原文标题：The evolution of perpetual DEXs: Niche trading venues to on-chain adoption drivers

Original article by Gaurav Gandhi | Hashed Emergent

Compiled by: Bai Ding, Geek Web3

Abstract: In today's crypto market, perpetual contract DEX is developing rapidly. From the perspective of efficiency, speed, scalability and other aspects, such platforms have made great progress. This article aims to illustrate that perpetual contract DEX is not limited to trading scenarios, it is broadening the application scope of blockchain and paving the way for the mass adoption of web3.

Text: Exchanges are the core of the crypto market, supporting the market through transactions between users. The primary goal of any exchange is to achieve efficient (low transaction costs and low slippage), fast and secure transaction matching. Based on this goal, DEX has made many innovations based on CEX, such as eliminating trust assumptions, avoiding intermediaries and centralized control, allowing users to retain control of funds, and allowing the community to actively participate in discussions and governance on product updates and iterations.

However, looking back at the development history of DeFi, we can see that although DEX has several advantages, it often comes at the cost of higher latency and lower liquidity, which is mainly due to the throughput and latency limitations of the blockchain.

(Transaction delay data of major public chains)

According to data from Chainspect and some blockchain browsers, DEX spot trading volume now accounts for 15%-20% of the total trading volume of the crypto market, while perpetual contract trading only accounts for 5%.

In fact, it is not easy to develop perpetual contract business on DEX, because CEX perpetual contract trading has several advantages:

1. Better product experience

2. Efficient control of market makers provides finer spreads

3. Better liquidity (especially for mainstream assets, and the ultimate goal of new projects is to be listed on large CEX)

4. One-stop combination of multiple functions (spot trading, derivatives, OTC and other scenarios can be directly nested and combined)

The centralization and monopoly of CEX have become a problem that users cannot ignore. In particular, the collapse of FTX has further exacerbated the trend of centralization. Today, the CEX field is almost completely dominated by a few giants. This centralization has brought systemic risks to the crypto ecosystem. By increasing the use of DEX and increasing market share, such risks can be effectively reduced, thereby promoting the sustainable development of the entire crypto ecosystem.

The rise of Ethereum Layer2 and multi-chain ecology has provided innovations in liquidity sources and UX, which has created excellent conditions for the development of DEX, and now is a good time for the development of perpetual contract DEX. This article will conduct an in-depth discussion on the current status of perpetual contract DEX and introduce some DEX design concepts.

Perpetual Contracts PMF in the Crypto Ecosystem: Becoming an Important Tool for Speculation and Hedging

Perpetual contracts allow traders to hold positions indefinitely, which is very similar to the over-the-counter futures trading in the traditional financial (TradFi) market for many years. The difference is that perpetual contracts popularize futures, a trading method that is only available to certified investors in traditional finance, by introducing the concept of funding rates, allowing more retail investors to participate. At the same time, it also constructs an "underdamping effect" to prevent excessive imbalance in the long-short structure to a certain extent.

The current monthly trading volume of the perpetual contract market has exceeded US$120 billion. Such a market size is due to the good user experience provided by the exchange, the order book mechanism promotes trading efficiency, and the vertically integrated clearing system enables clearing to be completed quickly and securely.

In addition, projects like Ethena that use perpetual contracts as the underlying mechanism have brought diversified uses to perpetual contracts beyond speculation. Generally speaking, perpetual contracts have four advantages over traditional futures contracts:

1. Traders save on rollover fees and other related costs at each contract expiration

In traditional futures trading, if traders want to continue to hold positions when the contract expires, they need to close the current contract first and then buy a new contract to renew it. This is called "rollover", which means replacing an old contract with a new one. During the rollover process, traders need to pay related fees, bear the bid-ask spread and other costs. However, since perpetual contracts have no expiration date, they do not need to be rolled over, thus avoiding additional costs.

2. Avoid making forward contracts more expensive

In the traditional futures market, the price of forward contracts (futures contracts with a longer expiration date) is usually higher than that of near-term contracts (futures contracts with a closer expiration date). This phenomenon is called "positive market structure". When investors roll over, they usually need to buy new contracts at a higher price, thereby increasing the cost of holding positions. Perpetual contracts avoid this through the funding rate mechanism.

