Shield’s one-of-a-kind decentralized risk-free perpetual product may seem to be a bit overwhelming, or complicated to new users. This may be especially the case for those who are recently made aware of crypto perpetuals thanks to the recent explosion in popularity of the DeFi industry.
If you’re looking for instructions on how to use the world’s only decentralized, risk-free perpetual that operates completely on Ethereum Layer 1, don’t worry, you’re in the right place.
In this post, along with a theoretical explanation of what perpetuals are, how our funding fee mechanism works, we will also provide you a practical example of how the risk-free perpetual works
1. In this tutorial, the DAI token contract address for testing needs to be listed to facilitate users to add assets
2. Add interaction restrictions
2. How to win SLD tokens?
-Complete the Gleam mission
-Interact with Shield Kovan testers and complete at least one transaction (at least 50DAI/time).
Perpetual Contracts — What are They
If you’re new to the world of Decentralized derivatives, you might not have heard about perpetual contracts before. Perpetual Swaps are equivalent to a Futures contract, except for the fact that there’s no expiry date, and can be traded at any strike price.
In essence, perpetuals are derivatives that allow you to buy or sell the value of something (in this case cryptocurrencies) with advantages such as
- There is no expiry date to your position, enabling a long-term long, or short position,
- No custody issues, as the underlying asset is never traded
- The swap price closely tracks the price of the underlying asset
- It’s extremely easy to hold a short position.
In the current market conditions, owing to the volatile nature of cryptocurrencies, there is a high demand for an instrument that can function both as a speculative and a hedging tool, to profit from/protect against the volatility. Perpetuals contracts are the perfect way to achieve both.
Shield’s Risk-Free Perpetuals — How they work
Usually, with normal perpetuals, the downside can be unlimited in the case of an unfavorable price movement. However, thanks to Shield’s ingenuous funding-fee mechanism, your downside is limited only to the funding fee that you’ve to pay to keep your position open.
The protocol allows the users to open long or short positions with infinite upside potential, without delivery, in a fully trustless manner. The expected payoff is calculated as follows
(Number of contracts*price change)- funding fee — transaction fee.
Once settled, the profits can be claimed back to the wallet allowing users to use it as they wish. The funding fee can be topped-up at any time, allowing users to double down on positions if they feel a favorable price change is right around the corner. Once the balance of funding fee is running short and is inadequate to cover the current payable, the liquidation process will be triggered.
Practical Example of How Shield’s Risk-Free Perpetual Works
Let’s assume you open a 1-ETH long position at 400DAI/ETH, and prepay 10 DAI as the funding fee. After a day, if the index price of ETH goes down to 380 DAI/ETh, you do not suffer any loss from this downward price movement. All you need to do is is pay the funding fee for this interval, which is taken from the prepaid funding fee account. Assuming a 1 DAI per day funding fee (arbitrary, the actual funding fee is based on a floating rate based on the volatility of the asset). Her 10 DAI prepaid funding fee will be reduced to 8.6 DAI (0.4 initial transaction fee, and 1 DAI being the funding fee for the day)
If on Day 2, the index price of ETH rises to 430DAI/ETH, you have an unrealized profit of 30DAI, which will be transferred to your funding fee. You can choose to exercise the contract and withdraw your profits now or keep your position open for longer, as you deem appropriate.
If you fall short of the arbitrary 1 DAI fee at any point in time, the liquidation process will be initiated, closing down your position. You will not face any losses, apart from the fee you’ve utilized to keep the contract open.
If you want details on the formula used for calculating the funding fee, or how the risk-free perpetual contract works, do check out the whitepaper. Meanwhile, here’s a step-by-step perspective from our testnet:
Step 1: Head over to the Shield website, and click on Start Trading
Step 2: Connect your MetaMask wallet
Step 3: Switch to the Kovan Testnet
Step 4: You can now deposit the funding fee, and go either long or short. Scroll down, and you can see your order history.
Step 5: Deposit your funding fee, and sign the transaction on your MetaMask.
Step 6: Open your long position, review the funding fee locked, and confirm the order.
Shield’s risk-free perpetual is only the first step in realizing our goal of providing everyone with the next-generation of global derivative infrastructure. Currently, we are in the testing phase of our protocol, and we would very much appreciate your feedback and participation in our testnet (it’s live now!). Everyone who submits any bugs or suggestions will be warmly welcomed.
Be on the lookout for our early adopter’s program to ensure that you stay on top of the possible incentives that you will receive for being an early member of the community!
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