Overview of Perptual Futures DEX Track: Models, Ecosystem, and Prospects

In today's crypto market, Perptual Futures DEX is rapidly developing, with significant advancements in efficiency, speed, and scalability. This article aims to clarify 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 crypto market, supporting market operations through user-to-user transactions. The primary goal of any exchange is to achieve efficient, fast, and secure trade matching. Based on this, DEX innovates on the foundation of CEX by eliminating trust assumptions, avoiding intermediaries and centralized control, allowing users to retain control over their funds, and enabling community participation in product updates, iterations, discussions, and governance.

However, looking back at the history of DeFi development, it can be seen that while DEX has advantages, it often comes at the cost of higher latency and lower liquidity, mainly constrained by blockchain throughput and latency.

According to the data, the current DEX spot trading volume accounts for 15%-20% of the total trading volume in the cryptocurrency market, while Perptual Futures trading only accounts for 5%.

Developing Perptual Futures business on DEX is not easy, because CEX has several advantages in Perptual Futures trading:

1. Better product experience

2. Market makers efficiently control to provide finer spreads

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

4. Multiple functions in one-stop combination ( spot trading, derivatives, OTC and various scenarios can be directly nested and combined )

The centralization and monopoly of CEX has become an issue that users can no longer ignore, especially with the collapse of FTX further exacerbating the trend of centralization. Nowadays, the CEX space is almost entirely dominated by a few giants, and this centralization brings systemic risks to the crypto ecosystem. By increasing the usage rate and market share of DEX, such risks can be effectively reduced, promoting the sustainable development of the entire crypto ecosystem.

The rise of Ethereum Layer 2 and multi-chain ecosystems provides innovation for liquidity sources and UX, creating excellent conditions for the development of DEX. It is currently a good time for the development of Perptual Futures DEX. This article will explore the current state of Perptual Futures DEX and introduce some design concepts of DEX.

The PMF of Perptual Futures in the Crypto Ecosystem: Becoming an Important Tool for Speculation and Hedging

Perptual Futures allow traders to hold positions indefinitely, which is very similar to over-the-counter futures trading in traditional financial markets over the years. The difference is that Perptual Futures popularize this trading method, which in traditional finance is only available to accredited investors, by introducing the concept of funding rates, allowing more retail investors to participate, while also creating a "under-damping effect" that prevents excessive imbalance in the long-short structure to a certain extent.

The current monthly trading volume of the Perptual Futures market has exceeded 120 billion USD, a scale made possible by the exchange providing a good user experience, the order book mechanism promoting trading efficiency, and the vertically integrated clearing system ensuring that clearing is completed quickly and securely.

In addition, projects like Ethena that utilize Perptual Futures as the underlying mechanism bring diversified uses to Perptual Futures beyond speculation. Generally, Perptual Futures have four advantages over traditional futures contracts:

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

2. Avoid making the forward contracts more expensive

3. The funding rate system provides continuous real-time profit and loss, simplifying the processing flow for contract holders and the clearing system backend.

4. Perptual Futures provide a smoother price discovery process, avoiding sharp fluctuations caused by overly coarse price granularity.

Since BitMEX first introduced Perptual Futures in 2016, the Perptual Futures DEX has rapidly developed, and now there are over 100 DEXs supporting Perptual Futures in the market. In the early days, the scale of Perptual Futures DEX was very small. In 2017, dYdX launched on the Ethereum ecosystem and has long dominated the Perptual Futures market. As a result, decentralized Perptual Futures trading was mainly concentrated on Ethereum, and the contract trading volume was very low at that time. Today, active Perptual Futures DEXs can be seen on various chains, and contract trading has become an indispensable part of the crypto ecosystem.

Multiple studies indicate that as the trading volume of Perptual Futures increases, the Perptual Futures market has begun to exhibit price discovery functions during periods of inactivity in the spot market. The trading volume of Perptual Futures on DEX has grown from $10 billion on July 2021 to $120 billion by July 2024, with a compound annual growth rate of approximately 393%.

However, the Perptual Futures DEX faces bottlenecks due to blockchain performance limitations. To further promote the development of the Perptual Futures market, it is essential to address two core issues: low on-chain liquidity and high latency. High liquidity can reduce slippage, making trades smoother and minimizing user losses; low latency allows market makers to quote tighter prices, enabling fast execution of trades and enhancing market fluidity.

Perptual Futures DEX Pricing Model

In Perptual Futures DEX, the pricing mechanism is key to ensuring that market prices accurately reflect supply and demand dynamics. Different Perptual Futures DEXs adopt various pricing mechanisms to balance liquidity and reduce volatility. Below is a brief introduction to several major models:

Oracle Mode

The oracle model refers to how perpetual futures DEX obtains price data from large-volume leading exchanges and provides services based on that data. Although there is a risk of price manipulation, it can reduce the pricing costs for DEX. For example, the decentralized perpetual futures exchange GMX.

