[Serenity Premium] Pika Protocol [Initial Review Feb 2023]
Pika Protocol is a derivatives trading platform on Optimism, where users can trade perpetuals up to 100x leverage. Pika uses USDC as collateral and a vault is set up to be the counter-party of traders.
The Strategy in this Article
This strategy is providing liquidity into Pika's USDC vault.
Current yield: 22.4% (15 Feb 2023)
Our risk assessment: Medium to High
Our yield projection based on this week's Benchmark Yield: 15.9%
The Concept and How the Protocol Works
Overview
Pika Protocol is similar to Perps Finance or dYdx in terms of user experience. It allows traders to open long or short positions with leverage. Currently, it supports 20 major tokens like BTC and ETH, as well as 5 forex products, such as EUR and JPY.
Traders deposit USDC as collaterals. Traders can open long or short positions at market price or put up limit/stop orders. The maximum leverage is 100x.
Low Slippage
As described in the documentation, Pika uses concentrated liquidity (which we believe is a matter of setting parameters to lower slippage and not actually having liquidity) and slippage is very low. Putting a $1.5m trade in ETH only has a slippage ratio of 0.01%. For CRV and LINK, a $1m trade will have about 3.5% slippage, and 2.0% for AVAX and MATIC. However, for each token, there's a cap as to how much long and short imbalance can be allowed, so no one can take a one-sided trade for a huge value.
Traders will be liquidated if the prices do not move in their favour, and the liquidation threshold is 80% (of the margin). The liquidation fee is then 20% of the margin as well. Liquidation fee is shared between liquidators, Pika Protocol, and liquidity providers.
Liquidaton Price = entryPrice−(entryPrice∗(liquidationThreshold∗margin+funding)/positionSize
Currently, the Pika Protocol team will be the liquidator for all the positions.
Trading Fee
A small trade fee (0.1% for crypto and 0.03% for forex) is charged for each trade. 50% of trade fees are distributed to the vault(liquidity providers), 20% to be used as protocol owned liquidity and 30% to the protocol.
A small execution fee (~0.0002 ETH) is charged when an order is submitted, which is paid to keepers who are responsible for executing the submitted orders with the latest oracle update.
Funding Rate
Pika Protocol uses a one-hour funding rate, similar to dYdx.
The Liquidity Vault
Pika Protocol has set up a liquidity vault, which is used as the counter-party for traders, taking the opposite of traders' aggregated trading PnL.
In addition, the vault also earns:
Trading fee (50% as stated above)
Liquidation fee (the portion after paying liquidators and protocol)
Funding rate payments
OP rewards
Currently, the size of the vault is $12.3m, against a total open interest of $1.67m. The vault has earned 13.20% APR based on the last 7-day fee payouts (excluding traders' PnL) as well as 9.29% OP rewards.
Historically, the total open interest has been around $2m to $3m, since last December. The details on the long and short open interest of each token can be found in the trading UI, after expanding the Details tag.
Traders have been losing money since July 2022. Since then, the vault has received about $320k in fees and earned $401k of traders' losses. More details are at official Dune dashboard https://dune.com/T0xicPotato/Pika-Protocol .
This would translate into a fee APR of about 13% (last 30-day average), excluding OP rewards and traders' PnL.
Investment Risks and Yield Projection
Our assessment is purely based on the economic perspective of investing stablecoins into the protocol, and is not based on the smart contract or the other soft factors, such as company/project/investor quality. Our assessment of the strategy providing liquidity in Pika's USDC vault is MEDIUM to HIGH risk.
Exposures to stablecoins: USDC
Exposures to protocols: Pika Protocol
Quality of the yields: Fees, trader's PnL, OP incentives
Major risk points: trader's PnL can be volatile and lead to losses of the invested principal. OP incentives might not be sustainable in the future.
Based other economic risks, we project the equilibrium yield rate of this investment to be 9.0% + Benchmark yield, i.e. 14.9% based on this week's Benchmark Yield of 5.9%. Our Benchmark yield is the weekly average yield of the 10 selected stablecoin strategies, in protocols on Ethereum. This is published weekly on our Medium and Twitter, under the section "Other Stablecoin Platform".
Disclaimer
The information provided on this document and the referenced sources do not constitute investment advice, financial advice, trading advice, or any other sort of advice and you should not treat any of the content as such. The author of the document makes no representation or warranty as to the accuracy and or timelines of the information contained herein. A qualified professional should be consulted before making any financial decisions.