Understanding Perpetual Exchanges: A Dive into DeFi Perpetual DEXes
Perpetual futures, or perpetual swaps, have become a cornerstone of modern cryptocurrency trading. Unlike traditional futures contracts, perpetual futures do not have an expiration date, allowing traders to hold positions indefinitely. This flexibility has significantly contributed to their popularity in both centralized (CeFi) and decentralized finance (DeFi) markets (Kraken) (AlphaPoint).
How Perpetual Futures Work
Perpetual futures are financial instruments that allow traders to speculate on the price movements of an asset without actually owning it. These contracts are similar to traditional futures but with a key difference: they do not have a settlement date. Instead, perpetual futures are designed to closely track the underlying asset’s price through a mechanism known as funding payments. (BlockchainSimplified)
The funding rate is a periodic payment exchanged between long and short positions. When the price of the perpetual contract is higher than the spot price, the funding rate is typically positive, and traders holding long positions pay this fee to traders holding short positions, and vice versa. This mechanism ensures that the contract price remains anchored to the underlying asset’s price over time (Investopedia) (Kraken).
The Rise of Perpetual Futures
Perpetual futures gained traction due to several advantages they offer over traditional futures and spot trading. One significant benefit is the ability to leverage trades, allowing traders to amplify their exposure to price movements without needing to hold the actual asset. This has made perpetual futures particularly appealing to traders looking to maximize their returns on smaller capital bases (Binance Academy).
Additionally, perpetual futures provide continuous trading opportunities without the need to roll over contracts as with traditional futures. This convenience, combined with the ability to short-sell easily, has attracted a wide range of traders, from retail investors to institutional players (Kraken) (CoinTelegraph).
In DeFi, perpetual futures have further democratized trading by removing intermediaries and enabling users to trade directly from their wallets on decentralized exchanges (DEXs). This aligns with the broader ethos of DeFi, which aims to create a more open and inclusive financial system (Binance Academy).
The Role of Funding Rates
The funding rate is a crucial component of perpetual futures, ensuring that the contract price stays aligned with the underlying asset’s price. Funding rates are determined by market forces and can fluctuate based on the demand for long and short positions. When there are more long positions, the funding rate increases, and long position holders pay a fee to short position holders. Conversely, when short positions dominate, the funding rate turns negative, and short position holders pay long position holders (Investopedia) (Kraken).
These periodic payments occur at regular intervals, typically every eight hours, and the rates can vary significantly depending on market conditions. Traders need to consider these rates when holding positions for extended periods, as they can impact overall profitability (Binance Academy) (Drift)
Current State of the Perpetual Futures Market in DEX
Leading Platforms
The decentralized perpetual futures market is rapidly evolving, with several platforms standing out due to their innovative features and significant trading volumes.
ApeX Protocol
ApeX Protocol is a leading permissionless and non-custodial decentralized exchange (DEX), established in 2022.(ApexProtocol) Demonstrating significant traction and impressive metrics, ApeX Protocol showcases its robust performance and growing user base:
- Total Trading Volume: $61.45 billion
- Total Trades: 66.86 million
- Open Interest: 60.85 million
These metrics reflect ApeX Protocol’s capability to handle large volumes of transactions efficiently while maintaining high liquidity and security.
ApeX Pro
The protocol’s inaugural product, ApeX Pro, facilitates decentralized derivatives trading through an orderbook model. It offers USDC and USDT cross-margined perpetual contracts across 45+ pairs with up to 50x leverage.
ApeX Omni
The newest product, ApeX Omni, is a modular, intent-centric, and chain-agnostic DEX. It aims to redefine the decentralized trading experience with an aggregated multichain liquidity trading framework. ApeX Omni’s innovative features and robust performance enhance the DEX trading experience by providing a diverse range of trading products, deep liquidity, and a seamless user experience.
GMX
GMX is a prominent decentralized exchange (DEX) specializing in perpetual futures. Operating primarily on the Arbitrum network, GMX has achieved a Total Value Locked (TVL) exceeding $400 million and facilitated over $108 billion in trading volume. The platform’s unique selling points include zero price impact trades and low flat fees, making it a preferred choice among traders. GMX’s V2 launch is anticipated to enhance capital efficiency and introduce isolated liquidity for each market, expanding its reach and capabilities (CoinGecko) (CrypticEra).
dYdX
dYdX is another key player in the decentralized perpetual futures market, offering trading on Ethereum Layer 2 solutions. It supports a wide range of trading pairs and provides up to 20x leverage for major cryptocurrencies like Bitcoin and Ethereum. dYdX’s fully collateralized system and low trading fees have contributed to its popularity. The platform plans to launch its own chain via the Cosmos Tendermint network, further increasing its scalability and user base (CrypticEra)
Why USDC and USDT Are Preferred as Margin Collateral in Perpetual Futures Markets
In the perpetual futures market, the most commonly used currencies for margin collateral are indeed USDC (USD Coin) and USDT (Tether). Both of these stablecoins are highly favored for their stability, as they are pegged to the value of the US dollar, providing a reliable and less volatile form of collateral compared to other cryptocurrencies. (HtxOfficial)
Stability
As stablecoins, both USDC and USDT maintain a stable value relative to the US dollar. This stability is crucial for margin trading, as it helps traders avoid the additional risk of collateral value fluctuation that could trigger unexpected liquidations.
