Quanto Perpetual Futures vs Traditional Perpetual Futures: An Overview of What, Why, and How + Exploring the mechanics, purpose, and distinctions.

Both derivatives enable traders to speculate on an index asset by posting some collateral asset to secure the position. However, the numeraire asset used for settling payouts varies between markets.

Quanto Perps uniquely allow traders' profits and losses (PnL) to be settled in a numeraire asset that differs from the quote asset (which is used to express or price the index asset). Typically, this quote asset for any index asset is USD in both Traditional and Quanto Perps.

While trading Traditional Perps, traders face exchange rate risk if the quote asset used to price the index asset weakens. Furthermore, even multi-collateral supported Traditional Perps do not provide full protection against exchange rate risk.

For example, if a position in a Traditional Perps market still settles PnL in a quote asset numeraire, weakening of the quote asset affects the index-derived PnL return.

🛠️ Quanto Perps fix this problem and more…

The central innovation of the quantity-adjusting (“Quanto”) derivative is its ability to adjust for changes in the value of the quote asset. If the quote asset weakens, then the derivative adjusts the quantity of the numeraire asset that can be exchanged for the quote asset to match the numeraire-to-quote exchange rate established at the position's onset.

This adjustment mechanism preserves PnL in terms of the numeraire, regardless of fluctuations in the exchange rate between the numeraire and quote asset during the position's lifetime.

Establishing a fixed numeraire-to-quote exchange rate can have a “degen-welcomed” side effect when both the numeraire and index assets increase in value. Greater profits are achieved when PnL is calculated using the numeraire at a favorable exchange rate, as opposed to holding a similar position in Traditional Perpetual Contracts.

The content so far might have been a tough read if you are new to Perps, Quanto, Derivatives, DeFi, etc. The following work seeks to help break down the “What, Why, and How” further by stepping through two detailed trade lifecycle examples, explaining the basic math behind the payoffs, and emphasizing the significance of units (see User-Defined Types in DeFi and Why You Should Care).

Quanto Perpetual Futures vs Traditional Perpetual Futures: An Overview of What, Why, and How + Exploring the mechanics, purpose, and distinctions.

Both derivatives enable traders to speculate on an index asset by posting some collateral asset to secure the position. However, the numeraire asset used for settling payouts varies between markets.

Quanto Perps uniquely allow traders' profits and losses (PnL) to be settled in a numeraire asset that differs from the quote asset (which is used to express or price the index asset). Typically, this quote asset for any index asset is USD in both Traditional and Quanto Perps.

While trading Traditional Perps, traders face exchange rate risk if the quote asset used to price the index asset weakens. Furthermore, even multi-collateral supported Traditional Perps do not provide full protection against exchange rate risk.

For example, if a position in a Traditional Perps market still settles PnL in a quote asset numeraire, weakening of the quote asset affects the index-derived PnL return.

🛠️ Quanto Perps fix this problem and more…

The central innovation of the quantity-adjusting (“Quanto”) derivative is its ability to adjust for changes in the value of the quote asset. If the quote asset weakens, then the derivative adjusts the quantity of the numeraire asset that can be exchanged for the quote asset to match the numeraire-to-quote exchange rate established at the position's onset.

This adjustment mechanism preserves PnL in terms of the numeraire, regardless of fluctuations in the exchange rate between the numeraire and quote asset during the position's lifetime.

Establishing a fixed numeraire-to-quote exchange rate can have a “degen-welcomed” side effect when both the numeraire and index assets increase in value. Greater profits are achieved when PnL is calculated using the numeraire at a favorable exchange rate, as opposed to holding a similar position in Traditional Perpetual Contracts.

The content so far might have been a tough read if you are new to Perps, Quanto, Derivatives, DeFi, etc. The following work seeks to help break down the “What, Why, and How” further by stepping through two detailed trade lifecycle examples, explaining the basic math behind the payoffs, and emphasizing the significance of units (see User-Defined Types in DeFi and Why You Should Care).