For example, suppose the March futures price of a commodity is $100, while the June futures price is $105. If you hold the March contract and switch to the June contract at expiration, you need to buy it at $105, increasing the holding cost by $5. Since perpetual contracts have no expiration date, you can always hold the original position without paying a higher price.

3. The funding rate system provides continuous real-time profit and loss, simplifying the back-end processing of contract holders and clearing systems

Perpetual contracts use a funding rate system to balance the positions of both long and short parties, and the settlement cycle is short (the industry standard is 8 hours, and Binance, Bybit, etc. all follow this standard). After each cycle is settled, funds will be automatically deducted or added from the contract holder's account to provide the holder with real-time profit and loss. At the same time, this real-time settlement can reflect the profit and loss of each trader's contract. Compared with the daily settlement and daily marking to market of traditional futures, the real-time settlement of perpetual contracts is more efficient, simplifying the fund management of contract holders and the background processing of the clearing system.

4. Perpetual contracts provide a smoother price discovery process, avoiding violent fluctuations caused by too coarse price granularity

Price discovery refers to the process of pricing assets between market participants through various mechanisms. As mentioned above, while reflecting the market supply and demand, the funding rate can continuously adjust the contract price to closely follow the spot price, ensuring the continuity and stability of price changes. At the same time, because the settlement cycle is short, the price discovery process is smoother, and compared with the daily or monthly settlement of traditional futures, it avoids price fluctuations caused by extension or delivery.

Since BitMEX first introduced perpetual contracts in 2016, perpetual contract DEXs have begun to develop rapidly, and now there are more than 100 DEXs supporting perpetual contracts in the market. In the early days, perpetual contract DEXs were very small. In 2017, dYdX was launched on the Ethereum ecosystem and dominated the perpetual contract market for quite a long time. Therefore, decentralized perpetual contract trading was also mainly concentrated on Ethereum, and the contract trading volume was very low at that time. Today, we can see active perpetual contract DEXs on various chains, and contract trading has become an indispensable part of the crypto ecosystem.

Several studies have shown that as the scale of perpetual contract transactions grows, the perpetual contract market has begun to have the function of price discovery when the spot market is inactive. The perpetual contract trading volume on DEX has also increased from US$1 billion in July 2021 to US$120 billion in July 2024, with a compound annual growth rate of approximately 393%.

However, perpetual contract DEX faces bottlenecks due to the performance limitations of the blockchain. To promote the further development of the perpetual contract market, the two core problems of low liquidity and high latency on the chain must be solved. High liquidity can reduce slippage, make the transaction process smoother, and reduce user losses; low latency can enable market makers to quote more compact prices, enable transactions to be executed quickly, and improve market fluidity.

Perpetual Contract DEX Pricing Model

In perpetual contract DEX, the pricing mechanism is the key to ensure that market prices accurately reflect supply and demand dynamics. Different perpetual contract DEXs use a variety of different pricing mechanisms to balance liquidity and reduce volatility. Below we will introduce several major models:

Oracle Model

The oracle model refers to a perpetual contract DEX that obtains price data from the top exchanges with large trading volumes and provides services based on this data. Although this method has the risk of price manipulation, it can reduce the pricing cost of DEX. For example, the decentralized perpetual contract exchange GMX.

By using Chainlink oracles to obtain price data, GMX ensures the accuracy and integrity of prices, creates a friendly trading environment for price takers (small institutions and individuals), and provides generous rewards for price makers (large institutions and market makers). However, such exchanges that use the oracle model to complete pricing generally face a problem, that is, they are extremely dependent on the price data source of the head exchanges, and can only act as price takers and cannot actively conduct price discovery.

Virtual Automated Market Maker vAMM

The virtual automated market maker (vAMM) model is inspired by Uniswap's AMM model, but the difference between the two is that the AMM model provides liquidity and pricing through an actual pool of funds and corresponding exchange rates, while the vAMM's pool of funds is virtual and does not actually contain assets. It simply uses a mathematical model to simulate the buying and selling behavior of trading pairs to achieve pricing.

The vAMM model can support perpetual contract transactions without investing a lot of money or being associated with spot. Currently, the vAMM model has been adopted by perpetual contract DEXs such as Perpetual Protocol and Drift Protocol. Although vAMMs have problems with high slippage and impermanent loss, it is still an excellent on-chain pricing mechanism because of its transparency and decentralization.

