The Current Status and Future Prospects of Perpetual Futures DEX Development

In the current crypto market, Perptual Futures DEX is rapidly developing. In terms of efficiency, speed, and scalability, these platforms have made significant progress. Perptual Futures DEX is not limited to trading scenarios, but is also expanding the application scope of blockchain, paving the way for the large-scale adoption of web3.

Exchanges are the core of the crypto market, supporting market operation through trading activities between users. The primary goal of exchanges is to achieve efficient, fast, and secure trade matching. Based on this goal, DEX has made several innovations on top of CEX, such as eliminating trust assumptions, avoiding intermediaries and centralized control, allowing users to retain control of their funds, and enabling community participation in product updates and iterations.

However, reviewing the history of DeFi development, it can be seen that while DEX has several advantages, it often comes at the cost of higher latency and lower liquidity, mainly due to the throughput and latency limitations of blockchain. According to relevant data, the spot trading volume of DEX accounts for 15%-20% of the total trading volume in the crypto market, while Perptual Futures trading only accounts for 5%.

Developing Perptual Futures business on DEX is not easy, because CEX's Perptual Futures trading has the following advantages:

1. Better product experience
2. Efficient control of market makers provides more refined spreads.
3. Better liquidity
4. One-stop combination of multiple functions

The centralization and monopoly of CEX has become an issue that users cannot ignore, especially as the collapse of FTX has further exacerbated the trend of centralization. Currently, the CEX field is almost entirely dominated by a few giants, and this centralization poses systemic risks to the crypto ecosystem. By increasing the usage and market share of DEX, such risks can be effectively reduced, promoting the sustainable development of the entire crypto ecosystem.

The rise of Ethereum Layer 2 and multi-chain ecosystems has provided innovation for liquidity sources and user experience, creating excellent conditions for the development of DEXs. This is currently a great time for the development of Perptual Futures DEX.

Perptual Futures in the Crypto Ecosystem

Perptual Futures allow traders to hold positions indefinitely, similar to over-the-counter futures trading in traditional financial markets over the years. The difference is that Perptual Futures introduce the concept of funding rates, which popularizes a trading method that is traditionally only available to accredited investors in traditional finance, while also creating the "under-damped effect" to some extent to prevent excessive imbalance in the long-short structure.

The current monthly trading volume of the perpetual futures market has exceeded $120 billion. This scale is attributed to the exchanges providing a good user experience, the order book mechanism enhancing trading efficiency, and the vertically integrated clearing system allowing for fast and secure settlements.

Perptual Futures have four advantages over traditional futures contracts:

1. Traders save on rollover fees and other associated costs at each contract expiration.
2. Avoid making forward contracts more expensive
3. The funding rate system provides continuous real-time profit and loss, simplifying the backend processing workflow for contract holders and the clearing system.
4. Provides a smoother price discovery process, avoiding the severe fluctuations caused by overly coarse price granularity.

Since BitMEX first introduced Perptual Futures in 2016, the development of Perptual Futures DEX has rapidly accelerated. Today, there are more than 100 DEXs supporting Perptual Futures in the market. Early Perptual Futures DEXs were small in scale and mainly concentrated on Ethereum. Now, active Perptual Futures DEXs can be found on various public chains, and contract trading has become an indispensable part of the crypto ecosystem.

Perptual Futures DEX Pricing Model

In the Perptual Futures DEX, the pricing mechanism is key to ensuring that market prices accurately reflect supply and demand dynamics. The main pricing models include:

Oracle Mode

The oracle model refers to how perpetual futures DEXs obtain price data from top exchanges and provide services. Although there is a risk of price manipulation, it can reduce the pricing costs of DEXs. For example, GMX uses Chainlink oracles to obtain price data, ensuring price accuracy and integrity. However, such exchanges are highly dependent on the price data sources of top exchanges, and can only act as price takers, unable to actively engage in price discovery.

Virtual Automated Market Maker ( vAMM )

The vAMM model is inspired by Uniswap's AMM model, but the funding pool of vAMM is virtual, achieving pricing by simulating the buying and selling behavior of trading pairs through a mathematical model. The vAMM model can support Perptual Futures trading without the need to invest large amounts of capital and does not have to be associated with spot trading. It is currently adopted by perpetual contract DEXs such as Perpetual Protocol and Drift Protocol.

