Perpetual DEXs: The Future of Decentralized Trading

Written by Jeremy, data supported by Esther, and case references provided by Lucas. Special thanks to Derek from Gourds for providing insight from the industry.

In the upcoming year, a transformative development is on the horizon: perpetual DEXs. These innovative systems are set to revolutionize the way individuals engage in trading digital assets. Gone will be the days of being confined to spot trading or being reliant on centralized exchanges for more sophisticated trading strategies. The advent of perpetual DEXs introduces a new era characterized by decentralized perpetual contracts, offering a continuous and unrestricted array of trading opportunities.

Decentralized Perpetual Trading: A Primer

Decentralized perpetual trading allows you to trade crypto assets with high leverage and without an expiration date. Unlike traditional futures contracts, perpetual swaps don’t have an expiry, so you can keep a position open for as long as you like.

To understand how perpetual DEXs work, let’s start with a primer on decentralized exchanges (DEXs) and perpetual contracts.

DEXs are peer-to-peer cryptocurrency exchanges that allow direct trades between users without an intermediary. They provide continuous liquidity so you can trade anytime. Perpetual contracts are derivative products that enable traders to speculate on the price movement of an underlying asset without taking ownership. They provide much higher leverage than spot trading.

When combined, decentralized perpetual trading gives traders the following benefits:

• 24/7 trading. As DEXs operate continuously, you can trade perpetual swaps anytime.
• High leverage. Perpetual contracts provide leverage up to 100x, allowing you to amplify gains (and losses).
• No expiration. You can keep positions open as long as you like and close them whenever you want.
• Low fees. DEXs typically have lower fees than centralized exchanges since they don’t have the same overhead costs.
• DEXs don’t require KYC so you can trade with a high degree of anonymity.

Decentralized perpetual trading is a fast-growing trend in crypto. If you’re looking to trade digital assets with maximum flexibility and leverage, perpetual DEXs are the way to go. They provide a truly 24/7 market where you’re in full control of your funds and positions. The future of trading is here.

How Perpetual DEXs Work: Permissionless and Non-Custodial

Perpetual decentralized exchanges (DEXs) are built on blockchain networks and allow users to trade digital assets continuously without needing to match buyers and sellers. They operate permissionlessly and non-custodially, meaning anyone can access them and users maintain control of their funds.

Perpetual DEXs utilize automated market makers (AMMs) instead of order books to facilitate trading. AMMs use mathematical formulas to determine prices based on the supply of each asset in a liquidity pool. Traders can instantly buy or sell any amount of an asset, and the AMM will rebalance the pool to determine new prices that keep the values of the assets roughly equal.

Liquidity providers add an equal value of two assets to a pool to earn trading fees. They receive liquidity provider (LP) tokens that represent their share of the pool. LP tokens can be redeemed at any time to withdraw funds plus any accrued fees. Adding liquidity is not without risks as the value of LP tokens can decrease if the value of one asset drops. However, liquidity pools on perpetual DEXs tend to be very deep, so the likelihood of impairment loss is low.

Perpetual DEXs and AMMs enable digital asset markets to remain open 24 hours a day, 7 days a week. They facilitate high trading volumes, low slippage, and maximize capital efficiency. The permissionless and non-custodial nature of perpetual DEXs gives traders more control and access. Overall, perpetual DEXs represent an important step in the maturation and decentralization of cryptocurrency trading.

The Importance of Deep Liquidity Pools

The success of any decentralized exchange (DEX) depends on attracting high volumes of traders and maintaining deep liquidity pools. Liquidity refers to the availability of buyers and sellers for a given asset. Without ample liquidity, trades cannot be executed quickly and efficiently.

For perpetual DEXs that offer perpetual contracts, liquidity is especially crucial. These non-expiring futures contracts allow traders to speculate on the price of an asset without having to settle the trade. Traders can enter and exit positions at will. However, this continuous trading requires abundant liquidity to facilitate the frequent buying and selling. If liquidity runs low, traders may face significant slippage, difficulty entering or exiting positions at a desired price.

