Contango Explained: Automation for Perps or Built Through Looping
What Contango is, what is looping and this innovative solution helps to automate the perps experience.
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Introduction
1. What is looping
2. Architecture of Contango
3. Users and Potential Use Cases
4. Contango Token Metrics
5. Team and Backers
Conclusion
Introduction
The world of crypto perpetuals has witnessed substantial growth, but with that growth comes the challenge of effectively managing these continuous contracts. Manual looping, the DeFi-native method of gaining leverage on-chain, has its drawbacks, creating inefficiencies and complexities for traders. This article explores the shortcomings of existing approaches and introduces Contango, a protocol designed to automate looping strategies and offer synthetic cPerps (Contango perps) as a result. Beyond simply addressing the downsides of perps, Contango redefines the landscape by providing 3 main killer features:
An immense liquidity ($20B) for traders, taken from spot and money markets
The cheapest and least volatile funding rates across both CeFi and DeFi
The possibility of farming rewards just by trading
Contango's unique approach to liquidations at the money market level ensures transparency and security. The protocol boasts three times lower volatility than competitors due to its cheap and low-volatility funding rates. The availability of multiple cPerps pairs tokenized as NFTs, along with the ability to modify position size and leverage in a single transaction, adds flexibility. Let’s uncover how exactly Contango builds cPerps by automating looping, what are the issues of manual looping, and why automated looping saves time and reduces complexity.
1. What is looping
Looping in the context of decentralized finance (DeFi) refers to a strategic process where users engage in repetitive lending and borrowing actions on money markets to amplify their exposure to a specific asset or to maximize yield farming rewards. The concept gained popularity over six years ago, notably with $COMP farming in mid-2020 and even earlier with users looping as soon as MakerDAO went live in 2017.
The manual looping process involves depositing capital, borrowing another currency against it, swapping the borrowed amount for the original asset, and repeating these steps through several loops. However, manual looping has its limitations, with diminishing returns after a certain number of loops due to overcollateralization requirements and increasing gas fees.
To address these challenges, automated strategies utilizing flash loans were introduced. A flash loan enables users to borrow capital without collateral, provided it is repaid within the same block. Contango, in line with the DeFi-native way of longing and shorting on-chain, uses flash loans to automate looping.
Automated strategies, replacing manual looping, involve obtaining a flash loan, swapping it for the desired asset, lending the asset along with the user's margin, borrowing against it within specified limits, and reimbursing the initial flash loan amount. This streamlined process, depicted in diagrams, allows users to gain leverage instantly and efficiently without the need for repetitive manual looping.
Comparing manual looping to automated flash loan strategies on platforms like Aave, the latter proves to be more time and cost-effective. While manual looping requires multiple loops with associated gas fees, an automated strategy achieves the desired leverage and exposure in a single transaction, saving time and reducing complexity.
These leveraged strategies emulate the cash flow of future positions, with positions on variable money markets resembling perpetual futures. The associated variable funding rate, termed APY on Contango, is determined by the difference between the borrowing costs and lending profits of each position.
In essence, looping, whether manual or automated, provides users with a mechanism to efficiently gain exposure and leverage within the DeFi ecosystem, enhancing flexibility and optimizing capital utilization.
2. Architecture of Contango
As seen above, Contango constructs perpetuals via automated looping. At a high level, when a trader opens a position, the protocol engages in borrowing from a money market, executing a swap on the spot market, and subsequently lending back on the money market.
At a detailed level: when a trader intends to go long on ETH using DAI as margin, Contango initiates the process by acquiring the required additional DAI through a flash loan. The obtained DAI is then entirely swapped for ETH, which is subsequently lent on a variable rate market. Borrowing DAI against the lent ETH completes the cycle, allowing the reimbursement of the initial flash loan. The diagram below succinctly outlines these sequential steps, accompanied by a numerical illustration where a trader longs 1 ETH with a margin of 200 DAI, considering the spot ETH price to be 1000 DAI.