By using Chainlink oracles to obtain price data, GMX ensures the accuracy and integrity of prices, creating a friendly trading environment for price takers such as small institutions and individuals (, while providing generous rewards for price makers like large institutions and market makers ). However, exchanges that use the oracle model to complete pricing are generally heavily reliant on the price data sources from leading exchanges, functioning only as price takers and unable to actively engage in price discovery.

( Virtual Automated Market Maker vAMM

The virtual automated market maker ) vAMM ### model is inspired by Uniswap's AMM model, but the difference is that the AMM model provides liquidity and pricing through actual liquidity pools and corresponding exchange rates, while the vAMM's liquidity pool is virtual, not holding real assets, but simulating trading behaviors through a mathematical model to achieve pricing.

The vAMM model supports Perpetual Futures trading, requiring no large capital investments and not necessarily associated with spot trading. It has currently been adopted by perpetual futures DEXs such as Perpetual Protocol and Drift Protocol. Although vAMMs have issues with high slippage and impermanent loss, they remain an excellent on-chain pricing mechanism due to their transparency and decentralization.

( Off-chain order book combined with on-chain settlement

To overcome the performance limitations of on-chain order matching, some DEXs adopt a mixed model of off-chain order books and on-chain settlement. In this model, the trading matching process is completed off-chain, while trade settlement and asset custody remain on-chain. This way, user assets are always under their control, known as "self-custodial ) self-custodial ###". At the same time, since the trading matching is conducted off-chain, risks such as MEV are significantly reduced. This design retains the security and transparency of decentralized finance while addressing issues like 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 puts all data and operations related to trading orders entirely on-chain for publication and processing, is the optimal solution for maintaining trading integrity among traditional schemes. The full-chain order book is almost the safest solution, but its drawbacks are also very apparent, being significantly affected by blockchain latency and throughput limitations.

In addition, the full-chain order book model also faces risks such as "front-running" and "market manipulation". Front-running refers to situations where, when someone submits an order, other users ), typically MEV Searchers ###, monitor pending transactions to jump ahead of the target transaction execution to make a profit. This situation is relatively common in the full-chain order book model because all order data is publicly recorded on the chain, allowing anyone to view it and formulate MEV strategies. At the same time, in the full-chain order book model, due to the transparency of all orders, certain participants may take advantage of this by influencing market prices through large orders and other means to gain improper benefits.

Despite the above issues with the full-chain order book, it still has considerable narrative appeal in terms of decentralization and security. Public chains like Solana and Monad are working hard to improve infrastructure in preparation for the realization of full-chain order books. Some projects such as Hyperliquid, dYdX v4, Zeta Markets, LogX, and Kuru Labs are also continuously expanding the scope of full-chain order book models, innovating on existing public chains or building their own application chains to develop high-performance full-chain order book systems.

DEX Liquidity Acquisition and UX Improvement

Liquidity is fundamental for the survival of every exchange, but how to acquire initial liquidity is a tricky issue for exchanges. In the development of DeFi, emerging DEXs generally obtain liquidity through incentives and market forces. Incentives often refer to liquidity mining, while market forces refer to providing traders with arbitrage opportunities between different markets. However, as more DEXs emerge, the market share of individual DEXs decreases, making it difficult to attract enough traders to reach the "critical mass" of liquidity.

The term "Critical mass" here refers to "effective scale," which means that when a certain entity reaches a sufficient scale, it breaks through the minimum cost required to sustain its development in order to achieve maximum long-term profit. When above or below the effective scale, products cannot achieve profit maximization; good products must operate for a long time at the effective scale.

In DEX, critical mass refers to the threshold of trading volume and liquidity. Only by reaching this threshold can a stable trading environment be provided, thereby attracting more users. In perpetual futures DEX, liquidity is voluntarily provided by LPs, so a common method to reach critical mass is to set up LP pools with economic incentives. In this model, LPs deposit assets into a pool and receive certain incentives to support trading on the DEX.

Many traditional DEXs offer high annualized yield rates ( APY ) or airdrop activities to attract LPs, but this method has a drawback: to meet high APY and airdrop returns, DEXs must allocate a large portion of Tokens as LP mining rewards. Such an economic model cannot last long and may fall into a vicious cycle of "mining to withdraw and sell". DEXs may also quickly collapse and fail to operate sustainably.

To address the issue of acquiring initial liquidity for DEX, two new ideas have recently emerged: community-supported active liquidity vaults and cross-chain liquidity acquisition.

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

Cross-chain liquidity allocation is proposed by Orderly Network and LogX Network, among others. These projects allow the creation of front-ends for perpetual futures trading on any chain and achieve liquidity leverage across all markets. The so-called "liquidity leverage across markets" refers to the integration and utilization of liquidity resources across multiple markets or public chains, enabling trading platforms to access liquidity on different markets or public chains.

By combining on-chain native liquidity, cross-chain aggregated liquidity, and creating discrete asset market neutral (DAMN, it refers to integrating various independent assets to build a portfolio that is insensitive to market conditions, hedging the impact of market fluctuations on the portfolio )'s AMM pool. LogX can maintain liquidity during periods of severe market volatility. These pools use stable assets such as USDT, USDC, and wUSDM, leveraging oracles to enable Perptual Futures trading. The aim