-settlement collateral refers to all assets other than USDC, such as ETH or WETH.
What does change with the new multi-collateral release is how your free collateral, and in turn buying power, is calculated. Each non-settlement collateral type has a weighting factor, which determines how much USDC is added to your free collateral.
The weights are displayed in the table below:
On the homepage, all supported collateral types and their corresponding balances are shown. Each collateral type has individual deposit and withdraw buttons.
The net USD value of your account is the total value of your collateral assets, while free collateral is calculated using the weighting system described above, where:
Free collateral = the available amount of the collateral × the weight + PnL (in USD value)
The buying power is then obtained by multiplying this value by 10, and is shown by the tooltip next to free collateral:
The available collateral can be used to trade or provide liquidity as a maker on Perp.
When an account has no USDC balance and solely uses non-settlement collateral (such as ETH/WETH), the USDC balance can turn negative, which affects the balance of ETH available to be withdrawn. A warning will appear in the UI in this case.
Whenever the USDC balance is negative, the non-settlement collateral cannot be withdrawn until the USDC balance becomes positive. However, the total collateral, free collateral and buying power are unaffected.
Examples
Example 1: User has USDC only: nothing changes!
In this scenario, total account value = total collateral, where buying power is simply your USDC balance multiplied by 10. So for an account with $1,000 USDC, the total collateral is $1,000 and the maximum buying power for trading or providing liquidity is $10,000.
Position liquidations occur whenever the margin ratio of 6.25% is not met. So for a position size of $10,000, the minimum collateral required to avoid liquidation is $625. When the account value goes below $625, free collateral falls to zero and your position will be liquidated.
Example 2: User has ETH, but no USDC
What if you have only deposited ETH and have no USDC? How does this change things?
Let’s assume an account has 0.5 ETH as collateral and the price of ETH is $3,000. The account value in USD will be $1,500, however the total collateral value is only $1,237.50 due to ETH’s weighting factor of 82.5%.
Until a position is opened, the total collateral value will equal to the free collateral value. Since free collateral equals $1,237.50, the maximum buying power to be used for trading or providing liquidity in this case is $12,375.
As the price of ETH fluctuates over time, the value of the collateral will also change in proportion. For example, if the price of ETH crashes from $3,000 to $2,500, then the USD value of the 0.5 ETH falls to $1,250 and the account’s total collateral value declines to just $1,031.25.
On the other hand, if the price of ETH rises to $3,500, then the USD equivalent of 0.5 ETH rises to $1,750 and the total collateral value of the account increases to $1,443.75.
Now let’s say at a price of $3,000, you want to open a position of 3 ETH just using 0.5 ETH as collateral. Since there’s no USDC balance in this case, the moment you open a position, the USDC balance will turn negative due to the two following factors:
- the 0.1% trading fee (which is denominated in USDC),
- the impact of your trade on the price, meaning PnL will turn slightly negative after execution.
The trading fee of 0.1% amounts to $9 for a position size of 3 ETH and let’s say the price impact of the trade is $0.5, meaning that the PnL shown in the UI will amount to around -$9.5.
At this moment, your USDC balance will be equal to -$9.5 and the 0.5 ETH collateral cannot be withdrawn. Once the USDC balance turns positive, either from closing a profitable trade or by depositing USDC into Perp, the ETH collateral will once again become available to withdraw.
Once the market moves in your favor, you can close the position. Then the PnL and any funding payments are credited to your account in USDC, and the ETH used as collateral is made available once more.
The position liquidation process is still the same.
However, there’s another process called collateral liquidation. This can make sure that your account health and system health. Collateral liquidations will occur to convert ETH collateral into USDC when:
- margin ratio falls below the maintenance threshold of 6.75% (the position maintenance margin threshold of 6.25% plus a buffer of 50 basis points),
- If the USDC debt is greater than non-settlement token value x 0.75,
- If the USDC debt is greater than $10,000.
The liquidator will swap the ETH for USDC using external markets and this is done iteratively until all bad debt has been eliminated.