Should a trader decide to go long on ETH with ETH as margin, Contango will initiate the process by acquiring DAI through a flash loan. The obtained DAI is then exchanged for ETH, and this combined ETH, along with the initially posted ETH as margin, is lent. Borrowing DAI against this combined ETH allows the reimbursement of the initial flash loan. The diagram below succinctly outlines these steps, accompanied by a numerical example where a trader longs 1 ETH with 0.2 ETH as margin, considering the spot ETH price to be 1000 DAI.
3. Users and Potential Use Cases
Contango Protocol offers a range of use cases tailored to meet the diverse needs of its user base, comprising Traders, Loopers, and Farmers. Leveraging a unique looping mechanism, the protocol opens avenues for speculative activities, hedging strategies, and arbitrage opportunities.
Traders:
Contango provides professional traders with a sophisticated trading interface, free from order books or Automated Market Makers (AMMs). This design ensures deep liquidity and lower and less volatile funding, enabling traders to efficiently arbitrage prices and rates across lending markets.
Loopers:
Because under the hood the protocol automates a looping strategy, it also caters to loopers with a user-friendly interface that furnishes essential metrics such as liquidation price, Profit and Loss (PnL), margin, and mark price.. Specifically, Contango is notably used by loopers for stETH/ETH and stMATIC/MATIC loops .
Farmers:
Contango seamlessly integrates with underlying money markets, facilitating automated borrowing and lending activities for farmers. This automation streamlines the accrual of rewards, aligning with the protocol's commitment to offering a comprehensive solution for users seeking farming opportunities effortlessly. Farmers can leverage Contango for farming rewards or the net APY, expanding their opportunities in the DeFi.
4. Contango Token Metrics
At the moment there is not much information on the token, we only know that the total number of tokens is planned to be 1b, and they will be distributed as follows:
While there is little information on tokenomics at the moment, Contango have provided detailed information on rounds and token pricing, which is quite rare:
5. Team and Backers
Contango's team comprises three co-founders: Kamel, Bruno, and Egill. All team members boast diverse backgrounds. Kamel has a background in financial engineering and previously worked at Adaptive, a consulting company, before co-founding Contango with Bruno and Egill. Bruno served as a Senior Software Engineering Consultant, and Egill held the position of Full Stack Developer at Adaptive, the same company where Kamel had worked.
The team's extensive experience and ambitious goals enabled them to secure capital from some of the most reputable backers in the crypto space, including ParaFi Capital, Spartan Group, Coinbase Ventures, Cogitent Ventures, and others. The impressive list of angel investors features notable names such as Andrew and Juan from MakerDAO, Larry from The Block, Nicolas from Swissborg, Julien from Stake Capital, and more.
In addition, Contango is actively building partnerships and integrations that include Aave, Spark, Radiant, Sonne, Granary, Lodestar, Moonwell, Exactly, Morpho, Silo and others.
Aligned with their commitment to long-term growth, the team, alongside their robust group of investors and partners, aims to focus on expanding their presence in the space through marketing and incentivization programs in 2024.
Their TGE is planned for 2024 and they currently have a point system in place for early users.
Conclusion
The crypto industry, as it evolves, new mechanics and new protocols emerge, becomes more and more complex through multi-component strategies. Bribe and voting aggregators in the Curve Finance ecosystem, such as Votium, Llama Airforce, Concentrator, Clever and others, can be considered the first swallows in simplifying user processes with complex strategies. But these solutions were narrowly focused, for specific use cases.
Contango, as we could see from the review, offers automation of several processes at once: flash loan, swap, lending, borrowing, and reimbursement, making protocols much easier for professional traders, loopers, and farmers. The crypto industry is coming to realise the importance of improving not only the UI/UX in web3 for web2 users, but also the automation of typical processes for narrower categories of users.
Contango links:
Website | Twitter | Discord | Documentation | Medium