How to improve PowerPerp AMM | Gautham, Polynomial | ETHTaipei 2023

huh okay hello uh everyone um let's welcome Galton from polynomial polynomial was doing some option stuff but today um Gautam is here to present something pretty new and it's about power perks so it's welcome [Music] uh hey everyone I'm Gautam so I'm from polynomial we call we're like a D5 derivative Powerhouse so we do primarily two things at the moment one is like we have burps uh like an on-chain purpose it's built on top of synthetics and secondly we have earn which is like a on-chain option Vault uh we we were the first fully Onsen option world and we've been doing it for a year and then after doing it for a year we realized options probably won't work on chain so and then the conclusion of what we came what might be a potential product that options are trying to solve is the main main thing that we're going to talk about uh so uh what the problem is that it's very simple crypto is too volatile and most of you go into different products in defy and you want to hedge the convexity of the product right uh convexity is there if you put money in unisa V3 most of the crypto native products have a certain level of convexity and you want to exit and so you you want to do primarily two things one is like you want to get Dynamic leverage as many speakers before set Dynamic leverages if you are right uh your profit goes up a lot and if you are wrong your losses are like minimally capped right and so uh so the first thing like everybody looked into was like why don't we just take options uh they are from tradition Finance it's well understood there is like Nobel prize winning or Papers written about it why don't we just like take options and bring it into onsay and that's what like most people did uh so this is like the adoption of options unseen and you can see like this is 2020 it's been 3 billion and it has never gone up after that it's like after that bull market like nobody really went into I mean you'll think like it's like a lot of volume but if you compare it with Futures which is doing like a trillion dollars it's kind of like not as much popular and the main thing is like the Futures on chain are very different from Futures that are uh like in the tradition finance and they are Perpetual features meaning they have no expiration and this expiration plays a role uh very much in defy and you can see uh you can see that one more thing about the the option adoption is that most of the usage is still happening off chain right like it happens in derivative and all those things and even in a very like what do you say like a an order book we still consider order books as one of the most efficient ways to match orders and all those things and even there the adoption is like still lower so uh there are like two major things like I think like the growth of the options is like uh not very good one of them is expiry so if you look at crypto in general most of the instruments which are expiry related to it don't have much adoption so you can look at fixed lending which is very simple but it has like much smaller than like variable lending I mean it's obvious and then there is like Futures fixed Futures they don't really have any adoption and that is like one of the main important thing because it's very hard to make a D5 product with an expiry on it it's very hard to make something like that and the second thing is like crypto is very unpredictable like we've been selling options for like a very long time and if you have a one week expiry option and you're selling it regularly you are going to get wrecked because you'll lose money and it's very hard to like you know put money into options for a very long term because the unpredictability is way way too high and if you just sell an option for a week and you are just waiting for something to happen within that week just like anything happen and you will probably lose a lot of money and the risk is also very high on the seller side that's the main issue so uh so there are mainly like why option ceremons are very hard first is like the spreads are very high like it's almost all the time more expensive than the uh of chain counterparties and the risk for being an LP for an amm is way too high because most of the time you will be making like one two percentage and one week you lose 20 of the capital and they just happen so it doesn't make sense in a practical scenario and so the Traders are not happy because they are getting shitty prices the LPS are not happy because if they are taking a unwanted risk and they are not doing that well so uh so there are like some ways people are mitigating it there are like so many people doing like a layer two order books to make like options happen similar to turbidden and that's like going away from the ammo model but essentially like models are not doing well with options so I just want to bring back an analogy this is like when printing started what we did was uh we took away we took existing things that were there like for example the first thing we printed was like Bible right so we took something that already existed and we made the same thing using printing so it was a new technology and then we implemented the same thing so or like newspapers magazines and all those things and after hundreds of years the real Innovation that came from printing was like people could spread ideas faster such as like Newton Road principia and all those things so it similarly happens everywhere like when we started internet most of the things that were built on top of internet where things that were just copy pasted as a retail thing so similarly like things are happening in default already like if you see like uni service something that doesn't exist so we are majorly like looking into Powerpuffs so power-ups are generally each Square b d c Square Etc so essentially like uh every time like each price goes up by two dollar it will go by four dollar similarly like an x square so if it's price doubles each Square goes by 4X and it works similar to how pervs work it uses a funding rate and so here there are like majorly two advantages one is like you get Dynamic leverage because your curve is a simple x square curve so so like so if you join over here and then like when it goes up you your profit increases over time right so it's a much simpler thing and then there is uh funding rate and that will like take care of things and also as an LP there is no expiry and all those things so like for a simple example like so if it goes up by two dollar like its car goes up by four dollar and it goes It goes up by three dollars it goes up by nine dollars so it's not it's not really cheap so you need to pay a funding rate regularly like kind of like how you do a data feature so uh it's this is like a idea like a year old I think open was the first team to like come up with a paradigm come with Wow pups but like they were trading on unisa V3 so what we uh mergently focus on how do we design up amm specifically for power-ups because if you put liquidity in a unisa V3 you are in a it's uh the payoff becomes very complicated and for shorting and all those things are General easy so when we looked into powerpuff's amm so we wanted to look into two main things one is like how do we make a delta neutral mm and how do we make the payoff predictable uh because if you