Trading Cost Analysis — A Comparison Among Perp DEXes
Dragons,
Today, we’ll take a look at the different perpetual protocols and compare their cost structure to help you determine which protocol may be the best fit for your trading strategy. The protocol that we’ll be looking at today are Perp88, GMX, Metavault.Trade, and MMF (Madmex), who all share a similar architecture.
Before we jump into the analysis, let’s first understand the different costs associated with trading on decentralized perpetual protocols!
What are the different cost buckets? 🤔
There are generally two types of cost associated with opening a position when using a decentralized perpetual exchange:
Transaction Cost: This is the cost incurred when you make a trade transaction regardless of how long the position is active. Below are the cost under this bucket:
- Position Opening Fee: This is the cost you incur when you open a position. It is typically charged as a percentage of the position size at the time at which the position is opened.
- Position Closing Fee: This is the cost you incur when you close a position. It is typically charged as a percentage of the position size at the time which the position is closed.
Note that most perpetual protocols offer discount on Position Opening Fees & Closing Fees through their referral program. You can find more details about Perp88’s referral program here.
Carrying cost: This is the cost incurred over the period at which the position is active. The longer the position is active, the higher cost the position owner will bear. Below are examples of the cost under this bucket:
- Borrowing Rate: This is the cost that leveraged traders bear when they borrow assets to open a leveraged position. When traders open a leveraged position at the four DEXes (Perp88, GMX, Metavault.Trade, MMF), they are also borrowing funds from the liquidity pools, as the funds are reserved to be paid out to these traders as profits. The Borrowing Rate is charged hourly on the position size based on the utilization rate of the borrowed asset. You can find more details about the Borrowing Rate here.
- Funding Rate: This is the cost that is added on top of the Borrowing Rate to help bring a balance between the long and short open interest (OI) of each listed asset. When there’s a significant imbalance between the two sides of the OI, one side will pay the other, thereby incentivizing more traders to open a position in the direction that the OI is skewed away from, bringing back the balance between the two sides of exposure. This means that, in some instances, traders can also earn from the Funding Rate. Similar to the Borrowing Rate, the Funding Rate is also charged on an hourly basis based on the position size. Perp88 is the only DEX among the four with the Funding Rate mechanism. You can read more about the Funding Rate here.
Below is a table summarizing the rates under each cost bucket charged by each of the perpetual protocol.
Now that we’ve covered the cost structure, let’s analyze the costs of trading based on the different trading strategies. There are generally two types of traders based on the timeframe at which they speculate on asset prices: Short-Term Trader and Mid to Long-Term Trader.
1. Short-Term Trader 👨💻:
A short-term trader speculates on asset prices under a short time frame, typically within days or even a few hours. Consequently, they may open and close multiple trading positions within a day to capitalize financial gains on rapid price actions. A day trader, for example, would be categorized as a short-term trader.
Due to the nature of their trading strategy, this type of trader is best suited for using a DEX with low transaction cost. As some short term traders make multiple trades within a day, the difference in the transaction cost incurred may contribute significantly to their PnL, which is why they would benefit more from using a trading platform that charges a low trading fee.
On the other hand, since short-term traders do not leave their position open for extended period of time, placing an emphasis on minimizing the carrying cost may be secondary to them.
Below, we simulate a case on how much the collateral value is retained if a trader opens a leveraged trading position at the different DEXes based on the parameters below. For the example below, we will assume that there is no price movement of the asset during that period to allow us to create an apple-to-apple comparison of the four DEXes. Note that the data used to calculate the borrowing fee and the funding fee is true as of Jan 10th, 2023.
- Asset: ETH
- Direction: Long
- Collateral: $1,000
- Leverage Level: 5x
- Duration: 12 hours.
As you can see in the comparison above, the Perp88 trader bears the lowest position opening & closing fee. That’s becausePerp88 charges the fee of 0.09% of the position value compared to 0.10% charged by GMX, Metavault.Trade, and MMF. Moreover, Perp88 offers a 10% discount on trading fees from the base-tier referral program while the figure is only 5% for GMX, Metavault.Trade, and MMF. On a net-basis, the Perp88 trader incurs roughly 15% less one-time cost compared to GMX, Metavault.Trade, and MMF.
In addition, while all four exchanges charge a maximum hourly borrowing fee of 0.01% of position size, Perp88 is still able to offer the cheapest borrowing fee due to the currently low ETH utilization rate. Couple that with the Funding Fee, that is currently paying the ETH long traders, Perp88 is able to offer the lowest net-fees to its trader. Metavault.Trade & MMF Finance followed closely while GMX was the most expensive platform to trade on.
While the difference in the carrying cost for this example may not stand out, under a longer timeframe, the difference will be amplified as shown in the next example.
2. Mid to Long-Term Trader 👨💼:
A mid to long-term trader has a view on how the asset price will move typically under a longer time frame, such as multiple days, weeks, or even months. This means that they may open a trading position and keep it active over a longer period of time and might not trade as frequently as the short-term traders.
Due to the nature of their trading strategy, this type of trader is best suited for using a DEX with low carrying cost, as they may keep their position active for an extended period of time, accruing additional carrying cost in the meantime.
Below, we simulate a case on how much the collateral value is retained if a trader opens a leveraged trading position at the different DEXes based on the parameters below. Similar to the previous example, we will assume that there is no price movement of the asset during that period to allow us to draw an apple-to-apple comparison of the four DEXes. Note that the parameters used for this example is the same as the previous one with the exception of the duration where in this case, the position would be active for a week (168 hours). Also note that the data used to calculate the borrowing fee and the funding fee is true as of Jan 10th, 2023.
- Asset: ETH
- Direction: Long
- Collateral: $1,000
- Leverage Level: 5x
- Duration: 1 week (168 hours)
While the one-time cost remains the same as the previous example, this example highlights the stark differences in the carrying costs incurred at the different exchanges. While all four DEXes charge the same maximum borrowing fees of 0.01% per hour, GMX was the most expensive platform to keep the position open given that their ETH utilization at the time of writing was the highest. If the price of ETH did not increase over 5% during the one-week period, the GMX trader would already be negative in terms of PnL. On the other hand, Perp88 was the cheapest, followed closely by Metavault.Trade & MMF. The borrowing fees for all three are significantly cheaper than GMX (75% at minimum).
When we look at the net collateral value, we also found that the Perp88 trader is actually the only one with a positive net collateral value, while the other three traders are negative. This is because Perp88 trader actually earned roughly ~$43 in funding fee, increasing their net collateral value to $1,032 from the original $1,000. This was made possible due to the Dynamic Funding Rate mechanism, as there are currently significantly more short OI than long OI for Ethereum.
In this case, even if the price of ETH drops by 3%, the Perp88’s trader would still have a positive PnL, while GMX, Metavault.Trade, and MMF trader would have been down by almost 9%, 4%, 4% respectively. In conclusion, under this set of parameters, Perp88 is still the cheapest option to trade on.
To help you compare the costs of the different trading platforms, we have created a simple model for you. You can access the model here. To use the model, simply create a copy of the file and adjust the numbers in highlighted in blue fonts based on the parameters that you’d like to compare.