There are a few key strategies perpetual DEXs can employ to build and sustain deep liquidity:

• Offer incentives for market makers and liquidity providers. Rewards, rebates and other perks can motivate traders to contribute liquidity.
• List a variety of perpetual contracts for major crypto assets. The more options available, the more opportunity to attract traders and increase volume.
• Charge low or no fees. Minimizing fees encourages higher trading volumes and more liquidity.
• Foster an active trading community. A vibrant community of traders will naturally boost volumes and liquidity. Engagement through social media, online forums, events and more helps build an enthusiastic user base.

Robust liquidity is essential for any exchange but especially critical for perpetual DEXs. With the right strategies and community support, perpetual DEXs can achieve the volumes and liquidity depth required to become a dominant force in decentralized trading. Continuous innovation and improving the trading experience will further cement their role in the future of crypto.

Perpetual Contracts: Trading Crypto With Leverage

Perpetual contracts are an innovative new product in decentralized finance that offer traders additional flexibility. Perpetual contracts, also known as perps, provide leveraged exposure to crypto assets without an expiry date. This allows traders to hold positions for an indefinite period of time.

Unlike traditional futures contracts that expire on a set date, perps remain open until the trader decides to close the position. Perps are ideal for shorter-term swing trading and scalping strategies where positions are opened and closed quickly. They also appeal to longer-term investors who want to gain leveraged exposure to crypto assets over an extended time period.

Margin Requirements

To open a perp position, a trader must commit an initial margin amount that serves as collateral. The margin requirement is typically a percentage of the total position value. For example, a perp may have an initial margin requirement of 10%, meaning a trader would need to commit $1,000 to open a $10,000 position.

The margin amount is held on the exchange to ensure the trader can meet their obligations if the position moves against them. If the loss on a position exceeds the posted margin, the trader will face a margin call and be required to deposit additional funds to avoid liquidation of the position.

Perpetual contracts provide a compelling product for traders seeking leveraged and flexible exposure to cryptocurrencies and other digital assets. While margin trading does amplify risk, perps open up more trading strategies and opportunities for investors in decentralized finance. The ability to hold positions for an indefinite time period and avoid expiry dates gives traders more control and flexibility over their portfolios.

FAQs: Common Questions About Perpetual DEX Trading

Perpetual decentralized exchanges (DEXs) allow for continuous trading of crypto assets without oversight from a central authority. Below are answers to some of the most frequently asked questions about perpetual DEX trading.

1. How does perpetual trading work on a DEX?

Perpetual trading on a DEX enables buyers and sellers to trade crypto assets continuously without a defined settlement date. Trades are executed on-chain using smart contracts that match buy and sell orders automatically. Traders can open and close positions at any time, allowing for more flexibility and control over trades.

2. What are the benefits of perpetual DEX trading?

Some of the main benefits of perpetual DEX trading include:

• Continuous trading 24 hours a day, 7 days a week.
• No settlement periods so traders have more flexibility.
• Traders maintain control of funds in their own wallets.
• Anonymity and privacy since trades are executed on-chain.
• Access to a wider range of crypto assets including new listings.
• Ability to go long or short on positions to capitalize on market volatility.

3. What are the risks of perpetual DEX trading?

While perpetual DEX trading offers many benefits, there are also risks to be aware of:

• Price slippage: The price of assets can change quickly, leading to trades executing at an unfavorable price.
• Impermanent loss: Providing liquidity can lead to losses if the price of assets changes dramatically.
• Smart contract risk: Bugs or exploits in the DEX’s smart contracts could put funds at risk.
• Volatility: The high volatility of crypto markets means positions can turn unprofitable quickly.
• Manipulation: Decentralized markets may be more prone to manipulation and spoofing.

Perpetual decentralized trading introduces an exciting new model for crypto markets. However, traders should go in with their eyes open to the risks as well as the rewards. Doing research, starting small, and using trusted platforms are good ways to mitigate risk. The future is bright for perpetual DEXs, but remain vigilant.

The Perpetual DEXs Projects You Should Know

As decentralized finance continues to gain mainstream popularity, perpetual decentralized exchanges (perpetual DEXs) are emerging as an exciting new development. Perpetual DEXs allow traders to speculate on the price of crypto assets without actually holding the underlying assets.

