Perps DEX tokens are pumping across the board, with SNX and associated tickers spiking, and now Vertex Protocol flipping dYdX in 24h volume.
In today’s edition, we continue to keep you peeled on the perps sector. Keep reading to learn about Parifi, a perpetuals protocol aiming to bring parity to all market participants.
Stay alert, stay informed ⬇
Not yet a member of Revelo Intel? Take advantage of our Black Friday Sale and get access to our entire platform.
Offer only applies to Eagle (Annual) and Phoenix plans.
Code expires Monday, Nov. 27 @ 23:59 EST.
Click here to take advantage of this offer.
Background of Parifi
Parifi is a decentralized perpetual protocol designed to bring parity to all market participants.
The name "Parifi" derives from "parity finance."
The platform has been being developed in stealth mode for over a year and eight months.
It is aimed at bringing parity to traders and liquidity providers.
The team started building Parifi with the goal of solving inefficiencies identified in existing market solutions.
Initially, they planned to fix existing protocols but realized it required significant changes due to technical complexities.
The team decided to build everything from scratch to achieve their vision.
Evolution of Solutions in DeFi: AMM vs Orderbooks
Sudeep Biswas, builder at Parifi, says that in the past, there was a focus on different technical solutions in DeFi.
Currently, there is a trend towards improving the user experience and building on top of existing infrastructure.
Order book exchanges have latency issues and may require off-chain processing.
AMM-based solutions face liquidity issues and challenges with oracles.
There are no absolute solutions; each option has its trade-offs.
Oracles play a crucial role in providing accurate pricing data for perpetual contracts.
Earlier Oracle systems lacked innovation and were not suitable for time-sensitive perpetual contracts.
Parfi has partnered with Pyth as an on-demand price oracle, which has been beneficial to the project.
Challenges with Different Solutions
Order book exchanges have latency issues due to the need for off-chain processing.
It is challenging to have everything on-chain while maintaining low latency.
He adds that AMM-based solutions often face liquidity problems that can impact trading experiences.
Ensuring sufficient liquidity is crucial for smooth operations.
Sudeep says that earlier Oracle systems had limitations and did not suit the needs of perpetual contracts.
Pyth’s on-demand price oracle has been a significant improvement for Parfi.
He adds that the predictable pricing introduced by Pyth has been impressive and beneficial.
Choosing Arbitrum as a Layer-2 Solution
Like many perps and derivatives protocols, Parifi is deployed on the Arbitrum layer-2.
This helps improve scalability and reduce gas costs.
Some protocols have even moved to their own chains (eg. Hyperliquid, dYdX) or built on top of optimism or arbitrum.
Challenges with Market Design
Borrowing concepts from traditional finance may lead to inefficiencies in DeFi systems.
One challenge is that funding rates can be exploited by arbitrageurs, leading to unfair outcomes for liquidity providers.
Liquidity providers take on additional risk but do not receive the funding rate rewards.
To combat this, Parifi focuses on introducing liquidity curves to balance markets and ensure fairness between traders and liquidity providers.
Parifi's Solution: Liquidity Curve and Borrowing Fees
Parifi aims to mimic an order book exchange by introducing a liquidity curve.
The liquidity curve adjusts based on liquidity availability, making it more expensive to buy leverage when liquidity is scarce.
He adds that the spread between bid and ask prices increases during volatile market conditions.
These mechanisms ensure balanced markets and resolve inefficiencies.
Parifi does not have funding rates but instead uses borrowing fees.
Borrowing fees are split into base borrowing fees and dynamic borrowing fees.
Dynamic borrow fee acts similarly to funding rate, balancing longs and shorts while redirecting fees to liquidity providers.
This design benefits both traders and liquidity providers by keeping fees lower for traders while providing incentives for liquidity providers.
Comparison with Spot Margin Trading
In traditional centralized exchanges, there is a mark price and a spot price, with funding rates ensuring their alignment.
In DeFi or AMM-based perpetual protocols like Parifi, there is already a price feed available from an oracle (in this case, Pyth).
Parifi leverages this existing price feed to eliminate inefficiencies associated with funding rates.
While other protocols may have different architectures, Parifi maximizes efficiency by resolving these issues.
Providing Liquidity on Parifi
Users can provide liquidity on Parifi's platform and earn fees without taking on negative exposure to traders' success.
Parifi offers auto-compounding vaults where users can deposit assets and accrue fees automatically without active management.
Liquidity providers earn a share of the generated fees from traders' activities, including opening, closing, borrowing, and liquidation fees.
Profits made by traders are provided by liquidity providers, while losses made by traders act as profits for liquidity providers.
