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Perpetual Protocol

4.4/10

vAMM pioneer that lost its edge — V2 struggled with adoption as the market moved to order books and oracle-based models

Updated: February 16, 2026AI Model: claude-4-opusVersion 1

Overview

Perpetual Protocol was one of the earliest decentralized perpetual futures protocols, launching V1 on xDai (now Gnosis Chain) in December 2020. It introduced the virtual AMM (vAMM) concept — a pricing mechanism that used a Uniswap-style constant product formula without requiring actual liquidity providers. Traders traded against the virtual curve, and funding rates ensured the vAMM price converged with the underlying market price. This was a genuinely novel mechanism that attracted significant early attention.

V2, launched on Optimism in late 2022, represented a fundamental redesign. It abandoned the pure vAMM for a "concentrated liquidity" model built on top of Uniswap V3, where real LPs provided liquidity in specific price ranges and traders traded against this liquidity. The idea was to combine Uniswap V3's capital efficiency with perpetual futures mechanics. In practice, V2 struggled: the LP experience was complex, liquidity was thin, and execution quality suffered compared to the oracle-based and order-book models that competitors were deploying.

Perpetual Protocol's trajectory is a case study in how early innovation does not guarantee sustained success. The vAMM was elegant but had fundamental issues (mark-price deviation, funding rate instability), and V2's Uniswap V3-based approach failed to attract the LP participation needed for competitive execution. By 2025, Perpetual Protocol had been eclipsed by Hyperliquid, dYdX V4, GMX, and others.

Smart Contracts

Trading Engine

V1's vAMM was conceptually simple: a virtual x*y=k curve that existed only for pricing, with no actual assets in the pool. Traders deposited USDC as collateral and traded against the virtual curve. This was elegant but created persistent mark-to-index price divergence that the funding rate mechanism struggled to correct during trending markets. V2 replaced this with Uniswap V3-based concentrated liquidity markets, where real makers provided USDC liquidity in tick ranges. Traders traded against maker liquidity, creating a pseudo-order-book experience through concentrated LP positions.

Architecture

V2 operates on Optimism, inheriting the L2's scalability and cost benefits. The architecture uses Uniswap V3's core contracts as the underlying market structure, with Perpetual Protocol's contracts handling margin management, funding rates, liquidations, and position tracking. The clearing house contract manages all positions and collateral. This reliance on Uniswap V3 as a dependency adds both the battle-tested security of Uniswap's contracts and the constraint of designing around someone else's AMM model.

Code Quality

Both V1 and V2 contracts are open source and have been audited. V1 was audited by Consensys Diligence and others. V2's Uniswap V3-based contracts were audited by multiple firms. The codebase is well-documented. However, V2's architectural complexity — layering perpetual futures mechanics on top of concentrated liquidity — created a large and intricate contract surface. The integration with Uniswap V3 contracts means the protocol inherits any Uniswap dependencies or limitations.

Security

Audit History

Perpetual Protocol has conducted thorough audits for both V1 and V2. V1 was audited by Consensys Diligence, and V2 underwent multiple audits including reviews of the Uniswap V3-based market contracts, clearing house, and collateral management. The audit trail is relatively comprehensive compared to many DeFi protocols. An Immunefi bug bounty has been maintained for critical vulnerability disclosure.

Insurance Fund

An insurance fund accumulates from a portion of trading fees and liquidation penalties. The fund is used to cover bad debt from underwater positions that cannot be fully liquidated. Given V2's low volume, the insurance fund is modest in size and may be insufficient for a major market dislocation event. The protocol also uses auto-deleveraging as a backstop mechanism.

Liquidation Engine

Liquidations are triggered when a position's margin ratio falls below the maintenance threshold. Liquidators are incentivized with a portion of the remaining collateral. The system uses keeper bots to monitor and execute liquidations. During V1's operation, the vAMM model sometimes created cascading liquidation dynamics as large liquidations moved the virtual price significantly. V2's Uniswap V3-based model reduced this concern but introduced the risk of liquidity withdrawal during volatile periods.

Track Record

Perpetual Protocol has not experienced a catastrophic exploit. V1 had incidents related to vAMM manipulation — traders occasionally exploited the mark-price deviation to extract profit at the expense of the protocol or other traders. These events were addressed through parameter adjustments and contributed to the decision to redesign for V2. The protocol's biggest "failure" has been market-related (loss of users and volume) rather than security-related.

Trading

Product Range

Perpetual Protocol V2 offers perpetual futures on a limited selection of crypto pairs. The asset range has contracted from V1's broader offerings, as V2 requires dedicated LP liquidity for each market, and many pairs failed to attract sufficient makers. There are no options, structured products, or non-crypto assets. The product range is narrow compared to competitors like Kwenta (which offers forex/commodities via Synthetix) or Hyperliquid (130+ pairs).

