Challenges and Opportunities Facing Decentralized Exchange for Perpetual Futures

Recently, a trader opened a long position on ETH with 50x leverage on a DEX, achieving a peak floating profit of over 2 million USD. Due to the large position size and the transparent nature of DeFi, the entire crypto market is closely watching the movements of this "whale". Surprisingly, the trader did not choose to increase their position or close it for profit, but instead adopted a unique strategy: by withdrawing part of the margin to realize profits while triggering the system to automatically raise the liquidation price of the long position. Ultimately, the trader successfully triggered the liquidation, realizing a profit of approximately 1.8 million USD.

This operational method has significantly impacted the platform's liquidity. The platform's liquidity pool is responsible for providing market-making services, maintaining operations by charging funding fees and clearing profits. Due to the excessive profits of ETH whales, normal liquidation could lead to insufficient liquidity on the opposing side. However, by actively triggering liquidation, this portion of the loss was absorbed by the liquidity pool. On March 12 alone, the liquidity pool decreased by approximately $4 million.

This incident highlights the severe challenges faced by the Perptual Futures Decentralized Exchange (Perp Dex), especially the urgent need for innovation in the liquidity pool mechanism. We will compare the operating mechanisms of several mainstream Perp Dexs (such as Hyperliquid, Jupiter Perp, and GMX) and discuss how to prevent similar attacks.

Hyperliquid

Liquidity Provision:

• The community liquidity pool HLP (Hyperliquid Pool) provides funding.
• Users can deposit assets such as USDC to participate in market making.
• Supports users to create their own "Vault" to participate in market-making profit sharing

Market Making Model:

• Adopting high-performance on-chain order book matching
• HLP treasury acts as a market maker, providing depth for orders.
• The price refers to external oracles, ensuring closeness to the global market.

Clearing mechanism:

• Trigger liquidation when maintenance margin is insufficient (usually starting at 20%)
• Any adequately capitalized user can participate in liquidation.
• HLP Vault serves as a liquidation insurance vault.

Risk Management:

• Use multi-exchange price oracles, updating every 3 seconds
• Increase the minimum margin requirement for large positions
• Allow anyone to participate in liquidation, enhancing the level of Decentralization.

Funding Rate and Position Cost:

• Calculate long and short funding rates every hour
• Funds are used to anchor contract prices close to spot.
• No additional overnight interest, but high leverage increases the pressure of funding fee expenses.

Jupiter

Liquidity Provision:

• Multi-Asset JLP (Jupiter Liquidity Pool) provides liquidity
• Users swap assets to mint JLP as counterparty.

Market Making Mode:

• Adopt an innovative LP-to-Trader mechanism
• Achieve near-zero slippage trading through oracle pricing.

Clearing Mechanism:

• Automatic liquidation occurs when the margin rate falls below the maintenance requirement.
• The JLP liquidity pool acts as a counterparty to absorb gains and losses.

Risk Management:

• Use oracles to keep contract prices closely aligned with spot prices
• You can set limits on the total positions of a single asset.
• The borrowing rate increases with asset utilization, suppressing extreme bias.

Funding Rate and Position Cost:

• No traditional funding rate, using Borrow Fee
• The borrowing fee accumulates hourly and is deducted from the margin.
• The longer the holding period or the higher the asset utilization rate, the more cumulative interest accrued.

GMX

Liquidity Provision:

• Multi-Asset Index Pool GLP (GMX Liquidity Pool) provides liquidity
• Users deposit assets to mint GLP and become the counterparty to all trades.

Market Making Model:

• No traditional order book, automatic market making through oracle pricing and pool assets.
• Use Chainlink decentralized oracle to obtain market prices

Clearing mechanism:

• Automatic liquidation, based on Chainlink index price
• The contract automatically closes positions with insufficient margin

Risk Management:

• Use multi-source oracles to reduce manipulation risk
• Set a maximum opening limit for easily manipulated assets
• Limit leverage risk through a dynamic fee rate mechanism

Funding Rate and Position Cost:

• No traditional long and short mutual funding fees
• Adopt borrowing fees, directly paid to the GLP pool
• The higher the asset utilization rate, the higher the annualized borrowing fee rate.

Conclusion

The challenges faced by decentralized exchanges stem from their transparency and code-driven rules. In the future, preventing similar attacks may require addressing the following aspects:

1. Reduce user position size, adjust leverage multiples and margin requirements.
2. Implement an Automatic Deductions of Position (ADL) mechanism to limit risks in extreme situations.
3. Strengthen address correlation analysis to prevent witch attacks
4. Continuously increase liquidity depth to raise the cost of attacks.

However, these measures may conflict with the permissionless philosophy of DeFi. In the long run, the ideal solution is for the liquidity of the protocol itself to gradually thicken as the market matures, naturally raising the attack threshold until such attacks are no longer economically viable. The current challenge is actually a necessary stage in the development of Perptual Futures DEX.