This balance ensures fairness in the system.
Multiple Types of Vaults
The team is considering the idea of having multiple types of vaults for different LPs.
Currently, there are two vaults: one for stablecoins and one for Blue Chip assets like $ETH.
Vaults available to deposit
Fragmenting liquidity by having multiple asset-specific vaults can be an issue.
The decision to start with two hybrid vaults was made to avoid liquidity fragmentation.
Liquidity deposited into $ETH is used to create markets for all assets within the vaults.
This approach allows users to benefit from fees and potential price increases of specific assets.
Available Markets on Testnet
On the testnet, there are several crypto assets available such as BTC, ETH, LINK, MATIC, and ARB.
Crypto isn’t the only asset available for trading; in the commodities category, gold is available.
In the Forex category, EURO is available to trade.
Incrementally, more assets will be added as the protocol matures.
Focus on User Experience and Onboarding
Along with providing a better experience for existing users, Parifi aims to onboard the next generation of users.
UX is important if this is the goal, as these users may not have interacted with crypto before.
This includes users from centralized exchanges and traditional finance markets like Forex.
Account abstraction and overall user experience play a critical role in attracting new users.
Account abstraction greatly improves ease of use and overall user experience.
Sudeep says that it eliminates the need for gas in wallets and simplifies transaction approval processes.
While experienced crypto users may be familiar with popup wallets like Metamask, it can be challenging for new users to understand these concepts.
Parifi Trading UI: mint test tokens to try the protocol & test trading
Simplifying Onboarding Process
Users currently can deposit fiat into centralized exchanges, buy tokens, and then send them.
This process is difficult for new users.
Seamless onboarding through on and off-ramp providers is needed.
The aim is to make the application feel like it's not running on a blockchain.
Sudeep says that account abstraction allows Parifi to be used on any device.
Users can sign up with a google or apple account, email or phone number.
If a user opts to sign up this way instead of connecting their wallet, a self-custiodial wallet will be provided for them for the purpose of trading on Parifi.
Users will have to deposit funds into it, and withdraw when they want.
Feedback from users during the alpha test shows that many are accessing PariFi through mobile devices.
The goal is to provide convenience so that users can trade and monitor their assets from any device, including smartphones.
He adds that along with the web app, there are plans to launch a native mobile application catering to the majority of users' needs.
Future Plans and Mainnet Launch
The team is working on enhancing the user interface based on positive feedback received.
They are also fine-tuning the pricing mechanism using Pyth oracles.
The two-step process for order settlement helps prevent arbitrage opportunities and flash loan attacks.
Permissionless Fetching and Activity Growth
Marc, contributor at Pyth, says that prices and proofs can be fetched from Pyth feeds at any time.
Verification of prices is possible directly on-chain.
Permissionless nature allows for easy access to price information.
More users (applications) lead to increased activity within ParFi.
The more applications, the cheaper it becomes for all users.
Scalability and cost efficiency are key goals for ParFi, aligning with Pyth’s utility.
Batch Update of Price Feeds
Marc says that batch updates of price feeds reduce gas costs.
It improves the overall efficiency of the protocol.
He adds that in the initial version of Pyth cross-chain, batches were used to optimize costs. Each batch contained five price feeds, which could be requested simultaneously.
He adds that this design was not intuitive and optimized only for big users.
Parifi, as a smaller user, did not benefit from this batching system.
Marc says that engineers working on the PYTH network came up with the idea of using Merkle Tree hash proof of signatures.
Instead of batches, one batch can now contain all price feeds together.
Users can select specific feeds they want from within this batch.
This new approach reduces gas consumption on chain for applications like Parifi.
Previously, Parfi needed to verify five prices but now only needs to verify one per proof.
Gas efficiency has improved significantly, making it more scalable for everyone.
Important Links
Become a Premium member to unlock all our research & reports including access to our members-only discord server
Join thousands of sharp crypto investors & traders by becoming a Premium Member & gain an edge in the markets. For just $33.25/month you’ll get:
Premium access to the entire Revelo Intel platform
*NEW* Raise Alpha- Weekly reports on interesting project raises
*NEW* Sector Overviews - 90 day Reports with data and insights on key sectors
Launch Alpha - Weekly report highlighting new projects
The Trace - Real-time onchain alerts for smart money movements
Airdrop Guides - Reports on airdrop opportunities
Members Only Discord server
Analyst Insights reports - actionable trade ideas
Project Snapshots - Monthly protocol-specific performance reports
Project Breakdowns & Timelines - Deep dive 50+ page protocol-specific reports
Notes - Summaries of your favorite podcasts & AMAs