Announcing Pika Protocol v2


We are excited to announce Pika Protocol v2, a decentralized perpetuals swap exchange on Ethereum Layer 2 that supports:

  • High Leverage: support up to 50x leverage.
  • Deep Liquidity: achieve the same level of liquidity as top perpetual exchanges.
  • Trade Any Assets: starting from crypto and expanding to commodities, volatility index, etc.
  • Composability: composable with the entire DeFi system.

Moving from v1 to v2

Pika Procool v1 is a derivatives backed stablecoin and an inverse perpetual swap exchange. The stablecoin achieves its peg to one dollar by taking the short position on the perpetual exchange. Though this is a proven concept from Bitmex exchange, its scalability largely depends on the trading volume of the perpetual swap exchange. If there are not many traders using the exchange, the stablecoin won’t be able to scale.

For the past year, linear perpetual exchange is becoming the new norm for leverage trading. The traders have been moving towards linear perpetual exchanges such as Binance and FTX, from old school inverse perpetual exchanges like Bitmex, because it is much easier user experience to trade the USDT/USDC based linear perpetual exchange.

Therefore, our biggest concern is Pika Protocol v1 won’t be able to attract large amount of traders because of its inverse perpetual swap design. However, if we want to build a stablecoin protocol, linear perpetual swap design won’t work. There is one decision we have to make: whether to build the stablecoin, or whether to focus on building a top DeFi perpetual exchange? We cannot do both.

We made the decision to build Pika Protocol v2 as a pure perpetual exchange, aiming at the huge perpetual market size.

Currently there is over $40B open interest on centralized exchanges, while less than $1.5B open interest is on decentralized exchanges(dYdX, Perpetual Protocol, and others combined). The decentralized perpetual swap exchange is taking off recently with the the launch of Ethereum layer 2s, which greatly reduces the transaction cost. The huge growing trend will continue.

How does Pika Protocol v2 work?

Deep Liquidity

Similar to virtual AMM’s xyk model, Pika has a virtual liquidity for each trading pair, supporting the same level of liquidity as top perpetual exchanges. This enables capital efficiency and minimum trade slippage without requiring too much exchange liquidity. For example, the current slippage for a $10k trade for ETH-USD pair is expected to be around 0.02%, a 100k trade is around 0.2%.

Dynamic pricing

Pika uses Chainlink Oracles with dynamic adjustments to price the assets. The pricing is determined by these factors:

Base Price: Pika gets the real-time Chainlink price as the base price.

Slippage: the trade slippage is calculated based on the virtual liquidity, trade amount and trade direction, using the xyk model.

Price Adjustment: to reduce the risks of the liquidity vault, Pika has the mechanism to balance the open interest of longs and shorts. When there are more longs than shorts in the protocol, the price will slightly moves up to incentivize more short positions, and vice versa.

Trade Anything

Pika Protocol empowers users to trade anything with leverage. It initially supports all the pairs Chainlink supports(BTC, ETH, LINK, SNX, etc). In the long term, Pika aims to work with multiple Oracle providers or build in-house Oracles to support large categories of assets including commodities(Gold, Silver, Oil), volatility index(VIX), NFTs(Punks, Pengus).


Pika Protocol is a permission-less smart contract that is fully composable with the entire DeFi system. Unlike some off-chain orderbook based decentralized exchanges(dYdX) operated by centralized teams, Pika is a trust-less protocol enabling trading directly from other smart contracts. Other DeFi protocols can choose to trade or hedge their positions easily with a simple smart contract call. This design also allows traders to directly trade from their wallets, without doing any initial deposit.


Pika Protocol will firstly be launched on Optimistic Rollups, with low transaction fee compared to Ethereum layer 1. The other fees include trade fee and interest fee.

Trade Fee: a small trade fee(0.1%) is charged for each trade to pay liquidity providers.

Interest: a small amount of interest is charged based on the time interval of the position staying open. This fee is paid to incentivize liquidity providers and as a reward for the protocol.


If the Oracle price reaches the liquidation price, the position will be liquidated. The liquidation price of a position is calculated using this formula:

The liquidationThreshold is set to 80% as default. The remaining margin of the liquidated position are shared as reward among liquidators, Pika Protocol, and liquidity providers.


For the 50x ETH long position with entry price at $4000 and positon size as 4000 USDC, the liquidation price would be $3936(4000–4000 * 0.8 / 50). If a liquidator liquidates this position at $3936, $64(4000–3936) will be used to pay liquidators, protocol fees and liquidity providers.

For the 50x ETH short position with entry price at $4000, the liquidation price would be $4064(4000 + 4000 * 0.8 / 50). If a liquidator liquidates this position at $4064, $64(4064–4000) will be used to pay liquidators, protocol fees and liquidity providers.

At the launch, Pika Protocol team will be the liquidator for all the positions.

Arbitrage Mitigation

Chainlink Oracle has delays in updates at times, giving opportunities for bots to arbitrage between centralized exchanges and our exchange. This issue hurts liquidity providers and leads to some past failures of leverage trading protocol.

Inspired by GMX, we introduced the minimum price change requirement for a position to be closed with profit. A position can be closed with profit if the oracle price has changed more than 1.5%. If the price changes less than 1.5%, the profit will be set to 0. However, this requirement only lasts for 12 hours, meaning if the trader closes the position 12 hours after opening the trade, the profit can be taken even if the oracle price changes less than 1.5%.

Liquidity Vault

The protocol is backed by the liquidity provided by the team and users. By staking in the vault, liquidity provider takes the opposite position of all traders on the platform. The vault pays for trader profits and receives trader losses. In addition, it also receives trading fees, interest and liquidation profit of trades.

To protect vault from big loss in highly volatile conditions, the vault has a maxExposure parameter for each trading pair. When the maxExposure is reached, traders cannot open the additional position that increases the vault's exposure, but can open the position in the direction that decreases the vault's exposure. This should rarely happen when the vault's liquidity is big enough.

In very rare conditions when the vault reached 80% loss in a day, the protocol will be in protection mode, where all the positions can only be closed with profit the next day. This should never happen when there’s enough liquidity.

What’s next

This post shares the basic idea of how Pika Protocol v2 works. More articles will be published on the testnet app and token generation event details. Welcome to the Pika Protocol V2.

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