Perp trading on Aave

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Introduction

Hi Aave community! I’m Kamel, co-founder of Contango, a protocol that builds perps by automating a looping strategy on money markets, through flash loans.

I’m excited to announce that we have integrated Aave’s v3 as our first liquidity source for our cPerps (Contango perps), across 4 major chains: Ethereum, Arbitrum, Optimism, Polygon.

cPerps are live at https://app.contango.xyz/ :dancer:

Our vision is simple: derivatives don’t need their own liquidity; they can tap into the liquidity of existing spot and money markets, like Aave. This solves the fragmentation problem that undermines DeFi, and showcases the composability of the Aave ecosystem.

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How it works

cPerps are built by automating a looping strategy via flash loans.

When a trader opens a long ETH/DAI position with DAI as margin, the protocol gets the remaining DAI from a flash loan, swaps all DAI for ETH on the spot market, then lends ETH on a money market, to borrow DAI against it and repay the flash loan. For more information visit our docs.

In DeFi, looping is still viewed as a way to profit from the net APR (the difference between borrowing and lending rates), but our view is that this is simply the funding rate a trader pays or receives to keep his leveraged position open. On Contango, what drives the PnL of a trader’s position is the spot price of the underlying asset.

The interface helps traders pick the best APR:

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Why build derivatives on Aave?

According to our vision, money markets like Aave are the place to build derivatives on, as they provide three key benefits for traders looking to lever up:

  1. Traders are not exposed to the potential insolvency as in protocols where their PnL is offset by liquidity providers.
  2. The combined liquidity of spot markets & Aave ($10B+) grants traders a minimal price impact.
  3. Funding rates have extremely low volatility (see this early study and the chart below).

Screenshot 2023-10-24 at 18.13.37

Looping (either manual or automated via existing apps) takes advantage of these two points, but is not widely understood by the majority of DeFi users out there.

Contango has a trading interface that abstracts away the fact that it uses spot and money markets under the hood. Through Contango, a money market like Aave has an incredible opportunity to become the new base layer for perp trading and bring together two sets of users, loopers and traders:

  • Loopers already make up most of the volumes across different money markets, e.g. Morpho claims 64% of their volumes come from leveragers/loopers (source). They are already familiarized with the concept of leveraging money markets, but need better trading tools to monitor their positions with TP/SL, liquidation price, charts.
  • Perp traders already settles around 1B+ of trading volume daily across DeFi, and are a very enticing segment as they can drive up volumes on Aave by a bigger order of magnitude than simple lending and borrowing, as leverage is employed.

Our ambition doesn’t end here.

The early research mentioned above clearly indicates that the design behind Contango makes it the perfect trading venue to compete with CeFi. At the moment, no other perp protocol can claim to be better than CeFi in terms of funding and liquidity.

We aim at onboarding traders from Cefi and compete with major CEXs too.

The team

We are a small team with +10 years experience in building trading infrastructure. We have deep expertise in building order books and smart route engines in TradFi and CeFi.

We raised $4.5M in 2021 and are backed by VCs like Coinbase, ParaFi, Spartan, GSR, CMS, Cumberland, Amber.

You can learn more about the team on Contango’s Linkedin page.

What’s the way forward?

As a recap, these are the 4 main advantages of cPerps built on Aave:

  • More volumes on Aave through leveraged trading.
  • As soon as Aave launches on a new chain, Contango can deploy too and quickly enable a derivative market on top of it.
  • Cross-chain rate alignment as arb opportunities can be traded in a more efficient way.
  • A new type of users from perp trading.

Our suggestions to move forward:

  • Push together this new paradigm to create perps built on money market which will bring clear advantages to users compared to CeFi
  • Find solutions to have higher LTVs, and hence higher leverage on Contango, to be more competitive with other perp platforms.

What is the view of the community on this?

We strongly encourage discussion around the topic of derivatives built on money markets, so feel free to leave your ideas and suggestions below.

Tagging some frens we’d love to hear feedback from:

@bneiluj
@calchulus

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Hello,

i like the idea of using already available liquidity. This is DeFi lego we are talking about but never really achieve. Currently its all fragmented.
I have a question have you ever though about using GHO in Cantango and get whitelisted as an facilitator?

See here for more information:

FlashMinter Facilitator

At launch, given community approval, GHO will have a second facilitator as discussed in this forum post .

FlashMinting provides the same functionality as a Flashloan, but instead of borrowing assets from a pool, users will be able to FlashMint GHO and repay in a single transaction. The FlashMinter would have a beneficial influence on GHO’s ability to maintain its peg because, amongst other benefits, it enables more efficient arbitrage.

The TEMP CHECK approving the FlashMinter Facilitator and its parameters, with 679,000 votes in support, can be found here .

As a result of this TEMP CHECK, it is agreed by the community that the FlashMinter Facilitators initial bucket capacity will be 2,000,000 GHO and that there will be no fee paid to the Facilitators. In the early stages, GHO’s ability to maintain its peg will be enhanced by low fees, which further incentivizes arbitrage.

As there are currently no fees you could really push this feature as user would be able to trade on your platform with zero fees (not including your opening and closing fees).

The benefit is pretty clear for you and GHO. I highly recommend checking out the GHO docs at gho.xyz

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Thanks for the suggestion @DeFi_EzR3aL.lens. You’re right, we could allow shorting GHO with the current minting setup, without even being a facilitator. And since trading on Contango is also free (there are no protocol fees atm) this could be great for users.

However, since at the time of writing the available GHO to borrow is very small, there could be very limited trading activity on GHO, and always on the short side. As soon as more GHO is available to borrow we could ship trading pairs very easily.

Ideally, we’d love to have GHO enabled as collateral to allow for trading in both directions. Integrations is pretty straightforward on our end and could be delivered in a few days.

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