Off-chain order book combined with on-chain settlement

In order to overcome the performance limitations of on-chain order matching, some DEXs have adopted a hybrid model of off-chain order books and on-chain settlement. In this model, the transaction matching process is completed off-chain, while transaction settlement and asset custody remain on-chain. In this way, the user's assets are always under their own control, which is the so-called "self-custodial". At the same time, since transaction matching is carried out off-chain, risks such as MEV are greatly reduced. This design not only retains the security and transparency of decentralized finance, but also solves problems such as MEV, providing users with a safer and more reliable trading environment.

Some well-known projects, such as dYdX v3, Aevo, and Paradex, have adopted this hybrid model. This approach improves efficiency while ensuring security, which is similar to the concept of Rollup.

Full chain order book

The full-chain order book, which publishes and processes all data and operations related to transaction orders completely on the chain, is the best traditional solution for maintaining transaction integrity. The full-chain order book is almost the safest solution, but its shortcomings are also very obvious, and it is obviously limited by the latency and throughput of the blockchain.

In addition, the full-chain order book model also faces risks such as "front-end trading" and "market manipulation". Front-end trading means that when someone submits an order, other users (usually MEV Searchers) monitor pending transactions and rush to execute the target transaction before it is executed, thereby making a profit. This situation is more common in the full-chain order book model, because all order data is publicly recorded on the chain, and anyone can view and formulate MEV strategies. At the same time, in the full-chain order book model, since all orders are transparent, some participants may take advantage of this and influence market prices through large orders and other means, thereby obtaining improper benefits.

Despite the above problems, the full-chain order book still has considerable narrative appeal in terms of decentralization and security. Public chains such as Solana and Monad are working hard to improve infrastructure and prepare for the realization of full-chain order books. Some projects such as Hyperliquid, dYdX v4, Zeta Markets, LogX, and Kuru Labs are also constantly expanding the scope of the full-chain order book model. They either innovate on existing public chains or build their own application chain to develop high-performance full-chain order book systems.

DEX liquidity acquisition and UX improvements

Liquidity is the foundation for the survival of every exchange, but how to obtain initial liquidity is a thorny issue for exchanges. In the development of DeFi, emerging DEXs generally obtain liquidity through incentives and market forces. Incentives often refer to liquidity mining, and the so-called market power is to provide traders with opportunities for arbitrage between different markets. However, as more and more DEXs emerge, the market share of a single DEX is decreasing, and it is difficult to attract enough traders to reach the "critical mass" of liquidity.

Critical mass here refers to "effective scale", which means that when something reaches a sufficient scale, it will break through the minimum cost that can maintain the development of the thing to obtain the maximum profit in the long run. If it exceeds or does not reach the effective scale, the product cannot achieve maximum profit. A good product must operate for a long time at the effective scale. As shown in the figure below, the horizontal axis is the product scale and the vertical axis is the total cost.

In DEX, critical mass refers to the transaction volume and liquidity thresholds. Only by reaching such thresholds can a stable trading environment be provided, thereby attracting more users. In perpetual contract DEX, liquidity is provided spontaneously by LPs, so a common way to achieve critical mass is to set up an LP pool with economic incentives. In this model, LPs deposit their assets into a pool and receive certain incentives to support transactions on DEX.

In order to attract LPs, many traditional DEXs offer very high annualized rates of return (APY) or airdrops. However, this approach has a drawback. In order to meet the high APY and airdrop returns, DEXs must use a large portion of the tokens as LP mining rewards. Such an economic model cannot last long and will fall into the vicious flywheel of LP mining "mining, withdrawing and selling". DEXs may also collapse soon and be unable to continue operating.

In response to the problem of obtaining initial liquidity for DEX, two new ideas have recently emerged: community-supported active liquidity vaults and cross-chain liquidity acquisition.

Hyperliquid, the perpetual contract DEX on Arbitrum, is a typical example of using community-supported active liquidity vaults. The HLP vault is one of Hyperliquid's core products, using community users' funds to provide liquidity for Hyperliquid. The HLP vault calculates fair prices by integrating data from Hyperliquid and other exchanges, and executes profitable liquidity strategies across multiple assets. The gains and losses (P&L) generated by these operations will be distributed according to the community participants' shares in the vault.

Cross-chain liquidity allocation was proposed by Orderly Network and LogX Network. These projects allow the creation of a front-end for perpetual contract trading on any chain and leverage liquidity across all markets. The so-called "inter-market liquidity leverage" refers to the integration and utilization of liquidity resources across multiple markets or public chains. This method enables trading platforms to obtain liquidity on different markets or public chains.

