Announcing Pika: A Derivatives Backed Stablecoin Protocol

TL;DR

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

  • 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.

Stablecoin: DeFi’s Missing Lego

Stablecoin market is huge. As of Feburary 2021, total market capitalization of stablecoins surpassed $50 billion.

Source: The Block Research

Derivatives Backed Stablecoin: A Proven Concept

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.

Pika Exchange: An Inverse Perpetual Swap Exchange

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

  • 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.

How PIKA Stablecoin Maintains its Peg

Essentially, PIKA stablecoins are backed by long positions’ loss at the time of the underlying token depreciation. At the time of the underlying token appreciation, the long positions’ profit are generated from both short positions’ loss and PIKA stablecoins’ collateral token appreciation.

  • Net profit of longs: 10000 * (1/2000–1/4000) = 2.5 ETH
  • Net loss of shorts: 2.5 ETH
  • Net loss of Bob’s position: 0.5 ETH
  • As a result, Bob’s current collateral is 0.5 ETH(1–0.5). If Bob burns the 2000 PIKA stablecoins to claim back ETH now, it is still worth $2000.
  • Net loss of longs: 10000 * (1/1600–1/2000) = 1.25 ETH
  • Net profit of shorts: 1.25 ETH
  • Net profit of Bob’s position: 0.25 ETH
  • As a result, Bob’s current collateral is 1.25 ETH(1 + 0.25). If Bob burns the 2000 PIKA stablecoins to claim back ETH now, it is still worth $2000.

How PIKA Stablecoin Compares with Other Stablecoins

We can write an entire blog about this but in short, PIKA’s unique derivatives backed design makes it a stablecoin that avoids the shortcomings of other protocol designs. PIKA avoids the centralized risk of USDT and USDC, requires less collateral compared to DAI, achieving a stronger peg than ESD and Basis Cash, has a more battle tested model than Frax and Fei.

How to Benefit from Pika Portocol

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

  • 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.

What’s next

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!

A decentralized derivatives backed stablecoin protocol