Perpetual Protocol

Perpetual Protocol is an Ethereum-based perpetual DEX that allows traders to speculate on the price of any ERC-20 token. Traders can long or short tokens with up to 20x leverage. The protocol is entirely on-chain, meaning all data and funds are transparently stored on the Ethereum blockchain.

dYdX

dYdX is another popular perpetual DEX built on Ethereum. It offers perpetual contracts for a variety of crypto assets including ETH, DAI, and WBTC. Traders can access up to 4x leverage when speculating on price movements. dYdX aims to eventually become a layer-2 scaling solution for decentralized finance.

Serum DEX

The Serum DEX is a perpetual DEX built on the Solana blockchain. It offers extremely fast transaction speeds and low fees, making it ideal for high-frequency trading strategies. The DEX supports perpetual contracts for major cryptocurrencies like BTC, ETH, and SOL with up to 10x leverage. Serum leverages the speed and scalability of the Solana blockchain to provide a premium trading experience.

Perpetual DEXs represent an exciting innovation in decentralized finance. By allowing traders to speculate on crypto price movements with leverage, perpetual DEXs bring a new level of liquidity and activity to the DeFi space. As the space continues to develop, perpetual DEXs could emerge as a prominent feature of the larger DeFi landscape.

Gains Network

Gains Network is a decentralized derivative trading platform that gives users a way through Crypto and stock derivatives. Gains Network offers high leverage. Traders’ profits are their own. However, as with any leveraged trading, losses are also amplified.

Instead of trading with perpetuals, Gains Network takes the medium value from different exchanges. Consequently, it provides a more accurate spot price of the asset. This additional accuracy liberates users from a constrained, brokered trading experience.

GMX is a spot and perpetual DEX with low swap fees and 0 price impact trades. Trading liquidity is provided by GLP, a crypto ETF-like asset native to GMX. The platform uses Chainlink oracles and large exchanges for asset prices.

GMX is ideal as the generation of real yield comes from trading fees, and swaps are distributed back to GLP and GMX stakers. The platform is nice and has an easy-to-use interface. It also has a strong community built on Arbitrum. In addition, a holder can self-custody their funds.

It has two tokens, GMX and GLP. $GMX is the governance and utility token, while GLP is the platform’s liquidity provider. Additionally, due to GMXs innovative multiplier points system, stakers are incentivized but not required to keep their tokens staked. As a result, it ultimately reduces sell pressure.

Metavault Trade

It is a decentralized spot and perpetual exchange built on Polygon, aiming at becoming the all-in-one platform for traders. The DEX constitutes high liquidity pools. It also can enter a leveraged position, offering up to 30x leverage. Additionally, the platform allows users to earn rewards from trading fees. Currently supports major tokens and stables.

The platform allows you to trade directly from your wallet without registration. It has a near-zero transaction fee. The platform has three main tokens in its ecosystem; $MVX, $MVLP, and $esMVX.

Perpetual Protocol

Perpetual Protocol is a decentralized perpetual futures exchange platform operating on the cutting edge of decentralized finance. The Perpetual protocol platform is true to the spirit of DeFi, emphasizing community and decentralization. The protocol is fully on-chain deployed on Optimism. Ten months after its launch, it had more than $30 billion in total trading volume.

Their mission is to provide a democratic finance platform by giving users access to its most popular financial instrument.

The current Pool Party provides an incentivized program to the liquidity providers. The LP can earn $OP and $PERP weekly, propor

Competitive Landscape

Decentralized Exchanges (DEX) represent a mere 2% of the overall Futures trading volume of Centralized Exchanges (CEX). This low market share indicates a significant untapped potential for DEX to expand its market presence, especially considering the stricter compliance requirements faced by centralized exchanges. As compliance and regulatory burdens continue to evolve, the allure of DEX’s more lenient approach to user onboarding and trading could further fuel its market expansion. Furthermore, the inherent advantages of decentralized platforms, such as enhanced security, reduced counter party risk, and increased user control over funds, could attract a growing number of traders and investors away from traditional CEX.