look at UNICEF like you when you put money you know at what range you will make what profit and all and that predictability is lacking in options so similarly like purpose like you came with it so Delta hedging so just to give an example give an idea of what Delta hedging is that so you whenever a person trades the amm takes the opposite side of the trade right so the Delta hedge means that when you just figure out what is the Delta of the trade and then do the purp on the opposite side so that the Delta of the pool Remains the Same uh just to give an idea what Delta is Delta is basically a rate of change of the derivative with respect to the underlying asset so essentially it's just taking a differentiation with it so for example like you have x square so you just do divided X and then you get 2x right so the similarly like here the x is Eid so to it is the derivative uh the power so what we do is every time a person places a trade we calculate the Delta uh 2 into 8 and then we take the opposite side by shorting a perp so that is generally the idea so after each trade so this is some simulations that we have done so essentially what happens is that there is an amm in the middle so a Trader comes he places a trade for let's say extoller and he gets back the you know the Powerpuff token back and then this pool now has a risk of this particular thing so this risk is like introducer there is an extra risk so this risk the if we calculate the Delta of this thing and the equivalent thing we go to per pmm and heads this risk so essentially what we are trying to do is that the amm remains uh amm like doesn't take the exposure and make sure that the LPS remain profitable so this happens after each trade so essentially a person places a trade then at the same time rate happens and then only like you get the power token so this is one way to do Delta hatching another way so here you can see that uh in this particular scenario like the Delta of the pool is like zero but like sometimes when it goes up and down it doesn't remain always zero as the Delta and so there is some risk associated with it so essentially what we did was like we also added rebalancing to the mechanism so rebalancing as in every 8 hours or 12 hours uh the someone will call a rebalancing function and that will make the pool uh delta neutral again so essentially like whatever the Delta of the mm means we calculated and then short the perp and then make sure it is done so we did this but one thing we realize over here is like sometimes there is like very high peaks of Delta because some trades are huge and they move the Delta very high so we combine both of them so it looks like almost all the time like uh it's Delta h n like delta neutral the whole time so we did the pole pnn so it's like the pool is almost all the time profitable and one of the good things is that since this amm is made per clearly just for Powerpuffs it's cheaper than like all the other ones that we have seen and the funding rates are also like much much lower because it's specifically designed for this thing and we can also make like Structured Products on top of it so we are kind of making like a a vault which does short volatility so one night good thing about this amm is that the payoff for the amm is looks something like this so if this is heat price so you can say like if Eid doesn't move within the a certain range for a very long time you I make money so that's kind of how the mm works so if you put money over there you can say like if it is very volatile my risk is like quite high at the moment so you can take it out or like you can figure out all those things yeah so that is one of the great things so you can have a predictable uh payoff and most of the time like uh people are longing so the pool will be mostly long at the same time so uh because of that it the pool is over there and it's easy to calculate risk and another thing is that we have done is like we can like short via Stables uh so you put usdc and like shot the other side and another important thing is like since the pool is based on Stables uh you can make it on any asset so you can have an Eid Square per BTC Square per and any other asset so this is one of the issues that people are facing that if you go to any long tail assist there is no way to make an option for them so you have a Ethan BTC option most of the other things people ask for a liquid per market and then only like an option sale happens so as long as there is a per market for the for a for a particular asset so we can make a Powerpuff for it and then we can make a walls as well let's sit [Applause] U's number [Music] hi hi um I had a I was okay about two questions um the first is uh would you see as the sort of in D5 specifically um who you see is like the primary users of this kind of product and then the other question is um so it's obviously open launched uh squeeze like I think over a year ago now maybe um and I just kind of curious as to um whether you think the only reason that that didn't necessarily complete takeoff was because they're on an L1 or if there's some other reason that they didn't take off yeah so can you repeat the first question again uh in D5 specifically uh as it's as it currently is who do you think the users are of of power perks are there uses of Powerpuffs and device specifically as in who do you think those users are like yeah I mean like um most of I mean once the people in the if I used to speculate right so one of the advantages is that you can you don't get liquidated so this is an instrument where you can like long and you don't get liquidated so that's those kind of people are there but in open space the major issues were like first it's on mainnet so perbs don't work on mainnet like normal pubs I don't know why they expected like Power Puffs super convenient it's it's essentially the same thing it's just like a little bit of different payoff right and the second thing is like you are on mainnet you made like 50 in profit you don't want to close it because the gas is 60 dollars right that's also there and and also you cannot like go after like you don't have fast on chain oracles so what one of the things that we have done is we use pyths Oracle and that is like that updates really fast so you get like really good price movements so when you're on main net you get like you get very bad pricing and all those things so all those things mitigate away so those are like one of them other things and then the one of the main thing is like shorting like for any map any instrument to take off there should be both sides right buying and selling so the selling side first squeeze is in Eid so if you are shorting each square with teeth the payoff is very weird it's very hard for a person to like think about that's one of the things that we have worked on like we made the shorting happen with Stables so it's more of like you you kind of know how it works like with the back of the Mind are you concerned about the collateral requirements for shorting something like squeeze yeah it works similar to like how you do in our way right like you put some capital and then you borrow against it like you have no no they're really no Capital requirement you can do it anymore anyone more questions if no um let's have a 30 minutes break and now we will come back with more math about uh perps and amms