Mycelium Perpetual Swaps
NOTE: Since the launch of Mycelium Perpetual Swaps on Arbitrum, we have changed our fees to be cheaper and more transparent, a full overview is here.
Mycelium Perpetual Swaps brings extremely low-cost, easy-to-use derivatives to Arbitrum, the layer 2 scaling solution built on top of Ethereum. With no price impact and low fees (0.03% entry and exit fees), traders can go long and short assets in the MLP pool, on up to 30x leverage and swap assets within the pool without moving the market. The pool is composed of high quality crypto-assets and stablecoins. Mycelium Perpetual Swaps is launching in August 2022 and features a jam-packed roadmap bringing new levels of capital efficiency to traders, increased yield for LPs and the ability to trade long-tail assets while preventing against toxic order-flow.
Trade derivatives with liquidity, leverage, and low fees = Trade with Mycelium Perpetual Swaps.
Traders on Mycelium Perpetual Swaps can perform asset swaps on ETH, BTC, LINK, UNI, CRV, BAL and FXS and a variety of stable coins. They can also leverage trade these assets in both directions by utilising the assets in the pool.
When entering a long on Bitcoin for example, a trader is ‘renting out’ the upside in Bitcoin, from the MLP pool.
When entering a short on Bitcoin, a trader is ‘renting out’ the upside of the Stablecoins versus Bitcoin, from the MLP pool.
The MLP pool is a multi-asset pool that supports trading and allows users to go long/short specific assets in the pool and/or swap pools assets. This pool earns liquidity provider (LP) fees from market making, swaps and leverage trading. 70% of these fees are distributed back to MLP holders.
LP’s can ‘mint’ MLP tokens, which represent shares in the MLP pool, by depositing any of the index assets to the pool. They can redeem any index asset by burning their MLP holdings. The fees associated with buying MLP vary depending on which of the MLP index assets are currently underweight/overweight. If any index asset is underweight the fees for minting MLP by depositing this asset is lower and hence incentivised.
The token weights in the pool are adjusted to help hedge the holders of MLP against the open positions traders have. So, if a large number of traders are long Bitcoin, the MLP pool would have a higher Bitcoin weight and vice versa with stablecoins if a large proportion are short.
Instead of the standard Automated Market Maker model (AMM) (x*y=k), the mechanism uses Oracle price feeds to set the price at which trades are executed. Furthermore, LP’s are protected against impermanent loss seen in the traditional AMM model.
The value of the MLP token is determined by the changing value of the index tokens inside of it, making it in a way, a diversified index of high quality crypto assets that also generates significant yield for holders.
The MLP pool is essentially a liquidity pool that acts as the counterparty to leverage traders on the exchange. This means that if traders make a profit, MLP holders make a loss and vice versa.
Empirical analysis of the cumulative Profit and Loss statement of traders on competitor exchanges shows that traders on average lose money over time. This would benefit MLP holders.
MLP’s Staking Rewards Program
Mycelium Perpetual Swaps will be boosting MLP returns to a Targeted Yield of 25% APR through a combination of MYC distributions and ETH earned by fees generated for the first month of the Perpetual Swap product’s operation. The following month’s MLP APR will be boosted to a targeted 20%. The boosted APR is inclusive of ETH rewards. If the ETH rewards APR is greater than the targeted APR, no MYC will be distributed.
Given the volatility of TVL in the liquidity pool, it will be difficult to consistently deliver the targeted APR to liquidity providers over the incentivised period. It is possible that some weeks will undershoot the target, and some weeks will overshoot the target.
Fees and Revenue Generation
The Mycelium Perpetual Swap protocol generates revenue by charging fees on the opening and closing of trades and also a “borrow fee” that is deducted every hour a leveraged position is open.
There is a very low trading fee of 0.03% of your position size plus a spread (to protect and incentivise LPs), which is incurred when opening a position and closing a position. The borrow fee is the fee that is paid to the counter-party (MLP pool) of your trade at the start of every hour. This fee varies based on utilisation of assets in the MLP pool and initially will be calculated as follows, dividing units of the particular asset that’s been borrowed by total units of that asset in MLP pool:
70% of the fees generated by the exchange are distributed back to MLP holders, 10% will be distributed to Mycelium, 10% will be allocated to a rewards bucket, and 10% will be distributed back to the top 50% of active traders. The MLP pool also receives capital appreciation via market making assets in the pool with a spread.
Oracle Pricing and Trade Execution
Mycelium Perpetual Swaps’ dual use of the MLP pool as the counter-party to traders and the oracle pricing system optimises the trading experience for its users. Firstly, trades are executed with zero price impact as the traditional Automated market maker (AMM) or an order book model is not used. Trades are executed at the Oracle price plus a spread. This also benefits LPs as they are not subjected to as much impermanent loss due to the oracle pricing system (not subjecting the LPs to the cost of price discovery via arbitrage).
Furthermore, the aggregated oracle pricing system Mycelium Perpetual Swaps uses pulls price feeds directly from Chainlink, Binance, Bitfinex and FTX. By aggregating these feeds prices are normalised, eliminating the risk of exchange specific volatility.
The dual use of capital and the oracle pricing system enables MLP to be one of the most efficient pools in the entire digital asset space.
Additional LP Protection: MEV
We have contracted a proprietary trading firm to minimise any losses from the frontrunning of the oracle updates. Currently, LPs are subject to stale oracle prices which can cause an effect similar to impermanent loss in AMMs. With stale prices, fast traders have an advantage to make trades with the LP pool knowing the future price of the asset will be in their favour. To counteract this behaviour, protect and reward our LPs, the trading firm will be extracting any value from latent oracle feeds and returning profits to our LPs. This way, in the event that the liquidity pool has a stale price, 80% of the profits from Oracle Extractable Value will be distributed back to the liquidity providers.
Additionally, the proprietary trading firm will be conducting price (backrunning) arbitrage between the Mycelium AMM and other spot AMMs. Despite none of this value being extracted from liquidity providers, 80% of the profits will be distributed back to the liquidity pool!
Trade with liquidity, leverage, low fees,
Trade with Mycelium.
Need more information? Read our docs here.
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