A decentralized volatility protocol that provides the ability to long volalitity of any crypto asset.
This whitepaper explains the mechanisms behind the Qilin protocol, a decentralized risk-optimizing protocol for asset derivatives trading on the Ethereum blockchain. This paper covers the protocol's core features, including a tranche-structured liquidity pool model, the Rebase Funding Rate mechanism, which reduces the risk of open positions for liquidity during market volatilities, the Dynamic Algorithmic Slippage mechanism, which incentivizes against position imbalance, and Leveraged L / S Position Token, a trading experience optimizing feature. This whitepaper also introduces the core application built on top of the Qilin protocol - perpetual futures trading, which allows traders to purchase long and short positions at leverage with guaranteed liquidity.
AMM started the normalization of non-custodial crypto asset trading and enabled pooled liquidity for long-tail assets. However, the time value of these assets is still unable to be traded - that is, the high-leverage derivatives trading scene of these assets still has significant liquidity issues.
On the one hand, the predatory trading practices that exist on centralized order books create an exponential risk and cost curve for the liquidity side. This excludes order-book-based derivatives trading to low liquidity risk assets. For crypto-assets with higher risk profiles, the complex infrastructure of order books makes the risk profile unattractive to liquidity providers (usually professional market makers or the exchange itself) as counterparties. This unattractive risk profile explains the use of aggressive liquidation practices employed by centralized exchanges.
On the other hand, the AMM-led P2Pool model only distributed the risk for liquidity providers but failed in systematic risk reduction. During market volatilities, liquidity providers either experience liquidity loss as counterparties or run the risk of the opportunity cost of missing out on the profit in the asset market. At the same time, capital efficiency issues exist in the DeFi market that further reduces the user experience for liquidity providers. Examples include having to provide liquidity on both sides of the trading pair, which adds a layer of exposure.
Overall, reducing liquidity risk is essential for the growth of decentralized derivatives trading. We introduce Qilin, a decentralized risk optimizer protocol for asset derivatives trading on the Ethereum blockchain.
Terms for Tranche-Structured Liquidity Pool
Terms for Dynamic Algorithmic Slippage
Qilin’s liquidity pools provide a single-side exposure to liquidity providers. The token pair of each liquidity pool is set as TokenA/TokenB, and LPs can purchase LS Tokens by depositing the pricing-side asset into the pool.
Similar to traditional tranche-structured finance, the liquidity pool for each asset pair is structured into two tranches - Tranche A and Tranche B - with different yield and risk profiles:
Tranche B: