Pika Protocol

Pika Protocol is a stablecoin protocol backed by decentralized derivatives. It consists of two components: Pika Exchange and PIKA Stablecoin.

Pika Exchange is a perpetual swap exchange that supports leverage trading. It supports token based inverse perpetual swaps. The underlying of the exchange is a virtual automated market maker(vAMM).

PIKA Stablecoin is a stable currency backed by Pika Exchange with these features:

• Stable: it uses perpetual swap positions to back its price stability around a 1 dollar target. PIKA is minted by opening a 1x short position of an inverse perpetual swap.
• Capital Efficient: a PIKA is minted by depositing one dollar value of supported tokens(e.g., ETH, WBTC), achieving better capital efficiency than overcollateralized stablecoins.
• Yield-bearing: yields are generated from trading fees of perpetual contract exchange.

While the waves of stablecoin experiments are taking place with many uncertainties, let’s look back and pick up a concept that have been proven for years.

One of the easiest ways to transform any token into dollar exposure is perpetual swap contracts. For example, Bitmex offers a BTC/USD contract that is margined in BTC. This contract is structured like non-linear inverse future contracts, meaning the contract value is measured in one currency, USD, but the position is margined and settled in a different currency, BTC. If a user opens a 1x short position, this gives the user a dollar exposure with the ability to earn yields from funding payments. This way of hedging is in fact widely adopted by traders to get exposed to dollar exposure.

PIKA achieves its stability in a similar way. To mint a PIKA, a user can simply open a 1 dollar value of short position in any supported token swap markets.

To better understand PIKA stablecoin, it is important to understand Pika Exchange. Pika Exchange is a decentralized non-linear inverse perpetual swap exchange.

Perpetual swap is the most popular way to trade cryptocurrencies with leverage in centralized exchanges like Binance and Bitmex. There are two popular types of perpetual contracts: linear and inverse.

While linear contracts have the benefit of low exposure to the volatility of the underlying assets, it is unfavorable to those long term holders of the underlying assets, especially in the bull market. Almost all the current decentralized perpetual exchanges are only supporting linear contracts. Pika Exchange is the one that supports inverse contracts.

Pika Exchange is also providing these features:‌

• Funding rate baked into price: funding payments are taken care of by the open and close price of perpetual contracts, so no explicit funding payments need to be made by longs and shorts, making it more friendly for DeFi folks.
• Tokenized leveraged positions: leveraged positions are tokenized into NFTs via ERC1155 standards, which allows traders to transfer or use tokens in the whole DeFi system.
• Virtual AMM with dynamic k adjustments: the “x*y = k” formula is used to determine the price of the perpetual contract, with k being dynamically adjusted based on open interest. This allows the exchange to achieve low slippage with small liquidity.

Why should you care about Pika Protocol? Because there are various ways you can benefit from it.

Any trader who likes to take leveraged positions can long or short with Pika Exchange. Since Pika Exchange is settled in the underlying tokens, it is favourable to traders who are long term holdes of the tokens.

Any person who likes to earn interests without exposing to the volatility can benefit from holding PIKA tokens to earn trading fees.

PIKA can also be minted to use as a stablecoin to transact in the entire DeFi space or hedge the volatility.‌

Arbitrageurs can profit from:

• arbitraging price difference among Pika Exchange and other exchanges.
• arbitraging across different markets within Pika Exchange. For example, the price of PIKA from ETHUSD market and BTCUSD market could be different, and people can profit from minting PIKA from one market and burning in another market.

This post shares the basic idea of how Pika Protocol works. More articles will be published on the development updates and the governance plans. Welcome to the new world of derivatives backed stablecoin!