Simple Summary:

The proposed change involves Kwenta integrating Perennial on Arbitrum to grow its userbase and expand + diversify its product offering.

Abstract:

This KIP seeks to launch Kwenta on Arbitrum by integrating Perennial. Doing so would provide access to a new chain, new users & new markets. By becoming one of Perennial’s early UI partners, Perennial will give Kwenta an industry-leading fee share (35%), and will allow Kwenta to partake in the upside of mutual growth on Arbitrum.

In addition, Perennial Labs will collaborate on (or even own) protocol improvements directly with Kwenta, giving Kwenta the ability to provide a leading trading UX at both the UI & protocol layers.

Motivation:

Background on Perennial:

Perennial is an on-chain derivatives protocol designed to be an efficient DeFi liquidity layer, acting as infrastructure upon which much can be composed.

Perennial V2 is:

1. Modular: Perennial was designed from the ground up to be a simple & flexible DeFi primitive. Perennial is oracle agnostic, can support derivatives of any structured payoff, has configurable market economics to incentivise different actors, and has fully customizable (& soon, permissionless) market creation.
2. Hyper-efficient: Capital efficiency is at the core of Perennial V2. $1M in TVL can support $5M-$10M in open interest, allowing perennial liquidity to rival that of other protocols with only a fraction of the TVL. Perennial natively nets longs & shorts, only requiring makers to cover the imbalance in exposure (and has incentives to minimize the imbalance).
3. Feature-rich: Perennial V2 has all the features traders & LPs demand: fast oracles, high taker leverage, maker leverage, price impact & dynamic funding, isolated markets, expressive trigger / limit / stop / take-profit orders, a flexible keeper system for automating transactions, multi-asset vaults, and proactive risk management by Gauntlet. Core features are built directly into the protocol, while extensions & periphery features are built as additional layers on top.

Perennial V2 docs can be viewed here: docs.perennial.finance.

Perennial has been live on Arbitrum since February 2023, and Perennial V2 launched on Arbitrum in October. In November, Perennial was chosen by Arbitrum governance delegates to receive a 750k ARB STIP grant, as part of the initial STIP distribution round.

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Kwenta has established itself as a leading application for trading decentralized perpetuals. This proposal aims to build on that success by expanding its offering to the Arbitrum ecosystem & integrating Perennial into its core product.

This KIP has a number of motivating factors, all of which aim to help Kwenta expand its current offerings, create a more robust ecosystem, and improve Kwenta economics.

1. A more robust Kwenta ecosystem — Expansion to Arbitrum + perp venue diversification: \ \ Kwenta is currently only serving users on Optimism. Meanwhile, Arbitrum has established itself as the leading L2 by most metrics. By integrating Perennial, currently live on Arbiturm, Kwenta opens its door to a massive new user base, while being able to offer virtually the same (if not better) user experience as that on Optimism.

   Timing for this is perfect, as Arbitrum is currently in growth mode, which Kwenta will be able to take advantage of — Arbitrum STIP program has been heavily incentivising ecosystem growth the past few months (Perennial ARB rewards would be available to traders on Kwenta post integration). \ \ Additionally, Kwenta currently relies on a single perpetual DEX. Diversifying through a second liquidity source makes Kwenta more resilient & establishes itself as a first-party application serving derivatives users broadly, as opposed to just those of a single protocol. \

2. Access to new markets (and ability to create customized, or even Kwenta-native, markets): \ \ To date, Kwenta has been limited to the markets (and liquidity) of Synthetix. Perennial V2 is fundamentally oracle agnostic & focused on introducing novel markets. For example, Perennial just launched Power Perps (e.g. BTC^2 / Squeeth), and we’re actively building an integration to allow for NFT collection markets.

   Perennial is the only on-chain derivative protocol with multiple oracle integrations. Currently, we have integrations built out for both Pyth & Chainlink’s low latency oracle (and we’re currently building an NFT oracle integration). We’re in talks with a number of other novel oracle providers to spin up price feeds for markets like real estate, economic data, niche assets (metals, rolexes, luxury commodities, etc.), and more. \ \ Perennial is built to be DeFi infrastructure at its core, offering unparalleled flexibility for DeFi teams looking to build on top. In short, the whole stack is designed to be modular — markets are primitives that can be customized significantly, allowing Kwenta to launch & tune markets with their own economics, fee distribution, risk manager, oracle, payoffs, etc.

