Exchanges form the backbone of capital markets by facilitating the trading of assets among participants. The core objective of any exchange is to enable efficient (cheap transaction costs with low slippage), fast and secure trading between counterparties. Decentralized exchanges (DEXs) add a layer of trustlessness on top of this objective, aiming to remove the need for intermediaries and centralized control. DEXs let users retain custody of their funds, allow the community to participate and foster open innovation. However, these benefits have historically come at a cost of higher latency and lower liquidity due to the throughput and latency limitations of underlying blockchains.

Source: Chainspect, Select block explorers

Spot DEX trading now accounts for 15-20% of total spot volumes compared to 5% for perpetuals. Centralised Exchanges (CEXs) have two major advantages when it comes to perpetuals - a better user experience for retail investors and tighter spreads due to efficient control for market makers. The demise of FTX has further consolidated the industry with a handful of CEXs now dominating the market. This concentration poses a systemic risk to the crypto ecosystem. The widespread proliferation of DEXs would not only reduce this risk but would also support the long-term sustainable growth of the entire ecosystem.

Source: The Block

In this article, we dive into the existing perpetual DEX landscape and review what the optimal design for a decentralised perpetual exchange might look like. The rise of Layer 2 solutions and multichain environments has provided a fertile ground for innovation in liquidity sourcing and user experiences. Building on research and knowledge from previous attempts, we believe we are now entering a golden era for DEXs. Finally, we explore how perpetual DEXs can potentially drive crypto adoption among mainstream audiences beyond the core function of enabling efficient trading.

Perpetuals have found a PMF within the crypto ecosystem for speculation and hedging.

Perpetuals are futures contracts without an expiry date allowing traders to hold positions indefinitely. These are similar to swaps that TradFi institutions have offered over-the-counter for decades. However by introducing the concept of funding rates, crypto democratised this product which was historically offered to only accredited players to retail products.

Perpetual markets now see over $ 120 billion in monthly volume by creating efficient trading venues with central limit orderbooks, clean user interfaces, and fast and secure trading between counterparties via vertically integrated clearing systems. Further, projects such as Ethena have been built on top of perpetuals, thereby extending the use of perpetuals beyond speculation.

Perpetuals have several advantages over traditional futures contracts:

• Traders save on exchange fees and other costs associated with renewing futures contracts at each expiration.
• Investors avoid the higher costs of rolling futures through contango where longer-term contracts are more expensive.
• The settlement/funding mechanism offers continuous realized profit and loss, simplifying backend processes for both contract holders and clearing systems.
• The contract provides a smoother price discovery process, avoiding the price jumps that occur when switching from one month’s contract to the next.

Source: Perpetual DEX marketshare - Artemis

Starting with BitMEX’s introduction of the concept in 2016, the market has witnessed a cambrian explosion in perpetual DEXs with 100+ implementations today. While the initial market was dominated by dYdX, today we have a vibrant ecosystem across various chains. Perpetuals have now become an integral part of the crypto ecosystem - various lead-lag studies suggest perpetual markets have started facilitating price discovery when spot markets are less active. Perpetual volumes on DEXs went from $ 1 billion in Jul’21 to $ 120 billion in Jul’24 - growing at ~393% CAGR annually.

However for the market to mature further, the undelying challenge of solving for high latency and low liqudity has to be addressed to create a cheap and efficient trading environment. High liquidity reduces slippage and provides a smoother trading experience. Low latency helps market makers quote tighter prices and execute transactions faster boosting actively quoted liquidity and creating a positive feedback loop.

There has been a variety of implementations in pursuit of the holy grail of DEXs from the Oracle model to vAMMs to “off-chain orderbooks and on-chain settlement”.

Oracle model The Oracle model provides trading services based on price data from leading exchanges with high trading volumes. This approach eliminates the costs associated with narrowing the gap between DEX prices and market prices, though it carries a significant risk of oracle price manipulation. Platforms like GMX benefit from their liquidity depth, offering zero price impact trades with flat fees and demonstrating organic growth. By using protocols like Chainlink for price feeds, GMX ensures price accuracy and integrity, promoting a price-taker-friendly environment with adequate rewards for price-makers. However, the major challenge with these exchanges is: they behave as price takers instead of facilitating price discovery.

AMM-based approach Virtual AMMs (vAMMs) facilitate perpetual contracts without involving actual spot exchanges inspired by Uniswap’s AMM for spot markets. This model, employed by platforms like Perpetual Protocol and Drift Protocol, allows for decentralized, composable liquidity bootstrapping for new tokens. Despite high slippage and impermanent loss issues, vAMMs provide a transparent, on-chain mechanism for price discovery. By adjusting the virtual depth (K value), these exchanges balance the need for liquidity against the risks of excessive depth or high slippage, aiming for a sustainable model.

