Perpetual Demand Lending Pools

TL;DR

This paper introduces Perpetual Demand Lending Pools (PDLPs), a formal framework for decentralized lending mechanisms in perpetual futures trading, analyzing their arbitrage, hedging, and potential for capital efficiency improvements.

Contribution

It formalizes PDLP mechanisms, generalizes existing protocols' target weight strategies, and analyzes arbitrage and hedging dynamics to enhance capital efficiency in decentralized perpetuals.

Findings

PDLPs are easy to delta hedge, facilitating strategy proliferation.

The framework describes pool arbitrage and expected payoffs for participants.

Dynamic parametrization can improve capital efficiency in PDLPs.

Abstract

Decentralized perpetuals protocols have collectively reached billions of dollars of daily trading volume, yet are still not serious competitors on the basis of trading volume with centralized venues such as Binance. One of the main reasons for this is the high cost of capital for market makers and sophisticated traders in decentralized settings. Recently, numerous decentralized finance protocols have been used to improve borrowing costs for perpetual futures traders. We formalize this class of mechanisms utilized by protocols such as Jupiter, Hyperliquid, and GMX, which we term~\emph{Perpetual Demand Lending Pools} (PDLPs). We then formalize a general target weight mechanism that generalizes what GMX and Jupiter are using in practice. We explicitly describe pool arbitrage and expected payoffs for arbitrageurs and liquidity providers within these mechanisms. Using this framework, we show that under general conditions, PDLPs are easy to delta hedge, partially explaining the proliferation of live hedged PDLP strategies. Our results suggest directions to improve capital efficiency in PDLPs via dynamic parametrization.