ON-CHAIN PERPETUAL CONTRACTS: EVALUATING PAST PERFORMANCE AND FUTURE PROSPECT
Future development of on-chain perpetual contracts will be shaped by emerging DeFi innovations and the combination of various DeFi protocols.
A new report by Huobi Research Institute has flagged that the future development of on-chain crypto perpetual contracts is constrained by the performance of their underlying public chains, with a breakthrough in the latter needed for the former to thrive. Titled “On-chain perpetual contracts: Evaluating past performance and future prospects”, the report also notes that the future development of on-chain perpetual contracts will be shaped by emerging DeFi innovations and the combination of various DeFi protocols.
First introduced by BitMEX in 2016, crypto perpetual contracts have become a mainstay at many digital asset exchanges. They work similarly to their traditional financial market equivalents in automatically rolling over contracts for popular digital tokens such as Bitcoin.
Compared with the booming off-chain perpetual contracts, on-chain perpetual contracts are developing at a slower pace. This is because perpetual contract trading is more sensitive to transaction speed and price fluctuations, requiring the higher performance of public chains. The latter is also the biggest constraint to the development of on-chain perpetual contracts at present, lagging centralized exchanges in terms of transaction experience and depth.
The report provides a detailed introduction to three on-chain protocols, Perpetual Protocol which uses the virtual automatic market maker (vAMM), dYdX (off-chain match + on-chain settlement) and Injective (on-chain order book with batch auction). Comparing the risk response of each protocol, the report’s evaluation shows on-chain perpetual contracts all face similar risks, including system stability risk, liquidation risk, front-running risk and protection for traders.
While AMM show strong potential in the spot market, it is difficult for it to meet demand in the futures market. dYdX’s compromise in its solution of “off-chain match + on-chain settlement” has been a great success, because it is applicable to the current situation and makes the best use of the limited infrastructure performance. With no one perpetual protocol meeting all desired attributes, the on-chain order book represented by Injective, a decentralized trading platform which uses Tendermint, appears to be the future direction of perpetual contracts’ development.
Huobi Research Institute researcher Hugo Hou, author of the report, said: “The development of the on-chain trading model has gone through several stages, from the early 0x protocol off-chain RFQ model to the AMM mechanism, and from the dYdX “off-chain match + on-chain settlement” approach to the on-chain order book.
“It can be seen that the on-chain trading paradigm has been converging with the traditional secondary market trading mode, from simple to complex, from off-chain to on-chain. Behind the transformation of the transaction mode is the evolving public chain performance, such as the maturity of Layer2 and the explosion of new public chains. Nonetheless, on-chain perpetual contracts are still in the early stages of development, which means there are many opportunities waiting to be discovered.”
To download the full report, click here.
About Huobi Research Institute
Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016. It is committed to researching and exploring new developments in the global blockchain industry. Its goal is to accelerate the research and development of blockchain technology, promote its applications, and improve the global blockchain industry ecosystem. Huobi Research Institute covers industry trends, emerging technologies, innovative applications, new business models, and more. Huobi Research Institute partners with governments, enterprises, universities and other institutions to build a research platform that covers the entire blockchain industry. Its professionals provide a solid theoretical basis and analyze new trends to promote the development of the industry.
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