DEX to CEX Futures Trade Volume (%)

Perpetual DEXs Insights (GMX, Perp, Kwenta, GNS）https://dune.com/shogun/perpetual-dexs-overview

Interview with Derek from Gourds on the Perpetual DEX 7/29

Market Size and Growth

According to Derek’s estimation, DEX: CEX will surpass 20% in the future.

Drivers: Lower capital barrier, incentives (token incentive + lower fees), transition of spot trading users to perpetual trading users, and CEX users to DEX users with easy KYC.

Perpetual DEX trading volume split — Institution: Individual: ❤0%.

Perpetual DEX functions similarly to CEX for both institutions and individuals.

Models

No clear winners have emerged yet.

There is a preference for Automated Market Makers (AMMs).

Key Success Factors for Perpetual DEX

Effective product operation (e.g., referrals and incentives).

Product innovation, such as bridging to attract traffic from more chains.

Crypto Derivative’s Potential

Currently, the types of financial products in the crypto world are still limited (e.g., BTC option volume).

If one seeks insights from the traditional financial sector (TradFi) regarding potential developments in the crypto space, they are likely to notice a burgeoning trend in forthcoming crypto product offerings, particularly centered around options-related products. Options, recognized as one of the most sophisticated trading instruments within TradFi, commands the attention of astute investors such as Citadel, Blackrock, and Bridgewater, who actively engage with these tools in their daily operations. This inclination toward options signifies a pivotal progression within the market.

Conventional financial literature underscores the notion that a market attains efficiency once it furnishes its participants with a comprehensive array of tools. Hence, the culmination of market efficiency could be on the horizon with the impending introduction and widespread adoption of crypto options among the general populace.

A perceptive observer might question why crypto options, despite their existence for several years — since Deribit pioneered the inaugural BTC European options contract in 2016 — have not garnered the anticipated prominence. Our perspective posits that this phenomenon can be attributed to the prevailing execution model employed by current options protocols, coupled with minor imperfections in the system. Delving into these intricacies warrants a separate discussion, which we reserve for another occasion.

Our conviction rests in the belief that a strategic recalibration in select aspects will propel crypto options to new echelons of significance, in symbiosis with spot trading, perpetual contracts, and other related instruments. This confluence of advancements holds the potential to elevate the entirety of crypto trading to unprecedented heights, fundamentally reshaping the landscape.

Conclusion

The emergence of perpetual decentralized exchanges (perpetual DEXs) introduces an exciting new frontier for decentralized trading. With the elimination of limitations tied to isolated trades at specific time points, traders now have the capacity to engage in indefinite open positions, unlocking novel opportunities for intricate trading strategies. This innovation reflects the broader potential of crypto derivatives, which extends beyond the scope of traditional trading by offering enhanced flexibility and versatility.

As the crypto space evolves, there’s a clear trend toward the proliferation of crypto derivatives products. Perpetual DEXs represent a substantial step in this direction, highlighting the industry’s recognition of the vast potential that derivative instruments hold. These perpetual contracts allow traders to capitalize on the dynamic nature of the cryptocurrency market, enabling them to hold positions for extended periods without the constraints of traditional expiration dates.

The ascent of perpetual DEXs is poised to catalyze the broader adoption of decentralized finance into mainstream markets. By virtue of reduced fees, expanded accessibility, and perpetual contracts, these exchanges stand to reshape how the next generation interacts with digital assets. This broader trend aligns with the growing demand for decentralized financial products, underpinned by the desire for more inclusive and accessible financial services.

The perpetual DEX model not only provides a glimpse into the forefront of decentralized technology but also underscores the significant progress made while illuminating the path that lies ahead. The potential of crypto derivatives, as exemplified by perpetual DEXs, extends well beyond their current state, with ongoing innovations and refinements anticipated to shape the landscape even further.

The era of open finance has arrived, and through perpetual DEXs, we take a solid stride forward while eagerly anticipating the uncharted territory awaiting exploration. In this rapidly evolving ecosystem, crypto derivatives are positioned to play a pivotal role in democratizing financial markets, providing traders and investors with unprecedented tools to navigate the complexities of the digital asset landscape.