What are decentralized perpetual futures in crypto?

Futures Contract

In traditional finance, a futures contract is an agreement to buy or sell an asset on a future date. These contracts are meticulously standardized, including details such as the asset’s quality, quantity, price, delivery location, and date. Futures can encompass a wide array of assets — from commodities like eggs and oil to various currencies.

Perpetual Futures Contract

A perpetual futures contract is a revolutionary futures contract without an expiration date. Their prices follow an underlying price, which comes from the main market prices. This new type started with cryptocurrencies in 2016 by BitMEX. Now, they’re very popular, and on platforms like Surf Protocol, you can trade them with many types of cryptocurrencies.

When comparing perpetual futures with regular spot trading (buying and selling assets directly), there are a few key differences:

1. Ownership: In spot trading, you actually own the asset. With perpetual futures, you deal with contracts that track the asset’s price but don’t involve owning the asset.
2. Leverage: Perpetual futures let you control big positions with less money, which means you can make bigger bets.
3. Funding: With perpetual futures, there’s a system of funding payments that helps keep the contract price close to the actual market price. This means people holding these contracts might pay or get paid money regularly to balance things out.

People like trading perpetual futures because they can bet on prices going down, not just up, which you can’t do with just spot trading. They also let traders use leverage to take bigger positions. Plus, they can be used to manage risk by balancing out what you own directly, helping protect against sudden price changes.

Decentralized Perpetual Futures Contract

While perpetual futures contract is a popular product on centralized exchanges, a lot of experienced traders have moved their perpetual trading on-chain on decentralized exchanges like Surf Protocol. There are a few key benefits:

1. Decentralization: One of the main attractions of DEXs is their decentralized nature, meaning they don’t have a single point of control. This reduces the risk of hacking, server downtime, and interference from any central authority, giving traders a sense of security and autonomy over their funds.
2. Anonymity: DEXs typically require less personal information from users. This privacy feature is particularly appealing to those who wish to keep their trading activities and identities confidential.
3. Accessibility and Inclusivity: DEXs are accessible to anyone with an internet connection and a cryptocurrency wallet. This open-access model is in stark contrast to some CEXs, which may restrict users based on geography or require extensive verification processes.
4. Full Control Over Funds: When trading on a DEX, users retain full control of their funds, interacting directly with the smart contracts on the blockchain. This eliminates the need to trust a centralized entity with one’s assets, reducing the risk of theft or loss due to exchange breaches.
5. Lower Fees: Without the overhead of a centralized entity, DEXs can sometimes offer lower trading fees. Additionally, the peer-to-peer nature of DEXs can result in more competitive rates for traders.
6. No Single Point of Failure: Because DEXs are distributed across many computers (nodes) on the blockchain, they are less likely to experience downtime or loss of service, unlike CEXs, which might suffer from server issues or maintenance downtimes.
7. Community Governance: Many DEXs operate with a governance model that allows token holders to vote on key decisions, such as protocol upgrades and fee structures. This democratic approach can align the platform more closely with the interests of its users.

While DEXs offer these advantages, it’s important to note that they also come with their own set of challenges, such as sometimes complex user interfaces and lower liquidity compared to established CEXs. However, for many in the crypto community, the benefits of decentralized trading outweigh these drawbacks, driving the popularity of perpetual contracts on DEX platforms.