Perpetual Pre-Launch Futures
How perpetual futures exchanges enable traders to leverage trade assets that have not yet been launched
Perpetual futures (perps) have garnered significant attention, particularly with noteworthy exchanges such as Binance, FTX (gg’s), and decentralized exchanges such as DYDX and GMX. Perpetual decentralized exchanges (perp DEXs) stand out as pioneers in the derivatives market, empowering users to engage in on-chain trading of crypto derivatives directly from their wallets. Many offer leverage of up to 50x—a capability akin to centralized exchanges.
Thanks for reading Shoal Research! Subscribe for free to receive new posts and support my work.
In the rapidly evolving digital asset trading ecosystem, perp DEXs seek innovative ways to distinguish themselves beyond only offering higher leverage options. One emerging concept is perpetual pre-launch futures, a novel financial instrument that enables the trading of tokens before they are officially launched. This article delves into the mechanics and implications of perpetual pre-launch futures, highlighting their potential in a market where differentiation and early adoption are key.
The Business of Attention and Speculation in Crypto Markets
The decentralized and open-source nature of digital assets inherently fuels speculation, especially due to the instant tokenization of value. To gain early exposure to projects, savvy crypto traders often engage in "airdrop farming," a strategy to game the token distribution system to acquire more tokens at a project's inception. Similarly, pre-launch futures represent a new avenue for gaining early exposure to nascent, high-profile projects since users can trade them with leverage before launch. Selected pre-launch projects typically generate significant attention leading up to their token generation event (TGE).
In an era where attention equates to value, innovative perp-exchanges like Aevo and Hyperliquid are leveraging pre-launch futures to carve out a niche in the competitive perpetuals market. The primary advantage of pre-launch perps lies in their ability to attract and retain users by offering access to exclusive assets not available elsewhere. For pre-launch perp, exchanges focus less on trading fees and more on user acquisition and growth, recognizing the long-term value in building a loyal user base.
The introduction of perpetual pre-launch futures marks a significant shift in the focus of crypto trading platforms. Exchanges are moving away from merely increasing leverage, “1000x leverage”, by embracing innovative ways to trade and offering early access to tokens. This not only caters to the trader's appetite for speculation but also fosters a sense of community and exclusivity among users who are the first to trade these nascent assets.
As the crypto market continues to evolve, platforms that innovate and offer unique features are likely to stand out and thrive. By tapping into the dynamics of user acquisition and the speculative nature of crypto enthusiasts, these platforms are able to acquire new users and stay relevant in a competitive landscape.
What are Perpetual Futures
Perpetual futures represent a highly profitable product in the digital asset ecosystem, functioning as derivatives. These contracts derive their value from an underlying asset, for example, digital assets like ETH. Unlike spot exchanges, where you buy or sell actual assets, dealing with perpetual contracts involves trading contracts linked to the value of cryptocurrencies.
In contrast to standard futures contracts that involve an agreement between a buyer and a seller to exchange a crypto asset at a predetermined future price, perpetual futures contracts add a particular variation. Trading with crypto perps typically occurs close to the underlying asset's current price and what sets them apart is their perpetual nature which lacks an expiry date.
In practical terms, consider a scenario where Ethereum is priced at $1,000. Sensing a bullish market trend, a trader might leverage perpetual futures contracts to capitalize on potential profits by using leverage. This trader could place an order of 1 ETH at $1,000 using 3x leverage which multiplies the position size by three, leaving the trader with a $3,000 position by using only $1,000 as collateral.
While leverage magnifies returns, it also increases the risk of substantial losses, making effective risk management crucial. Perpetual futures often involve funding rates, exchanged between long and short positions to align the contract's price with the underlying asset and traders may pay or receive funding periodically. However, the core allure of perps are using leverage on a variety of assets without having to purchase the underlying asset.
What are Pre-Launch Futures
Pre-launch token perps are derivative contracts allowing traders to speculate on the future price of a digital asset before it is officially launched. Investors can take positions based on anticipated market value, but it involves risk as actual performance may differ upon launch. These contracts do not grant ownership of the underlying asset, providing flexibility for long or short positions. Since limited information is available pre-launch, traders rely on project details for informed decisions which might include tokenomics, and last raise valuation.
Pre-launch futures typically operate without an index price and sometimes without a funding rate. However, upon activation of the token's spot market, exchanges promptly incorporate the index price and implement a funding rate.
Index Price: Initially absent in these futures, the index price is the average price of the asset across major exchanges and serves as a benchmark for the contract.
Funding Rate: A fee paid to keep a position open, with a positive funding rate, longs pay the shorts and vice versa. The rate incentivizes traders to take long and short positions opposite of where the consensus is.