Execution Quality

This is V2's most significant weakness. Because liquidity depends on active LPs providing concentrated liquidity in Uniswap V3 ranges, execution quality is directly tied to LP participation — which has been low. Spreads are wide on all but the most liquid pairs, slippage is meaningful for moderate-sized trades, and depth is inconsistent. The experience is markedly worse than oracle-based systems (GMX, Kwenta) or order-book platforms (Hyperliquid, dYdX) for almost all trade sizes.

Leverage & Risk

V2 supports up to 10x leverage on major pairs — significantly lower than competitors offering 50-100x. The conservative leverage limits reflect the liquidity constraints of the Uniswap V3-based model, where high-leverage positions in thin liquidity could create dangerous cascading effects. Funding rates adjust based on market imbalance. The lower leverage limits may be prudent but make the platform less attractive to the leverage-seeking traders who drive volume on perps platforms.

Adoption

Volume & Users

Perpetual Protocol V2's daily trading volume typically ranges from $5M–$30M — a fraction of what V1 achieved at its peak and orders of magnitude below leading competitors. Daily active traders are in the hundreds, not thousands. The protocol's market share has declined steadily since 2022, as users migrated to platforms offering better execution, more markets, and higher leverage.

Market Share

Perpetual Protocol has lost significant market share and now represents a marginal player in the DEX perps landscape. It was once a top-3 decentralized perpetual exchange; by 2025-2026, it ranks outside the top 10 by volume. The protocol's relevance has diminished as the market matured and competitors with superior execution models captured the majority of flow.

Growth Trajectory

Growth has been negative for an extended period. V2's launch failed to recapture V1's momentum, and the ongoing decline in volume, users, and LP participation suggests a structural rather than cyclical problem. The team has explored various initiatives to revive growth, including incentive programs and partnership strategies, but none have materially reversed the downward trend. Without a significant architectural pivot, continued decline is the base case.

Tokenomics

Token Overview

PERP has a total supply of 150 million tokens. Distribution includes team and advisors (36%), ecosystem fund (20.8%), strategic investors (17.5%), and various other allocations. The token launched in September 2020 and experienced significant price appreciation during the 2021 bull market before declining over 95% from its all-time high. Most team and investor tokens have fully vested.

Fee Distribution

Trading fees are split between LPs, the insurance fund, and the protocol treasury. There is no direct fee distribution to PERP token holders. Governance proposals have discussed implementing staking with fee-sharing, but the low fee revenue makes this economically marginal. The token's utility is primarily governance over the treasury and protocol parameters.

Staking & Utility

PERP can be staked for governance voting power. A lazy-staking mechanism earns modest rewards from protocol emissions. The token does not have meaningful utility beyond governance, and with declining protocol activity, even governance influence over a shrinking treasury and protocol has limited value. The tokenomics fail to create a compelling holding case in the absence of protocol growth.

Risk Factors

  • Structural decline: V2's adoption has been in sustained decline, with no clear catalyst for reversal. The platform risks becoming irrelevant as volume and LP participation continue to fall.
  • Execution quality: Thin liquidity creates a negative feedback loop — poor execution drives traders away, which reduces fees, which discourages LPs, which further worsens execution.
  • Architectural mismatch: The Uniswap V3-based model may be fundamentally unsuited for perpetual futures, where consistent deep liquidity is essential but LP positioning is complex and risky.
  • Competition: The DEX perps market has matured with platforms that outperform Perpetual Protocol on every metric — volume, execution, leverage, and asset range.
  • Token value: PERP has limited utility and no fee-sharing, making it primarily a governance token over a declining protocol — a weak value proposition.
  • Team and funding: Extended underperformance raises questions about the team's ability to execute a recovery or strategic pivot.

Conclusion

Perpetual Protocol holds an important place in DeFi history as the pioneer of the vAMM model for decentralized perpetual futures. V1 demonstrated that fully on-chain perps trading was viable, influencing the entire category. The concept was genuinely innovative, and the protocol deserves credit for pushing the design space forward.

However, innovation does not guarantee sustained relevance. V2's pivot to a Uniswap V3-based concentrated liquidity model failed to gain traction, producing an experience that was more complex for LPs and worse for traders than the alternatives. The market has moved decisively toward order-book (Hyperliquid, dYdX) and oracle-based (GMX, Kwenta) models, leaving vAMM and concentrated-liquidity approaches behind.

The scores reflect a protocol that is technically sound but competitively irrelevant. The smart contracts work as designed, security has been adequate, but the trading experience and adoption metrics tell the story of a product that lost its market. For Perpetual Protocol to recover, it would likely need a fundamental redesign — and even then, the competitive landscape has shifted so dramatically that recapturing meaningful market share would be an enormous challenge.

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