Not Exhaustive, * refers to dYdX v3 implementation

Off-chain orderbook with on-chain settlement To overcome the limitations of on-chain order matching, some DEXs use off-chain orderbooks with on-chain settlement. Trade matching occurs off-chain, while execution and asset custody remain on-chain. This method maintains the self-custodial advantages of DeFi while addressing performance and risk constraints like Miner Extractable Value (MEV). Notable examples include dYdX v3, Aevo and Paradex, which leverage this hybrid approach to provide efficient trading while ensuring transparency and security through on-chain settlement.

Fully on-chain orderbooks Fully on-chain orderbooks represent the traditional optimum way of maintaining trading integrity, though they face significant challenges due to blockchain latency and throughput limitations. These issues lead to vulnerabilities like front-running and market manipulation. However chains like Solana and Monad are rapidly trying to solve this challenge on an infrastructure level. Projects like Hyperliquid, dYdX v4, Zeta Markets, LogX and Kuru Labs are also pushing the envelope with high-performance, fully on-chain systems either leveraging existing chains or creating their appchains.

The major trends in the perpetual DEX space today are community-driven and cross-chain active liquidity alongside simple user experience through gasless transactions, session keys and social login.

Historically building liquidity on an exchange has been a cold-start problem. Exchanges get liquidity through a combination of incentives, rewards and market forces. Market forces are essentially traders looking to take advantage of arbitrages between different markets. However, with the proliferation of DEXs competing for mindshare, it becomes difficult for DEXs to tap enough traders to reach critical mass. Within perpetual DEX space, another popular method has been through liquidity pools with incentives and rewards. In this setup, liquidity providers (LPs) deposit their assets into a pool which is then used to facilitate trades on the DEX. Some perpetual DEXs offer high APY in vaults or airdrops to attract liquidity providers. In recent times, two major approaches have emerged to tackle this cold start challenge more effectively - community-supported active liquidity vaults and cross-chain liquidity sourcing.

Hyperliquid introduced the HLP vault which uses users’ funds to provide liquidity for the Hyperliquid exchange. The vault uses data from Hyperliquid and other exchanges to compute fair prices and execute profitable liquidity strategies across various assets. The profits and losses (P&L) generated from these activities are shared among the participants based on their share of the vault. Alongside community bootstrap for liquidity, Hyperliquid leverages HyperBFT to improve DEX performance through optimistic execution and responsiveness. Optimistic execution means that transactions in a block can be executed before the block is finalized at the consensus layer. This means that as soon as a block is proposed, validators begin executing the transactions in the block concurrently with the consensus process. Optimistic responsiveness allows consensus to scale with network conditions based on the number of validators able to establish consensus. One major risk with Hyperliquid at the moment is the lack of open source and transparent code on underlying infra. Similar to Hyperliquid, multiple projects are increasingly taking an appchain-based approach to overcome some of the inherent limitations of underlying blockchains.

Source: Hyperliquid

Another interesting approach has been cross-chain liquidity sourcing by projects like the Orderly Network and LogX Network. These networks allow the creation of a frontend on any chain to trade perps and leverage liquidity across all of the markets. By combining native liquidity on-chain, aggregate liquidity across other chains and the creation of a Discrete Asset, Market Neutral (DAMN) AMM pools - LogX can maintain liquidity during periods of high market volatility. These pools use stable assets like USDT, USDC, and wUSDM to enable oracle-based perpetual trading to traders. While designed for trading, this infrastructure also creates optionality to build various applications on top.

Source: LogX

As user interfaces become increasingly commoditized, DEXs have started adding features like gasless transactions, session keys and social logins using wallet adapters to create a smooth user experience. Traditionally CEXs were integrated across ecosystems - also functioning as onboarding & bridge services apart from the core exchange, whereas DEXs often remain siloed within their native ecosystems. These cross-chain DEXs are also revolutionizing the user experience by enabling seamless transactions across multiple blockchain networks and providing them with a more extensive selection of trading pairs with tighter spreads on some of the long-tail tokens.

DEX aggregators like Vooi.io are also building integrated intelligent routing systems, finding the most efficient trading paths or optimum venues for execution across various chains. This simplifies the trading process for users, who can manage complex routes within a single interface. These super aggregators combine the functionalities of multiple DEXs and bridges, offering a streamlined and user-friendly trading experience.

Telegram bots are further simplifying the trading experience for users with real-time trading alerts, executing trades, and managing portfolios, all within the convenience of a Telegram chat interface. This integration enhances accessibility and user engagement, making it easier for traders to stay informed and act swiftly on market opportunities. The listing of the BANANA token on Binance is a major win for the nascent telegram bot ecosystem. However Telegram bots run a major risk as users have to share the private keys with the bots exposing themselves to smart contract risk.

Perpetual DEXs have been continually introducing new financial products or creating mechanisms to simplify trading of existing products to cater to the evolving needs of traders.