Spot Market: Markets where the traded assets are immediately delivered to the buyer or seller and not based on contracts.
Simply put, this implies that pre-launch perp will align with the spot price once the spot market becomes operational, thanks to the funding rate mechanism. Importantly, users can engage in trading before the spot market goes live, allowing them to speculate on the starting/listing price of the token by taking long or short positions on pre-launch token futures.
In the typical process of launching a new market, exchanges might prioritize the release of tokenomics and wait for token confirmation before enabling trading. Announcing the token supply is a crucial step in this process, since it gives the team and traders a clearer understanding of the expected price of the underlying market.
The initial value of a derivative typically aligns with the protocol's valuation. For instance, if the protocol's valuation is $10 billion with a total token supply of 1 billion, the initial price per token is determined as $10. Nevertheless, its actual value is ultimately shaped by users through long/short positions and the addition of supply and demand. Simply put, market conditions are still a factor. Once the token is introduced and commences trading on an external exchange, the pre-launch token future transforms into a conventional perpetual future.
Exchanges are using measures to enhance the price discovery model, transitioning to a more sustainable approach. One example is Hyperliquid’s product, HyperPerps, which we will explore in a subsequent section.
Consider the Celestia ($TIA) pre-launch perps as a case in point. If you had purchased $TIA at its lowest point in the Aevo $TIA pre-launch market in early October, your investment would be up 6x by the start of December.
We can also look at a similar example with $MEME token. If you had acquired $MEME at its minimum value in the Pre-Launch market towards the close of October, your investment would have doubled within the first 10 days of the TGE.
This highlights the ability of pre-launch perpetuals to enable users to enter the market at a more favorable price before it's TGE, allowing for early exposure to digital assets. Now, let's explore the approaches different protocols take in managing pre-launch perpetuals and dive deep into their solutions.
On August 9th, 2023, Aevo revealed the introduction of Aevo pre-launch token futures. The initial token earmarked for trading using this method is $SEI, preceding its official listing on the Binance Exchange. Following the token's launch and commencement of trading on external platforms like Binance, the Aevo Pre-Launch token future transitioned into a conventional perpetual future.
Subsequently, they announced the introduction of BLAST pre-launch futures. However, since the tokenomics had not yet been disclosed, the Aevo Blast market operated under the assumption of a circulating token quantity of 1,000,000,000. For simplified computation, a value of $1 on the $BLAST pre-launch future suggests a fully diluted valuation of $1 billion. Upon the official launch of the $BLAST token, the market will undergo a transition to a conventional perpetual future, incorporating an index price and funding rate.
Responding to market trends and the Solana memecoin euphoria, Aevo made significant announcements on December 2nd, 2023 and December 5th, 2023, introducing pre-launch futures for $JUP and $JITO, capitalizing on hype and momentum.
Jupiter Exchange, a prominent Solana decentralized exchange (DEX), is renowned for its popularity, while Jito distinguishes itself by offering MEV rewards through liquid staking.
$JUP is currently trading at ~$0.7, having achieved a 7x increase since the launch of pre-launch perpetuals for Jupiter.
Pre-launch token futures on Aevo stand out from regular perpetual futures due to specific features. These include an initial margin of 0.5x, allowing a maximum leverage of 2x, a maintenance margin set at 0.48x, limitations on position sizes, the absence of an index price, and the exclusion of funding payments. Additionally, the contract specifications indicate a 25 basis points (bps) taker fee, a -10 bps rebate for makers, and the use of USDC as the settlement asset.
The Hyperliquid protocol introduced a new product known as Hyperperps, representing an enhancement to the traditional pre-launch futures model.
Hyperps (Hyperliquid-only perps) function similarly to perpetual contracts but deviate as they do not rely on an underlying spot or index oracle price. Instead, the funding rate is calculated in relation to a moving average hyperp mark price, offering greater stability and reduced susceptibility to manipulation compared to conventional pre-launch futures.
This novel derivative design eliminates the necessity for an underlying asset or index to exist throughout the entire hyperp's lifespan. Hyperps only require the underlying asset or index price for settlement and conversion to a normal perp. When engaging in hyperp trading, careful consideration of funding rates is crucial. Intense price momentum in one direction incentivizes positions in the opposite direction during the next eight hours. It is therefore essential to evaluate the opportunity thoroughly before participating in hyperp trading.
Once ABC/USDT is listed for spot trading on platforms like Binance, OKX, or Bybit, the Hyperperp tracking ABC (e.g., ABC = ZRO, TIA, PYTH, or JUP) will transition into a standard ABC-USD perpetual contract.
