We recently had the opportunity to engage with Jonathan Chang, the Chief Operating Officer of Nibiru, a novel Layer-1 chain established by experts from Google, Tendermint, and JP Morgan.
Apart from offering a throughput-optimized framework with an extensive developer toolkit suite, Nibiru presents an open, permissionless iteration of interconnected CEX-style applications. This allows individuals to participate in leveraged derivative and spot markets, earn staking yield, and provide bonded liquidity.
A notable advancement in the realm of cryptocurrencies is the emergence of ‘Perps’ or perpetual futures. Unlike traditional futures tied to an expiration date, perpetual futures can be held and traded indefinitely. While initially associated with leveraged trading of tokens, perps are now expanding to encompass real-world assets and financial instruments.
Our discussion with Jonathan delved into the intricacies of “Perps” and their potential to revolutionize investment strategies.
Crowdfund Insider: What exactly are Perps, and how do they function?
Jonathan Chang: Perpetual futures constitute a significant yet relatively unknown financial market. While the public is familiar with cryptocurrencies like Bitcoin and Ethereum, the conventional approach to crypto investment involved holding and trading tokens directly. Perps, akin to traditional futures, enable individuals to speculate on or gain exposure to assets without physical ownership. This extends beyond cryptocurrencies to any digitalizable asset. Perps serve various purposes, including hedging, leveraged trading, and shorting.
Perpetual futures are not niche instruments, with trading volumes on major exchanges exceeding trillions in notional USD value annually. Daily trading volumes for BTC perps often surpass those of Bitcoin itself.
These futures contracts empower investors to leverage assets without an expiration date, offering greater control over their investment strategies. For instance, an investor might purchase a Bitcoin at \(60,000 and retain the position until it reaches a predetermined threshold, such as \)100,000, before executing an exit order.
Crowdfund Insider: How is the valuation of perps maintained in alignment with the spot price of the underlying asset?
Jonathan Chang: A crucial aspect to prevent perps’ valuation from deviating significantly from the spot price of the asset is the funding rate mechanism. This mechanism leverages collateral to ensure that perpetual futures remain highly liquid and closely mirror the spot trading price. The funding rate involves periodic payments between long (buyers) and short (sellers) positions based on the disparity between the perp and spot values. When the perp trades above the spot price, buyers pay a percentage of their open position to sellers, incentivizing traders to maintain price proximity.
In instances where the perp price diverges significantly from the spot price, the funding rate escalates, prompting traders to assume counter positions.
Crowdfund Insider: Are perps suitable for all investors, or are they more suited to experienced individuals?
Jonathan Chang: The advent of web3 and digital assets has democratized access to financial services and investments, making it feasible for anyone to engage with assets or indices previously deemed inaccessible due to complexity or cost.
While perps are accessible to all on specialized exchanges, several considerations must be acknowledged. Investors should grasp that while perps offer advantages like leverage, hedging, and arbitrage opportunities, they also entail risks such as over-leveraging, liquidation, and volatility, particularly in the crypto realm.
Entering this domain requires a comprehensive understanding of how perps operate, associated risks, and strategies to optimize this investment avenue.
Crowdfund Insider: Is it straightforward for an informed individual to purchase their first Perp from an exchange?
Jonathan Chang: While the process may seem straightforward at a high level, it is imperative not to impulsively engage with exchanges without conducting thorough research. Understanding the intricacies of both the exchange and blockchain ecosystem, in addition to the chosen perp and underlying asset, is paramount.
It is critical for investors to discern that not all exchange platforms are equal. Variations exist in perp implementations across exchanges, with challenges such as latency, pricing rules, open interest imbalances, and the optimization of the Perp Fund. Addressing these obstacles is crucial for enhancing the efficiency and reliability of blockchain infrastructure supporting perp contracts.
For the complete interview and further insights on addressing technical challenges in the crypto space, stay tuned for updates from Nibiru and the evolving landscape of perpetual futures.