The Evolution of Perpetual Futures DEX: From Niche Trading Venue to Engine Driving On-Chain Adoption

Perptual Futures DEX is rapidly developing, making significant progress in efficiency, speed, and scalability. This article aims to illustrate that Perptual Futures DEX is not limited to trading scenarios but is also expanding the application scope of blockchain, paving the way for the large-scale adoption of web3.

Exchanges are the core of the cryptocurrency market, supporting market operation through user trading activities. The primary goal of any exchange is to achieve efficient, fast, and secure trade 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, looking back at the history of DeFi development, it can be seen that while DEXs have several advantages, they often come at the cost of higher latency and lower liquidity, which is mainly limited by the throughput and latency of the blockchain.

According to the data, the spot trading volume of DEX accounts for 15%-20% of the total trading volume in the crypto market, while Perptual Futures trading only accounts for 5%. Developing Perptual Futures business on DEX is not easy, as CEX has advantages in product experience, market maker control, liquidity, and functionality.

The centralization and monopoly of CEX have become issues that users cannot ignore. By increasing the usage and market share of DEX, systemic risks can be effectively reduced, promoting the sustainable development of the crypto ecosystem.

The rise of Ethereum Layer 2 and multi-chain ecosystems has provided innovation for liquidity sources and user experience, creating excellent conditions for the development of DEX. Now is a great time for the development of Perptual Futures DEX.

Perptual Futures in the Product Market Fit of the Crypto Ecosystem

Perptual Futures allow traders to hold positions indefinitely, similar to over-the-counter futures trading in traditional financial markets. The difference is that Perptual Futures introduce the concept of funding rates, enabling more retail investors to participate, while also creating a "underdamped effect" that prevents the long-short structure from becoming excessively imbalanced to a certain extent.

The current monthly trading volume of the Perptual Futures market has exceeded $120 billion. In addition, projects like Ethena that use Perptual Futures as an underlying mechanism bring diversified uses to Perptual Futures beyond speculation.

Perptual Futures have four advantages over traditional futures contracts:

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

Since BitMEX introduced Perptual Futures in 2016, Perptual Futures DEXs have started to develop rapidly. Today, there are active Perptual Futures DEXs on various chains, and contract trading has become an indispensable part of the crypto ecosystem.

Research shows that as the trading volume of Perptual Futures increases, the Perptual Futures market has begun to exhibit price discovery functions when the spot market is inactive. The trading volume of Perptual Futures on DEX has grown from $1 billion in July 2021 to $120 billion in July 2024, with a compound annual growth rate of approximately 393%.

However, perpetual futures DEX faces bottlenecks due to blockchain performance limitations. To further advance the market, it is essential to address the two core issues of low on-chain liquidity and high latency.

Pricing Model of Perptual Futures DEX

In the Perptual Futures DEX, the pricing mechanism is key to ensuring that market prices accurately reflect supply and demand dynamics. Different DEXs have adopted various pricing mechanisms to balance liquidity and reduce volatility. The main models include:

Oracle Mode

This refers to DEX obtaining price data from major exchanges with high trading volumes to provide services. Despite the risk of price manipulation, it can reduce the pricing costs of DEX. For example, GMX obtains price data through Chainlink oracles to ensure accuracy and completeness. However, such exchanges are heavily reliant on the price data sources of major exchanges and can only act as price takers, unable to actively engage in price discovery.

Virtual Automated Market Maker vAMM

The vAMM model is inspired by Uniswap's AMM model, but the liquidity pool of vAMM is virtual, using a mathematical model to simulate the buying and selling behavior of trading pairs for pricing. The vAMM model supports Perpetual Futures trading without the need to invest a large amount of capital and does not have to be associated with spot trading. It is currently adopted by Perpetual Protocol, Drift Protocol, and others. Despite the issues of high slippage and impermanent loss, it remains an excellent on-chain pricing mechanism due to its transparency and decentralization features.

Off-chain order book combined with on-chain settlement

To overcome the performance limitations of on-chain order matching, some DEXs adopt a hybrid model of off-chain order books and on-chain settlement. Trade matching is completed off-chain, while settlement and asset custody occur on-chain. User assets are always self-custodied, greatly reducing risks such as MEV. dYdX v3, Aevo, and Paradex adopt this model, improving efficiency while ensuring security.