Any collateral liquidations are shown on this page: https://app.perp.com/history/collateral-liquidation
Example 3: User has ETH and USDC as collateral
How does the situation change if a trader has both ETH and USDC balances?
To explore this question, let’s say you have $1,000 USDC and 0.50 ETH as collateral. Assume there are no open positions and the price of ETH is $3,000.
The account’s free collateral is equal to:
= (1,000 USDC x 1) + (0.5 x $3,000 x 0.825) = $2,237.50
The buying power (which is shown by the tooltip next to free collateral) will then be:
= $2,237.50 x 10 = $22,375.00
If the price of ETH moves up or down, it will affect your free collateral as in the previous example. A higher price of ETH translates into more free collateral/buying power, and vice versa.
Let’s say you open a long position of 3 ETH, equivalent to $9,000. Since your USDC balance is $1,000, the buying power provided by the settlement collateral (USDC) is $10,000.
Or in other words, opening a position of this size uses approximately $900 USDC as margin. Therefore, after execution, the account’s free collateral will be around $2,237.5 - $900 = $1,337.5. The amounts of USDC and ETH that can be withdrawn are $1000 and $1337.5/$3000 =0 .445833333 separately.
Since the amount you can withdraw is based on the account’s free collateral, once you withdraw that 1,000 USDC, you free collateral becomes $1,337.5–$1,000=$337.5 and the amount of ETH that becomes available for withdrawals is $337.5/$3,000=0.1125 ETH.
If the price of ETH moves lower after opening the long position of 3 ETH, the USDC balance eventually turns negative. In this case, the ETH and USDC balance cannot be withdrawn until the USDC balance is positive again. When the PnL of the position turns positive, it can then be closed. Any profits and funding payments due to the account will be credited into the USDC balance.
If instead of opening a position of 3 ETH, a position of 4 ETH was opened (equivalent to $12,000), then the USDC balance turns negative straight away. Since the USDC collateral provides a buying power of just $10,000, the ETH collateral is used to cover the margin for the remainder of the position.
Similar to the second example, liquidation occurs if any one of the three conditions are met:
- If the margin ratio falls below the maintenance threshold of 6.75% (the position maintenance margin threshold of 6.25% plus a buffer of 50 basis points)
- If the USDC debt is greater than non-settlement token value x 0.75,
- If the USDC debt is greater than $10,000.
The Benefits of Multi-collateral
With the release of the new multi-collateral feature, trading on Perp becomes more flexible and allows traders to better express their market views.
Maintain Exposure to the Upside of Non-USDC tokens
The biggest benefit is that traders can maintain exposure to the upside of the assets they hold while using them as collateral. For example, suppose there’s an ETH holder who’s bullish on AAVE.
Instead of selling ETH for USDC to go long on Perp v2 or swapping for AAVE via spot markets, traders can get exposure to the price of AAVE using ETH as collateral. In this way, traders do not have to miss out on the upside of ETH, while at the same time, also being leveraged long or short on any of the markets available on Perp. The multi-collateral feature lets you express such a position, and many others possibilities.
Another such possibility is using non-settlement collateral to earn fees as a maker and provide liquidity to the various markets available on Perp. For instance, ETH can be used as collateral to provide liquidity across different markets. As long as the liquidity positions remain in range and you avoid liquidation, trading fees can be earned from takers while maintaining exposure to ETH.
Funding Rate Arbitrage
By buying ETH through spot markets with USDC and using ETH as collateral to enter a short position, you’ll earn funding payments without the risk of liquidation during a bull market. Since the value of your collateral grows in line with a rising price of ETH, this negates the loss of your short position.
The Future of Multi-collateral on Perp
Other collateral assets will be added in the future, including decentralized stablecoins and highly liquid crypto-assets. Follow us on Twitter or join our Discord to be notified of when new collateral types become available!
Subscribe to our YouTube channel, as we’ll soon be providing a video walkthrough of the multi-collateral feature!