By combining on-chain native liquidity, cross-chain aggregated liquidity, and creating discrete asset market neutral (DAMN) AMM pools, LogX is able to maintain liquidity during periods of market volatility. These pools use stable assets such as USDT, USDC, and wUSDM to enable perpetual contract trading with the help of oracles. Currently, these infrastructures also make it possible to develop a variety of applications.

In today's DEX field, competition in user experience UX is intensifying. When DEX first emerged, simple improvements to the user interface could significantly improve UX. As user interfaces gradually converged, DEX began to compete in UX by introducing features such as gas-free transactions, session keys, and social login.

In fact, CEX is usually more deeply integrated in the ecosystem, not only providing core trading services, but also acting as a user entrance and cross-chain bridge, while DEX is usually confined to a single ecosystem. Now cross-chain DEX is breaking this limitation. For example, DEX aggregators can integrate the liquidity and price information of multiple DEXs into one interface to help users find the best trading pairs and slippages. It can be understood as a trading router.

Many DEX aggregators, such as Vooi.io, are developing smart routing systems that integrate the functions of multiple DEXs and cross-chain bridges to provide a simple and friendly trading experience. Such DEX aggregators can find the most efficient transaction paths on multiple chains, making the transaction process simpler and less costly. Most importantly, users can manage complex transaction paths through a simple interface.

In addition, Telegram trading robots are also constantly optimizing UX. Such robots can provide real-time trading reminders, execute transactions, and manage portfolios, and can be easily completed directly in the Telegram chat interface. This deep integration enhances the convenience and participation of transactions, making it easier for traders to obtain information and seize market opportunities. Of course, Telegram robots also have major risks: users need to provide their private keys to the robots, which may face security risks.

Innovative financial products in perpetual contract DEX

Many perpetual contract DEXs on the market have been continuously launching new financial products, or optimizing the trading mechanisms of existing products to simplify the trading process, in order to better meet the ever-changing needs of traders. Let us briefly introduce these products.

Variance Perpetual Contract

Variance is a common statistical indicator that aims to reflect the degree of dispersion of a set of data. As the name suggests, the trading content of the variance perpetual contract is no longer the price of the underlying asset, but the volatility of the asset.

For example, suppose you believe that the price of BTC will fluctuate violently, but you are not sure about the direction of the change. In this case, you can buy a BTC variance perpetual contract and bet on the event that "the price of BTC will fluctuate violently over a period of time". You will make a profit regardless of whether BTC rises or falls, or whether it fluctuates violently.

In addition, variance perpetual contracts can also hedge risks. For example, in the above example, once BTC falls sharply, since you hold variance perpetual contracts, the contract income will offset part of the loss.

Opyn, a decentralized perpetual contract exchange, is leveraging existing market resources to develop novel variance perpetual contract products that can not only simulate complex strategies and hedge risks, but also improve capital efficiency.

Opyn’s perpetual contract products 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 contract product has its specific purpose:

Stable Perps provides a solid foundation for trading strategies; Uniswap LP Perps can reflect LP's performance without directly providing liquidity; Normal Perps is the most common contract type; and Squared Perps can amplify profit potential through secondary exposure.

These perpetual contracts can be combined into more complex strategies. For example, the "Crab Strategy": by shorting 2-perps and going long 1-perps, you can earn funding rates in a stable market while maintaining a balanced directional exposure. Another example is the "Zen Bull Strategy": by combining shorting 2-perps, going long 1-perps, and shorting 0-perps, you can earn funding rate income while maintaining a long exposure in a stable market.

Pre-Launch Contract

Pre-Launch perpetual contracts allow traders to speculate on the future price of a token before it is officially launched. It can be understood as an on-chain version of IPO OTC, allowing investors to build positions in advance based on the expected market value. Several perpetual contract DEXs such as Aevo, Helix, and Hyperliquid have pioneered a new model for Pre-Launch. The main advantage of Pre-Launch contracts is that they can provide exclusive assets that are not available through other channels to attract and retain users.

RWA asset perpetual contract

RWA asset perpetual contracts may become the main way to put real assets on the chain. Compared with directly tokenizing RWA assets, it is simpler to put them on the chain in the form of perpetual contracts, which only requires liquidity and price oracles. Moreover, even if there is no spot market on the chain, a perpetual contract market with good liquidity can be built, because perpetual contract transactions can operate independently from spot.