Variance perpetuals These innovative financial instruments allow traders to speculate on the volatility of an asset rather than its price. In the highly volatile crypto markets, this product offers a unique way to hedge risk or capitalize on market movements. Opyn is leveraging existing markets to develop newer types of perpetual contracts that can replicate complex strategies, hedge unique risks, and unlock new forms of capital efficiency. Opyn’s perpetual offerings include Stable Perps (0-perps), Uniswap LP Perps (0.5-perps), Normal Perps (1-perps), and Squared Perps (2-perps, also known as Squeeth). Each of these perpetuals serves a distinct purpose: Stable Perps provide a steady foundation for trading strategies, Uniswap LP Perps mirror returns without direct liquidity provision, Normal Perps offer straightforward long/short positions, and Squared Perps amplify gains with quadratic exposure. These perps can then be combined into sophisticated strategies. For example, the Crab Strategy involves shorting 2-perps while going long on 1-perps to collect funding in stable markets while maintaining a balanced directional exposure. Another example, the Zen Bull strategy, combines short 2-perps, long 1-perps, and short 0-perps to earn funding while maintaining long exposure in calm markets.

Source: Opyn

Pre-Launch Futures Pre-launch token perpetual contracts allow traders to speculate on the future price of a digital asset before its official launch, acting as an on-chain version of the grey market for IPOs. These contracts enable investors to take positions based on anticipated market values. Various perpetual DEXs like Aevo, Helix, and Hyperliquid have used pre-launch futures to create a unique niche in the market. The key advantage of these pre-launch contracts is their ability to attract and retain users by offering access to exclusive assets unavailable elsewhere.

Real World Assets Perpetuals could become the main listing method for real-world assets (RWAs). Listing a new asset as a perpetual is simpler than tokenizing it, requiring only liquidity and a data feed. Further a spot market does not need to be on-chain for a liquid perpetual market to exist on-chain, as perps can thrive independently. In this context, perps are the stepping stone to spot tokenization once sufficient market interest/liquidity via the perps is established. The combination of both spot and perpetual contracts on RWAs opens up new strategies for predicting sentiment, event-based trading, and for executing cross-asset arbitrage strategies. Companies like Ostium Labs, Sphinx Protocol are some of the emerging players in the sector.

Exchange Traded Products Perpetuals could also be used to create Exchange Traded Products that hold expiring futures contracts, such as ETFs like USO (which holds WTI light sweet crude oil futures) and ETNs like VXX (which holds VIX futures) to reduce fees and NAV depreciation. This eliminates the need to roll their baskets to longer-dated contracts as expirations approach. Companies which require long-term economic exposure protection but don’t require physical delivery of a commodity can lower operating costs with perpetuals. Speculating on or hedging risk in restricted foreign currencies typically involves non-deliverable 30-day or 90-day forwards, which are non-standard and traded over-the-counter. These could be replaced with financially settled USD-denominated perpetual contracts.

Prediction markets Perpetual DEXs can revolutionize prediction markets by offering a versatile and continuous trading mechanism that accommodates non-regular markets such as elections / irregular weather forecasts. Unlike traditional prediction markets that rely on real events or oracles, perpetual futures allow for the creation of prediction markets based on evolving data from the market itself. This design enables the formation of sub-markets within a longer-term market, providing users with short-term trading opportunities and instant gratification. Integration of leverage has the potential to further enhance the market. The continuous settlement of perpetual futures ensures regular market activity, enhancing liquidity and user engagement. Moreover, a community-controlled perpetual futures market with reputation and token rewards can incentivize participation and ensure alignment of interests, creating a robust foundation for decentralized prediction markets. This approach democratizes market creation and offers a scalable solution for diverse prediction scenarios.

By providing platforms for building iOS-like integrated experiences, perpetual DEXs have the potential to usher in the next era of crypto adoption.

As the crypto financial system evolves, the design of perpetual DEXs will continue to improve. The focus will likely shift from merely replicating the functionality of CEXs to leveraging the unique advantages of decentralization—transparency, composability, and user empowerment. Building the optimal design for a perpetual DEX involves a careful balance of efficiency, speed and security. Perpetual DEXs are also focusing on community engagement through pre-sales and involving builders in the ecosystem. This approach fosters a sense of ownership and loyalty among users. Community-led initiatives, such as market-making with Hyperliquid bots further democratize access to exchange activites.

Creating integrated and user-friendly experiences akin to those on iOS is essential for mass crypto adoption which in turn would require developing more intuitive user interfaces and ensuring a cohesive user journey. These could make crypto trading more appealing to the average consumer, who may not be crypto-native, and eventually introduce them to other decentralized applications as well. Perpetual DEXs like Hyperliquid, LogX, and dYdX also create the ability to develop user-friendly and intuitive markets in various sectors beyond finance, such as elections and sports, which, in turn, open up new avenues for engagement for the masses.

Source: LogX

The past decade of development in DeFi has been focused on DEXs and stablecoins. However, the next decade could see DeFi consumer apps intersect with various domains, including news, politics, and sports among others. These applications will likely become some of the most valuable and widely used further driving crypto adoption. We remain excited to work with these players building the future of crypto adoption.

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