Full Chain Order Book

All data and operations related to trading orders are fully published and processed on-chain. It is nearly the safest solution, but it is subject to blockchain latency and throughput limitations. It faces risks such as "front-running" and "market manipulation." Public chains like Solana and Monad are working to improve infrastructure in preparation for a full on-chain order book. Projects like Hyperliquid, dYdX v4, Zeta Markets, LogX, and Kuru Labs are also continuously expanding the scope of the full on-chain order book model.

Liquidity Acquisition and User Experience Improvement for DEX

Liquidity is the foundation for the survival of exchanges, but acquiring initial liquidity is a tricky issue. Emerging DEXs generally obtain liquidity through incentives and market forces. However, as the number of DEXs increases, the market share of each individual DEX decreases, making it difficult to attract enough traders to reach the "critical mass" of liquidity.

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

Hyperliquid is a typical case of using a community-supported active liquidity vault. The HLP vault utilizes community user funds to provide liquidity for Hyperliquid, calculates fair prices by aggregating data from multiple exchanges, and executes profitable liquidity strategies.

Cross-chain liquidity allocation is proposed by Orderly Network and LogX Network. It allows the creation of Perptual Futures trading front-ends on any chain, enabling the leverage of liquidity across all markets. LogX maintains liquidity during significant market fluctuations by combining on-chain native liquidity, cross-chain aggregated liquidity, and the creation of discrete asset market-neutral AMM pools.

In terms of user experience, DEX competes by introducing features such as gas-free transactions, session keys, and social logins. Cross-chain DEX is breaking ecological limits, and DEX aggregators are integrating the liquidity and price information of multiple DEXs into a single interface. Platforms like Vooi.io are developing intelligent routing systems that integrate multiple DEXs and cross-chain bridge functionalities to provide a streamlined and user-friendly trading experience.

The Telegram trading bot is also continuously optimizing the user experience, providing features such as real-time trading alerts, executing trades, and managing portfolios. However, users need to provide their private keys to the bot, which may pose security risks.

Innovative Financial Products in Perptual Futures DEX

Variance Perptual Futures

The trading content is the volatility of the underlying asset rather than the price. Opyn is developing innovative variance Perptual Futures products, including Stable Perps, Uniswap LP Perps, Normal Perps, and Squared Perps. These contracts can be combined into more complex strategies, such as the "Crab Strategy" and the "Zen Cow Strategy."

Pre-Launch Perptual Futures

Allow traders to speculate on the future price of tokens before they officially launch. Aevo, Helix, and Hyperliquid have pioneered this new model. The main advantage lies in providing exclusive assets that cannot be obtained through other channels.

RWA Asset Perptual Futures

It may become the main way to put real-world assets on-chain. Compared to directly tokenizing RWA asset spot, putting it on-chain in the form of Perptual Futures is simpler. Companies like Ostium Labs and Sphinx Protocol are gradually emerging in this field.

ETP Perptual Futures

Can be used to create ETPs that hold expiration futures contracts, such as ETF-USO and ETN-VXX. No roll-over operations are required, which can reduce trading costs and the risk of net asset value depreciation. For companies that need long-term economic exposure protection but do not require physical delivery, operational costs can be significantly reduced.

Prediction Market

Perptual Futures DEX can change prediction markets by providing a flexible and continuous trading mechanism, especially for irregular events such as elections or non-regular weather forecasts. Unlike traditional prediction markets, Perptual Futures allow the creation of prediction markets based on the continuously updated data of the market itself.

This brings significant advantages: continuous data updates can generate multiple sub-markets in long-term market predictions. Users can participate in trading without waiting for the final results of long-term events and can buy and sell based on short-term market fluctuations. The continuous real-time settlement of Perptual Futures ensures market activity stability, enhances liquidity, and increases user participation.

Future Outlook of Perptual Futures DEX

The future focus may not only be on replicating CEX functions but also on better leveraging the unique advantages of decentralization. Ideal designs need to strike a balance between efficiency and security. There is an increasing emphasis on community and developer participation, enhancing user belonging and loyalty through various mechanisms.

To promote the widespread adoption of cryptocurrencies, it is necessary to develop more intuitive user interfaces to ensure a smooth overall usage process. Markets covered by Hyperliquid, LogX, and dYdX not only include finance but also areas like elections and sports, providing new avenues for the public to participate in crypto trading.

In the next decade, DeFi may intersect and integrate with various fields such as news, politics, and sports, and is expected to become a widely used tool, further driving the large-scale adoption of cryptocurrencies.