Off-chain order book combined with on-chain settlement

To overcome the performance limitations of on-chain order matching, some DEXs adopt a hybrid model of off-chain order books and on-chain settlement. Trade matching is completed off-chain, while trade settlement and asset custody remain on-chain. This design retains the security and transparency of DeFi while addressing issues like MEV. Projects such as dYdX v3, Aevo, and Paradex have adopted this hybrid model.

Full Chain Order Book

The full-chain order book processes all data and operations related to trading orders completely on-chain, making it the safest solution, but it is obviously limited by the delays and throughput of the blockchain. Some projects such as Hyperliquid, dYdX v4, Zeta Markets, LogX, and Kuru Labs are expanding the application scope of the full-chain order book model.

Acquisition of Liquidity in DEX and Improvement of User Experience

Liquidity is fundamental to the survival of exchanges. Emerging DEXs generally obtain liquidity through incentives and market forces. However, as the number of DEXs increases, the market share of individual DEXs declines, making it difficult to attract enough traders to reach the "critical mass" of liquidity.

To address the challenge of obtaining initial liquidity for DEX, two new approaches have recently emerged: community-supported active liquidity vaults and cross-chain liquidity acquisition.

The HLP treasury of Hyperliquid is a typical case of community-supported liquidity treasury. Projects like LogX Network have proposed cross-chain liquidity allocation solutions, allowing the creation of Perptual Futures trading frontends on any chain and enabling liquidity leverage across all markets.

In terms of user experience, DEXs are beginning to compete by introducing features such as gas-free trading, session keys, and social logins. Cross-chain DEXs are breaking ecological limitations, and DEX aggregators can integrate the liquidity and price information of multiple DEXs into a single interface. Telegram trading bots are also continuously optimizing the user experience by providing real-time trading alerts, executing trades, and managing portfolios.

Innovative Financial Products in Perptual Futures DEX

Variance Perptual Futures

The trading content of variance 永续合约 is the volatility of the asset rather than the price. Opyn is developing novel variance 永续合约 products, including Stable Perps, Uniswap LP Perps, Normal Perps, and Squared Perps. These contracts can be combined into more complex strategies, such as "crab strategy" and "zen bull strategy".

Pre-Launch Perptual Futures

Pre-Launch Perptual Futures allow traders to speculate on the future price of a Token before it officially goes live. Multiple Perptual Futures DEXs, such as Aevo, Helix, and Hyperliquid, have pioneered this new model.

RWA Perptual Futures

RWA asset Perptual Futures could become a primary means of bringing real assets on-chain. Compared to directly tokenizing RWA asset spot holdings, bringing them on-chain in the form of Perptual Futures is simpler. Companies like Ostium Labs and Sphinx Protocol are gradually emerging in this field.

ETP Perptual Futures

ETP Perptual Futures can be used to create ETPs that hold expiring futures contracts, such as ETF-USO and ETN-VXX. This type of contract can reduce trading costs and the risk of net asset value depreciation, making it attractive for companies that require long-term economic exposure protection but do not need physical delivery.

Prediction Market

The Perptual Futures DEX can change the prediction market by providing a flexible and continuous trading mechanism, especially for irregular events such as elections or ad-hoc weather forecasts. Unlike traditional prediction markets, Perptual Futures allows the creation of prediction markets based on the continuously updated data from the market itself, bringing significant advantages.

Future Outlook of Perptual Futures DEX

The design focus of future Perptual Futures DEXs may not only be to replicate CEX functionalities but also to better leverage the unique advantages of decentralization. An ideal design needs to find a balance between efficiency and security. In addition, Perptual Futures DEXs are increasingly emphasizing community and developer participation, enhancing users' sense of belonging and loyalty through various mechanisms.

To promote the widespread adoption of cryptocurrencies, it is crucial to create an integrated platform with an excellent user experience. Some Perptual Futures DEX markets have expanded into various fields such as finance, elections, and sports, providing new avenues for the public to participate in crypto trading.

In the next decade, DeFi may intersect and integrate with various fields such as news, politics, and sports, and is expected to become a widely used tool, further promoting the mass adoption of cryptocurrencies.