Liquidity
Both USDC and USDT are widely used and accepted across numerous trading platforms, providing deep liquidity. This ensures that traders can easily deposit and withdraw these stablecoins, facilitating smoother trading operations (Koinly) (Gilded Blog).
Transparency and Trust
USDC is known for its transparency and regulatory compliance, with regular audits confirming that its reserves fully back the tokens in circulation. This transparency has made it particularly popular among institutional traders and those who prioritize regulatory compliance (Koinly). On the other hand, despite past controversies regarding its reserves, USDT remains the most widely adopted stablecoin globally, mainly due to its early entry into the market and broad support across exchanges and DeFi platforms (Koinly).
How USC Can Transform the Perpetual Futures Market
The Chi Protocol’s stablecoin, USC, represents a groundbreaking development in the stablecoin landscape, addressing key issues of scalability, decentralization, and yield generation. USC’s unique features make it a promising candidate for becoming the primary currency used as collateral in perpetual decentralized exchanges (DEXs).
Enhancing Decentralization and Censorship Resistance
USC is backed by decentralized Liquid Staking Tokens (LSTs), which not only stabilize its value but also generate yield. This decentralized backing enhances the censorship resistance of the stablecoin, making it a robust alternative to fiat-collateralized and centralized stablecoins like USDT and USDC. By utilizing decentralized assets, USC reduces reliance on centralized entities, thus mitigating centralization risks and enhancing the overall security and integrity of the DeFi ecosystem.
Yield-Bearing Collateral
One of USC’s most compelling features is its ability to generate yield from the LSTs that back it. The arbitrage revenue generated from the dual stability mechanism (DSM) plays a crucial role in maintaining stability and providing profit opportunities.
The dual stability mechanism ensures that the price of USC remains stable at 1 USD by allowing users to mint and redeem USC while also taking advantage of arbitrage opportunities. Arbitrage data, including variables such as isPriceAboveTarget, isExcessOfReserves, reserveDiff, delta, and discount, are essential in identifying and executing these opportunities.
There are six different arbitrage opportunities based on the price of USC relative to its target and the value of reserves compared to the USC supply. For instance, when the USC price is above the target and reserves are in excess, or when the price is below the target with reserves in deficit, users can call specific arbitrage functions. These functions reward users in various currencies: ETH for above-peg opportunities, USC for below-peg opportunities, and CHI for at-peg scenarios, with profits arising because smart contracts always price USC at 1 USD.
Furthermore, users can mint USC by depositing ETH, stETH, or WETH and can redeem USC for WETH, with a protocol fee of 0.3% applied to both processes. This system not only maintains the stability of USC but also provides users with multiple ways to generate revenue through yield and arbitrage opportunities. Each week, the Dual Stability Mechanism (DSM) of the Chi Protocol generates arbitrage rewards. (Chi Protocol)
This intrinsic yield benefits all stakeholders, including users and stakers of the Chi Protocol’s governance token, CHI. In the context of perpetual futures trading, this yield-bearing characteristic can significantly enhance the profitability and appeal of stUSC as a margin collateral. Users can get stUSC by staking USC.
Benefits for Perpetual Futures Traders
Practical Examples
- Using stUSC as Collateral to Short the Perp with Positive Funding (Increased Funding Payment): When funding rates are positive, shorting a perpetual contract means receiving funding payments from long traders. By using stUSC, which generates yield, traders not only receive funding payments but also the rewards generated by stUSC
- Using stUSC as Collateral to Short the Perp with Negative Funding (Reduced Funding Cost): In a scenario where funding rates are negative, shorting a perpetual contract results in paying funding to long traders. With stUSC generating additional yield, traders reduce the effective cost of holding a short position is reduced
- Using stUSC as Collateral to Long the Perp with Negative Funding (Increased Funding Payment): When funding rates are negative, long traders receive funding payments. By using stUSC as collateral, traders can amplify their earnings through both the negative funding payments and the yield generated by stUSC.
- Using stUSC as Collateral to Long the Perp with Positive Funding (Reduced Funding Cost): In a positive funding rate scenario, long traders pay the funding rate to short traders. However, with stUSC generating yield, the effective cost of holding a long position is reduced, as the yield helps offset the funding fees.
Potential for stUSC as the Main Currency in Perp wDEXes
The yield-generating and decentralized nature of USC positions it as a superior alternative to traditional stablecoins for use in perpetual DEXs. As more traders recognize the benefits of using USC, it has the potential to become the dominant currency for margin collateral in these exchanges.
- Stability and Efficiency: The stability of USC, combined with its decentralized nature and yield-bearing properties, ensures that it remains an efficient and secure form of collateral for leveraged trading.
- Market Adoption: As perpetual DEXs continue to grow and evolve, the adoption of USC can enhance the liquidity and stability of these platforms, further solidifying its role as the primary currency for margin collateral.
In summary, USC, backed by decentralized LSTs and offering intrinsic yield, addresses the key challenges of the stablecoin trilemma — scalability, decentralization, and yield generation. Its adoption in perpetual DEXs can provide significant benefits to traders, including reduced funding costs and increased profitability, positioning stUSC as the main currency in the evolving landscape of perpetual futures trading.(Chi Protocol)
