Overview

Explore how Margined Power Perpetual contracts function at a high level.
Margined Power Perpetuals (MPP) are the first implementation of a power perpetual in the Cosmos ecosystem, offering perpetual exposure to a squared index of squared base tokens, e.g. OSMO².
The Power contract enables users to go long or short on this base² index. Assets for which MPP contracts will be deployed:
  • osmo
  • atom
  • wBTC
MPP functions like a perpetual contract that instead of tracking a leveraged spot price, e.g. 10x osmo, tracks OSMO² or sqOSMO! It gives traders global exposure, without strikes or expiry, consolidating much of the options market liquidity into a single token.
Distinctively, long positions in MPP do not involve leverage. It's impossible to get liquidated on a long MPP position.
Using Osmosis concentrated liquidity pools for trading and price discovery. Once sqOSMO is created, you can buy or sell an native token which closely tracks the value of OSMO². Long sqOSMO by buying Osmosis DEX and close the position by selling it back. To short, collateral is needed. Mint sqOSMO tokens, sell them in Osmosis' DEX. Closing the short position requires buying back and burning them to unlock your collateral.
MP contracts manage minting/burning of sqOSMO, and adjust funding to align the squosmo token with the value of OSMO². Funding is done through a global normalization factor, which changes whenever the contract is touched.
Minting sqOSMO requires putting down OSMO collateral and monitoring your vault to avoid liquidation. Closing your short position involves buying back the sqOSMO and burning them.

Trading Power Assets

In order to trade a squared asset such as sqOSMO the Osmosis Concentrated Liquidity Pools are used. Once a the asset has been minted it can be sold as a bank token, squosmo, on the Osmosis dex.
During calculation of the funding rate the TWAP price of the assets are used thus in order for the MPP contract to function there must be some Liquidity Providers in all relevant asset pools.
To gain long exposure simply purchase sqOSMO from the relevant pool, then to close the position just sell the asset in the same pool - thus realizing a PnL.
Similarly, to gain short exposure you must create and deposit collateral into a vault, through the power contract, thereby minting sqOSMO, which should then be sold in the CL pool. To close the position the same amount of sqOSMO must be bought from the pool and then can be burnt to redeem the deposited collateral.
In order to assist performing these actions helper contracts have been created to automate the various steps into one single transaction.

Funding Rate

To address the need for funding between longs and shorts as the price fluctuates relative to OSMO², we've adopted an in-kind funding approach. Rather than having longs directly pay shorts, we adjust the amount shorts owe, simplifying the process without extra mechanisms for handling these transactions.

Normalization Factor

The contract employs a global normalization factor that adjusts every time it's accessed. Initially set at 1, this factor fluctuates to reflect funding dynamics between long and short positions. For instance, if it drops from 1 to 0.99, it indicates a 1% funding shift from longs to shorts. The adjustment rule is as follows:
  • % change in normalization factor = % average difference between mark and index price × (elapsed time)/17.5 days
Here, the index price corresponds to osmo², and the mark price is calculated as:
  • `Mark = (sqOSMO price ÷ normalization factor) × 10,000`
This equation serves to counteract funding effects, ensuring the contract value remains comparable to osmo². The 10,000 scale factor is just helpful for creating usable denoms.

Using sqOSMO

Core contracts bear the responsibility of both minting and burning sqOSMO tokens. They also ensure proper funding application through normalization factor updates. The details of these "core contracts" will be delved into in an upcoming chapter. To mint sqOSMO, one must:
  • Deposit OSMO as collateral.
  • Mint sqOSMO.
  • Monitor their vault to circumvent liquidation risks.
Shorting osmo² carries inherent risks since it's impossible to entirely collateralize the associated debt. For instance, if the osmo price were to double, the debt would quadruple, while the collateral's value would only double. Closing a short position entails purchasing sqOSMO back and subsequently burning them, this process is pretty similar to creation of Dai or other CDPs.

Stategies

Strategies have been devised as a streamlined way to engage in a pool performing typical trading actions for short sqOSMO. These actions include yield-generating sqOSMO minting and collateral position adjustments for risk mitigation. A representative strategy is the crab strategy contract, which:
  • Accepts osmo deposits into a collective pool.
  • Facilitates sqOSMO minting.
  • Modulates the balance between osmo collateral and sqOSMO to best counteract osmo price variations, a technique known as delta hedging.
  • Tweaks this hedge by launching an auction to exchange OSMO with sqOSMO (or vice versa) upon hitting predetermined time or price thresholds.
Such operations yield outcomes akin to those of option sellers who utilize delta hedging.

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