   Additionally, as a liquidity layer for derivatives, Perennial has both on- & off-chain mechanisms for bootstrapping liquidity, and we’re actively designing additional mechanisms to reduce friction associated with launching / incubating new markets. \

3. Deeper liquidity & Improved execution: \ \ **Again, Kwenta currently utilizes only one venue for liquidity — adding Perennial as another venue provides access to more liquidity & opportunities for better execution for traders. Post integration, Kwenta could aggregate its order placement logic to allow users to seamlessly access optimal pricing & open bigger trades (split between venues). \

4. Opportunity to grow together (and superior economics for order flow) \ \ At Perennial Labs, we believe we’ve built an ideal on-chain derivatives primitive for developers to plug into. And Kwenta, a leading application for trading DeFi derivatives. There stands significant mutual benefit from a close partnership that combines the two, allowing each to share in the growth of the other. \ \ Through this partnership, Kwenta has an opportunity to become a core distribution partner & early adopter of Perennial V2. All of Perennial’s growth firepower is ahead of us (multiple initiatives currently in the works), and we’re now ready to turn on the jets. Perennial & Kwenta will benefit from mutual growth on Arbitrum — and Kwenta will be able to partake in the upside of doing so. \

5. Unparalleled flexibility for derivatives infrastructure (We will build directly for Kwenta)

   \ In short, whatever Kwenta needs to build the best trading app for its users, Perennial Labs will build — This is something only Perennial will be able to offer.

   Perennial Labs isn’t bogged down by governance structure — we’re scrappy & can move quickly. Perennial Labs has the ability & interest in flexing its roadmap to build that which is highest on the Kwenta community’s priority list. Perennial Labs is laser focused on building the best infrastructure for trading applications, and to do so, we’re willing to offer major support for Kwenta — including developer resources.

   This would also enable Kwenta’s core team to have additional capacity to work on other initiatives, like improving the UX of its core product — maximizing the potential for Kwenta to become the leading venue for traders on Arbitrum.

Specification:

Kwenta/protocol specification

Kwenta will integrate Perennial markets into the core Kwenta trading UI. Perennial code is open source here: https://github.com/equilibria-xyz/perennial-v2.

There is an SDK for Perennial, however, we are actively rebuilding this specifically for interfaces, and could flex the design to the needs of Kwenta, so as to significantly reduce integration time.

Perennial Labs will work closely with Kwenta product & design team to figure out the exact implementation. Though from our conversations with Kwenta council & team members: Integration should be straightforward given that Perennial will be the only liquidity source on Arbitrum at launch. When a user toggles from Optimism to Arbitrum, the backend will switch from Synthetix to Perennial.

Additionally, Kwenta will have access to the dev team at Perennial Labs for assistance & direct contribution. Ex. Perennial Labs could focus the majority of an FEs engineer’s time on the Kwenta integration to speed up the process.

Perennial <> Kwenta Partnership specification

As part of the integration, Perennial & Kwenta will establish a partnership, aimed at mutual growth for the projects. This section discusses some of the economic & business related terms / promises that Perennial has to offer.

Economics

When Perennial & Kwenta grow on Arbitrum, Kwenta will be able to capture proportional value. A fee share allows Kwenta to capture a substantial cut of trading fees on flow they bring to Perennial.

Fee Share

35%

Share of base trade fees from volume originating from Kwenta.

\ Developer Resources: \ \ Speed is everything. Perennial Labs will share our developer resources to keep integration (and future updates) on expedited timelines.

Front-end Devs	✅	Available to contribute directly alongside Kwenta engineers to speed up integration. Additionally, we are actively working on an SDK (and building with Kwenta in mind) to make integration easy.
Smart Contract Devs \ (& Mechanism design)	✅	Available to build independently for Kwenta, in line with product priorities. We have the ability to flex Perennial protocol design to meet Kwenta needs. This would give Kwenta the direct ability to take action upon user feedback, as opposed to being limited by the underlying protocol.
Backend Devs	🟡	Available as needed.

Product Development: \ Perennial Labs will be able to augment Kwenta’s protocol team. We can & will build whatever Kwenta traders demand. Perennial is uniquely positioned to offer this level of product flexibility. \ \ For example, there are a number of compelling technical problems & product opportunities for Kwenta & Perennial Labs to collaborate on:

• Enabling guaranteed-price limit orders and maximum slippage market orders.
• Introducing new types of structured products that build upon existing DeFi perps.
• Introducing new derivatives, such as NFT perpetuals, power perps, other commodities & FX, and other interesting payoffs.

• Experimenting with timely cross-chain deployments to other ecosystems.

  \ Liquidity Support:

Perennial is committed to providing stable liquidity and serving as a neutral liquidity layer. Perennial can rapidly scale liquidity with its existing vault infrastructure & professional market makers, and may have other future incentives to grow liquidity, especially in long-tail markets. Wherever liquidity is needed, we’ll have a strategy to bootstrap.

In line with the philosophy that developers are first-class users of Perennial, Liquidity in the Perennial protocol is designed to be accessible to higher-level protocols and trading applications making use of Perennial’s infrastructure. Bootstrapping usage of new markets is perhaps the biggest challenge for DeFi developers, and Perennial is specifically designed to solve this.