Perpetual Demand Lending Pools

ArXiv ID: 2502.06028 “View on arXiv”

Authors: Unknown

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.

Keywords: decentralized finance (DeFi), perpetual futures, liquidity pools, arbitrage, delta hedging, derivatives

Complexity vs Empirical Score

  • Math Complexity: 7.5/10
  • Empirical Rigor: 6.0/10
  • Quadrant: Holy Grail
  • Why: The paper formalizes decentralized perpetuals mechanisms using rigorous mathematical modeling, including arbitrage, payoff distributions, and delta-hedging conditions, but focuses more on theoretical financial properties than on providing code, backtests, or statistical validation of live implementations.
  flowchart TD
    A["<b>Research Goal</b><br/>Formalize Perpetual Demand Lending Pools<br/>(PDLPs) & improve capital efficiency"] --> B["<b>Methodology</b><br/>1. Define General Target Weight Mechanism<br/>2. Analyze Pool Arbitrage<br/>3. Model Payoffs (Arb/LPs)"]
    B --> C["<b>Data & Inputs</b><br/>Protocols: GMX, Jupiter, Hyperliquid<br/>Parameters: Fees, Target Weights, Liquidity"]
    C --> D["<b>Computational Process</b><br/>Analyze Delta Hedging Feasibility<br/>Simulate Arbitrage Incentives"]
    D --> E["<b>Key Findings & Outcomes</b><br/>1. PDLPs are easy to delta hedge<br/>2. Mechanism explains proliferation of strategies<br/>3. Directions for dynamic parametrization"]