Perpetual Demand Lending Pools and Delta-Hedged Strategies

Summary

This paper formalizes decentralized finance mechanisms that provide lending pools for perpetual futures trading. It calls these mechanisms Perpetual Demand Lending Pools (PDLPs), describing a general target-weight approach that extends mechanisms used in practice by GMX and Jupiter. The framework sets out how pool arbitrage works and analyzes the expected payoffs for both arbitrageurs and liquidity providers.

The authors show that, under general conditions, PDLPs are straightforward to delta hedge, which they offer as one explanation for the emergence of hedged strategies using these pools. They also identify dynamic parameter changes as a possible way to improve capital efficiency. The document motivates the mechanisms by noting the cost of capital faced by decentralized market makers and sophisticated traders, but it gives no quantitative comparison of borrowing costs, performance data, or detailed conditions for the stated hedging result. Its conclusions therefore describe a theoretical framework and potential design direction rather than establishing live profitability.

Key ideas

• PDLPs are lending mechanisms designed to support decentralized perpetual futures trading.
• A general target-weight mechanism is presented as an extension of approaches used in practice.
• The framework describes pool arbitrage and expected payoffs for arbitrageurs and liquidity providers.
• The authors find that PDLPs can be delta hedged under general conditions.
• Dynamic parameterization is proposed as a route to better capital efficiency.

Tags

# Perpetual Demand Lending Pools


# Perpetual Demand Lending Pools









Decentralized perpetuals protocols have collectively reached billions of dollars of daily trading volume, yet are still not serious competitors on the basis of trading volume with centralized venues such as Binance. One of the main reasons for this is the high cost of capital for market makers and sophisticated traders in decentralized settings. Recently, numerous decentralized finance protocols have been used to improve borrowing costs for perpetual futures traders. We formalize this class of mechanisms utilized by protocols such as Jupiter, Hyperliquid, and GMX, which we term~\emph{Perpetual Demand Lending Pools} (PDLPs). We then formalize a general target weight mechanism that generalizes what GMX and Jupiter are using in practice. We explicitly describe pool arbitrage and expected payoffs for arbitrageurs and liquidity providers within these mechanisms. Using this framework, we show that under general conditions, PDLPs are easy to delta hedge, partially explaining the proliferation of live hedged PDLP strategies. Our results suggest directions to improve capital efficiency in PDLPs via dynamic parametrization.

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