Bitcoin settled perpetuals via Stacks

By Ilya Bukalov, Alistair Dupont, Luiz Alberto, and August Felix.

Bitcoin was designed as a censorship-resistant, peer-to-peer method for sending and storing value, not as a way to host applications on its base layer. It does natively support smart contracts through Bitcoin Script, however, this language is best suited for simple, one-off contracts.[1]

Although Bitcoin is the oldest and one of the least volatile cryptocurrencies, it is still roughly four times more volatile than gold and most equities.[2] Perpetuals are a great vehicle for hedging and managing this volatility risk, and have several advantages over options in the sense that there is no time decay, they are often easier to understand, they allow for greater use of margin and they are typically more liquid. More liquidity means better entry and exit prices for investors.

In scenarios where a HODler anticipates a negative price move, instead of trying to time the market by selling and then buying back later in hopes of a gain, one can simply go short on a perpetuals contract. Or said bitcoiner expects a rally and rather than spending $42,000 (current price) on a single Bitcoin, can go long with perpetuals, needing only $1,050 to open the position (as DY offers 40x leverage) giving equivalent 1 Bitcoin exposure. In this situation, they will lose only the deposited $1,050 should the price of Bitcoin suddenly drop, whereas the buyer of 1 BTC stands to potentially lose the majority of their position.

Furthermore, all blockchains (and by extension their deployed protocols) involve trade-offs between decentralization, scalability, and security. Attempts to achieve product parity with TradFi have led many protocols performing core functions off-chain (e.g., matching orders), while other aspects (e.g., order cancellation) may be performed on-chain. This means, that company names, employees, addresses, publicly accessible servers all provide centralized entry points for regulators (regulatory hooks), creating censorship potential. The question Bitcoiners need to answer is whether there should be regulatory hooks for DeFi platforms they use, which are often advertised as decentralized protocols but often end up controlled by particular actors, such as developers and governance token wales.

At DY we believe the time is right for a Bitcoin settled perpetuals protocol for several reasons:

- Stacks Proof-of-transfer blockchain, which settles transactions on the Bitcoin blockchain, has a number of exciting upcoming developments, such as hyperchains, which offer efficiencies for on-chain trading and order books, facilitating price discovery.

- Ethereum dominates the DeFi market with a 62.4% share.[3] However in 2021 DeFi users lost $10.5 billion to theft,[4] a symptom of the fact that Solidity, the language in which the majority of Ethereum application are written, is a simply too insecure for the types of applications being built on Ethereum. DeFi users have endured Solidity smart contracts subverted by bugs and exploits. While it is common to blame unsafe smart contracts, some of the worst flaws in Solidity stem directly from fundamental design decisions in the architecture of the Ethereum Virtual Machine.[5] These include, the illegibility of code on-chain by devs or auditors, thus the lack of auditability and Solidity’s non-deterministic behavior when calling outside contracts. Clarity, the Stacks smart contract language, in contrast, is a non-Turing-complete smart contract language that represents a significant step-up in this regard.

- Demand for on-chain trading is significant, as evidenced by the popularity of dydx, with daily BTC perpetual trade volumes routinely exceeding ​​$6.5 billion.[6]

- Stablecoins such as USDA allow for on-chain trading with pricing in USD, EUR, and GBP, removing another regulatory hook, specifically the need for platforms to maintain bank accounts to hold fiat currency and interface with the traditional banking system.

- Another important reason to run DApps on Bitcoin and settle transactions on the blockchain is the security it affords users and protocols. Bitcoin’s proof-of-work consensus mechanism is undoubtedly the most difficult to breach.

- Finally, some of the largest ‘DeFi’ perpetual protocols have implemented location restrictions,[7] blocking citizens, residents, and users located in the United States, Burma, the Ivory Coast, or other states, countries, or regions that are subject to sanctions enforced by the US OFAC and have been known to exclude users from restricted locations from community airdrops, leaving many potential market participants without access to these products.

We’re building dy.finance on Stacks because we believe a more decentralized and censorship-resistant world benefits everyone. Settling on Bitcoin is, therefore, a huge priority for us: we’re a DAO because member-led communities have the potential to meet society’s needs more efficiently, and we’re building a derivatives DEX because bitcoiners are underserved by existing protocols.

Visit our website www.dy.finance to read our information deck.
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References

1. https://www.wellsfargoadvisors.com/research-analysis/reports/cryptocurrency.htm
2. https://www.wellsfargoadvisors.com/research-analysis/reports/cryptocurrency.htm
3. https://www.theasianbanker.com/updates-and-articles/ethereum-dominates-62-4-of-defi-market-while-terra-overtakes-binance-smart-chain-as-the-second-largest-defi-blockchain#:~:text=Ethereum's%20market%20share%20in%20DeFi%20TVL%20dropped&text=It%20had%20a%2097%25%20share,DeFi%20blockchain%20networks%20have%20emerged.
4. https://decrypt.co/93874/biggest-defi-hacks-heists
5. https://medium.com/hackernoon/the-evm-is-fundamentally-unsafe-d69f2e3b908b
6. https://zipmex.com/learn/what-is-dxdy/#:~:text=dYdX%20trade%20volume%20has%20consistently,from%20April%20to%20May%202021.
7. https://help.dydx.exchange/en/articles/4798063-location-restrictions