Perpetual contract trading is the first step for RWA assets to move towards spot tokenization. Once enough attention and liquidity are accumulated through the perpetual contract market, spot tokenization can be further promoted. Combining spot and perpetual contracts for RWA can provide new ways to predict market sentiment, event-driven trading, and execute cross-asset arbitrage strategies. Currently, companies such as Ostium Labs and Sphinx Protocol are gradually emerging in the field of RWA contracts.

ETP Perpetuals

ETPs track the performance of some underlying asset or index, and their value is usually based on the performance of the underlying asset, such as stocks, bonds, commodities, currencies or other asset combinations. Common ETPs include:

ETFs: Track the performance of a specific index or industry.

ETNs: Similar to bonds, but their returns are tied to the performance of an underlying index or asset.

ETC: Focuses on the commodity market and tracks commodity prices.

ETP perpetual contracts can also be used to create ETPs that hold expiring futures contracts, such as ETFs - USO (futures of West Texas Intermediate crude oil WTI) and ETN - VXX (S&P 500 Volatility Index VIX futures). Because there is no need for rollover operations, ETP perpetual contracts can reduce transaction fees and reduce the risk of net asset value (NAV) depreciation. For companies that require long-term economic exposure protection but do not require physical delivery, perpetual contracts can significantly reduce operating costs.

In addition, for those situations where speculation or hedging of foreign currency risk is limited, 30-day or 90-day forward contracts are usually involved. Such contracts are not standardized and need to be traded over the counter, which is very risky. However, in this case, perpetual contracts settled in US dollars can be used instead, simplifying operations and reducing related risks.

Prediction markets

Prediction market is a noun and a branch of financial market where participants can trade and bet on the outcomes of future events, such as election results, sports game wins and losses, changes in economic indicators, etc.

Perpetual contract DEX can revolutionize prediction markets by providing a flexible and continuous trading mechanism, especially in irregular events such as elections or irregular weather forecasts. Unlike traditional prediction markets that rely on real events or oracles, perpetual contracts allow prediction markets to be created based on the market's own constantly updated data.

This brings significant advantages: Continuous updates of data can generate multiple submarkets in long-term prediction markets, such as during an election, where submarkets can trade around a change in support for a candidate after a specific debate. Due to the existence of sub-markets, users do not have to wait for the final results of long-term events to participate in transactions. Instead, they can conduct buying and selling operations based on short-term market fluctuations, such as the impact of a certain news event, the release of data at a certain moment, etc. This provides users with short-term trading opportunities and brings instant trading gratification.

The continuous real-time settlement of perpetual contracts ensures the stability of market activities, enhances liquidity and improves user participation. In addition, the community-controlled perpetual contract market incentivizes participation through reputation and token reward mechanisms, laying the foundation for decentralized prediction markets. This design makes market creation more democratic and provides scalable solutions for various prediction scenarios.

Future Prospects of Perpetual Contract DEX

With the development of the crypto-financial system, the design of perpetual contract DEX is also constantly being optimized. The focus in the future may not only be to replicate the functions of CEX, but to better leverage the unique advantages of decentralization - transparency, composability and user empowerment, so as to design some new functions. The ideal perpetual contract DEX design needs to find a delicate balance between efficiency and security.

In addition, perpetual contract DEXs are also paying more and more attention to the participation of communities and developers, and increasing users' sense of belonging and loyalty through various mechanisms. Community-led measures such as using Hyperliquid robots for market making can enable more users to participate in trading activities fairly and truly implement the inclusiveness of decentralized trading.

In order to promote the mass adoption of cryptocurrencies, it is crucial to create a platform that is integrated and user-friendly like iOS. To this end, it is necessary to develop a more intuitive user interface and ensure the smoothness of the entire usage process. In addition, perpetual contract DEXs such as Hyperliquid, LogX and dYdX cover markets beyond finance, including elections, sports and other fields, providing new ways for the public to participate in crypto transactions.

In the past decade, the development of DeFi has mainly focused on DEX, lending, and stablecoins. In the next decade, DeFi may cross-integrate with multiple fields such as news, politics, and sports, and is expected to become a widely used tool, further promoting the mass adoption of cryptocurrencies.