The Evolution of Perpetual Futures DEX: From Niche Trading Venues to on-chain Adoption Drivers

In recent years, Perptual Futures DEX has been thriving in the cryptocurrency market, making significant progress in efficiency, speed, and scalability. This article will explore how Perptual Futures DEX breaks through the limitations of trading scenarios, broadens the scope of blockchain applications, and paves the way for the large-scale adoption of web3.

Exchanges are the core of the crypto market, supporting market operation through user-to-user transactions. The primary goal of any exchange is to achieve efficient, fast, and secure transaction matching. Based on this, DEX has made many innovations on the foundation of CEX, such as eliminating trust assumptions, avoiding intermediaries and centralized control, allowing users to retain control over their funds, and enabling community participation in product updates and iterations.

However, while DEXs have advantages, they often come at the cost of higher latency and lower liquidity, mainly limited by the throughput and latency of the blockchain. According to data, DEX spot trading volume accounts for 15%-20% of the total crypto market, while Perptual Futures trading only accounts for 5%.

Developing perpetual futures business on DEX faces challenges because CEX has advantages in product experience, market maker control, liquidity, and feature combinations. However, the centralization and monopoly of CEX have become issues that users cannot ignore, especially as the collapse of FTX has exacerbated this trend. Increasing the usage rate of DEX can effectively reduce systemic risks and promote the sustainable development of the crypto ecosystem.

The rise of Ethereum Layer 2 and multi-chain ecosystems has created favorable conditions for the development of DEX. This article will delve into the current state of perpetual futures DEX and introduce some design concepts of DEX.

Perptual Futures in the Product Market Matching of the Crypto Ecosystem

Perptual Futures allow traders to hold positions indefinitely, similar to over-the-counter futures trading in traditional finance. It popularizes futures to retail investors by introducing the concept of funding rates, while constructing a "damped effect" to prevent imbalance in the long-short structure. Currently, the monthly trading volume of Perptual Futures exceeds $120 billion, thanks to a good user experience, order book mechanism, and vertically integrated clearing system.

Perptual Futures have four major advantages over traditional futures:

1. Save on extension fees and related costs
2. Avoid more expensive forward contracts
3. The funding rate mechanism provides continuous real-time profit and loss, simplifying backend processing.
4. Provide a smoother price discovery process

Since BitMEX introduced Perptual Futures in 2016, the number of DEXs supporting Perptual Futures has exceeded 100. The trading volume of Perptual Futures on DEXs has increased from $10 billion on July 2021 to $120 billion in July 2024, with a compound annual growth rate of 393%. However, Perptual Futures DEXs face on-chain low liquidity and high latency bottlenecks, and addressing these two issues is crucial for driving market development.

Perptual Futures DEX Pricing Model

Oracle Mode

Obtain price data from top exchanges. Although there is a risk of price manipulation, it can reduce DEX pricing costs. For example, GMX uses Chainlink oracles to acquire price data, creating a friendly environment for small institutions and individuals, while providing substantial rewards for large institutions and market makers. However, there is an extreme reliance on prices from top exchanges, making proactive price discovery impossible.

Virtual Automated Market Maker ( vAMM )

Inspired by Uniswap AMM, but the vAMM liquidity pool is virtual. Pricing is achieved by simulating the buying and selling behavior of trading pairs through mathematical models. It supports Perptual Futures trading without requiring large capital investment. Although there are issues of high slippage and impermanent loss, it remains an excellent on-chain pricing mechanism due to its transparency and decentralized characteristics.

off-chain order book combined with on-chain settlement

The trading matching is completed off-chain, while settlement and asset custody are on-chain. Users' assets are self-custodied to reduce MEV risk. This improves efficiency while ensuring security, aligning with the Rollup concept. This model is adopted by dYdX v3, Aevo, and Paradex, among others.

full-chain order book

All transaction order-related data and operations are processed completely on-chain, which is the safest solution, but is subject to blockchain latency and throughput limitations. It faces risks of front-running and market manipulation. Some projects like Hyperliquid, dYdX v4, etc. are innovating full-chain order book models.

Liquidity Acquisition and UX Improvement of DEX

Liquidity is fundamental to the survival of exchanges, but acquiring initial liquidity is a challenge. Emerging DEXs usually obtain liquidity through incentives and market forces. However, as the number of DEXs increases, it becomes difficult for individual DEXs to attract enough traders to reach the "critical mass" of liquidity.

Recently, two new approaches have emerged: community-supported active liquidity vaults and cross-chain liquidity acquisition. Hyperliquid is a typical case, utilizing community user funds to provide liquidity. Orderly Network and LogX Network propose cross-chain liquidity allocation, allowing the creation of Perptual Futures trading front-ends on any chain, achieving liquidity leveraging between markets.

In terms of UX, DEX competition is becoming increasingly fierce. In addition to improving the user interface, features such as gasless trading, session keys, and social login have been introduced. Cross-chain DEX is breaking through ecological limitations, while DEX aggregators integrate liquidity and price information from multiple DEXs to provide optimal trading paths. Telegram trading bots are also optimizing UX, but there are security risks.

Innovative Financial Products in Perptual Futures DEX

Variance Perptual Futures

The transaction content is based on asset volatility rather than price. It can be used to hedge risks, such as the various Perptual Futures products developed by Opyn.

Pre-Launch Contract

Allows price speculation before the official launch of the Token, similar to an IPO OTC on-chain version.

RWA Perptual Futures

It may become the main way for real assets to go on-chain, which is simpler than direct tokenization.

ETP Perptual Futures

Can be used to create ETPs that hold perpetual futures contracts, reducing trading costs and NAV depreciation risks.

Prediction Market

Perptual Futures DEX can change the prediction market, especially suitable for irregular events. It allows the creation of prediction markets based on the market's own updated data, bringing significant advantages.

Future Prospects of Perptual Futures DEX

The focus of future design may be to leverage the advantages of decentralization, seeking a balance between efficiency and security. Emphasizing community and developer participation to increase users' sense of belonging. To promote large-scale adoption, it is necessary to develop more intuitive interfaces to ensure a smooth user experience.

In the next ten years, DeFi may intersect and integrate with various fields such as news, politics, and sports, becoming a widely used tool that further promotes the mass adoption of cryptocurrency.