Hyperp Mechanism Simplified:
Basic Concept: Hyperps are similar to regular perpetual contracts but with a unique approach to price determination.
Price Calculation: Hyperps use an 8-hour exponentially weighted moving average of the last day's minutely mark prices. This average considers recent prices more heavily, shaping the current price.
The Equation: oracle_price(t) = ... calculates the price at time 't'. It involves the sum of mark prices with an exponential decay factor, preventing extreme price influence. If there are under 480 mark price samples, the initial mark price fills the gaps. A safeguard ensures the final price doesn't exceed 4 times the initial mark price.
Sampling Method: Prices are sampled at the first block after each minute, with timestamps rounded to the nearest exact minute.
Funding Rate Premium: Calculated as one-fifth of the normal interest rate and premium formula used in funding.
As an illustration, Hyperliquid unveiled pre-launch perpetual contracts for LayerZero ($ZRO) on September 7th, 2023. For $ZRO, the conversion occurs when the maximum supply is 2 billion, and the assets launches. In cases where the max supply differs, ZRO-USD will settle based on the fully diluted valuation (FDV) divided by 2 billion, one week following the CEX listing. Following settlement, the hyperperp will be delisted and a new standard perpetual contract will be introduced. Regardless of the scenario, the price of the ZRO-USD Hyperperp ultimately aligns with the spot ZRO price after the token's existence.
To sum up, hyperps function similarly to standard perpetual contracts, with the distinction that the external spot/index oracle price is substituted by an 8-hour exponentially weighted moving average derived from the minutely mark prices of the preceding day.
Helix Exchange, a perps exchange on injective, was the first one to introduce the pre-launch futures market for Celestia ($TIA). Since early access to assets is traditionally reserved for insiders, early contributors, or VCs. Helix notes they aim to disrupt by allowing decentralized trading of upcoming tokens before their official launch. This would make trading fairer by allowing all types of traders to participate in the market for highly anticipated tokens before they become widely available.
On November 19th, 2023, Helix also revealed the launch of a market for the unreleased $PYTH token. Pyth Network is Solana’s native oracle network which streams financial market data to protocols, which was one of the largest token launched on Solana in 2023.
Trading pre-launch perpetuals comes with certain risks that investors should carefully consider. Some of the key risks include:
Duration and Project Development Risks: Delays, technical issues, or changes in project direction can impact the value of the pre-launch perps. For instance, if the project delays the launch by multiple quarters, traders might be paying a higher funding rate to keep the position open and at the whim of the project launching ultimately setting them back on the trade even if they are correct on timing.
Fees: On some exchanges, like Hyperliquid, users could be subject to increased fees based on the funding rate pricing model.
Price Volatility: Perps can be highly volatile, as they are influenced by factors such as market speculation, early investor sentiment, and uncertainties surrounding the project's development, leading to significant price fluctuations.
Liquidity Risks: The liquidity of pre-launch perps may be lower compared to more established assets. Limited trading volume can result in larger bid-ask spreads and difficulty executing trades at desired prices. For instance BLAST-USD on Aevo has only $3,000 in 24 hour trading volume, which is very small in comparison to other markets of listed assets.
Limited Trading History: challenging for traders to analyze historical price trends and patterns using technical analysis.
Perpetual decentralized exchanges (perp DEXs) allow users to engage in on-chain trading of crypto derivatives. Perps, or perpetual futures, function as derivatives within the digital ecosystem. Crypto perps notably do not have an end date and allow the use of leverage on various assets without needing to purchase the asset itself.
Pre-launch futures represent a way to gain early exposure to new projects, providing users with the opportunity to trade with leverage before launch. $TIA and $MEME display the ability of pre-launch perpetuals to allow traders to engage with digital assets. Aevo introduced pre-launch futures in 2023, capitalizing on hyped upcoming token launches and offering unique features for traders.
Hyperps are similar to perpetual contracts as they do not depend on an underlying spot or index oracle price. Instead, the funding rate is based upon a moving average hyperp mark price. Hyperliquid’s pre-launch perpetual contracts for LayerZero ($ZRO) is an example of this process.
It is important to note that trading pre-launch perpetuals come with risks that investors should carefully consider. In this article, we covered price discovery, performance, and risks associated with trading pre-launch futures, delving into main protocols which, despite their similar designs, exhibit notable distinctions.
Not financial or tax advice. The purpose of this newsletter is purely educational and should not be considered as investment advice, legal advice, a request to buy or sell any assets, or a suggestion to make any financial decisions. It is not a substitute for tax advice. Please consult with your accountant and conduct your own research.
Disclosure. All of my posts are the authors own, not the views of their employer.
Thanks for reading Shoal Research! Subscribe for free to receive new posts and support my work.