The Evolution of Perpetual Futures DEX: From Niche Trading Venue to Driving Force for on-chain Adoption

Perptual Futures DEX is rapidly developing in the current cryptocurrency market, making significant progress in terms of efficiency, speed, and scalability. This article aims to elaborate that 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 operations through user trading activities. The primary goal of any exchange is to achieve efficient, fast, and secure trade matching. Based on this goal, DEX has made numerous innovations on the foundation of CEX, such as eliminating trust assumptions, avoiding intermediaries and centralized control, allowing users to retain control over their funds, and permitting community participation in discussions and governance regarding product updates and iterations.

However, looking back at 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, which mainly stems from the throughput and latency limitations of the blockchain.

According to 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 ( especially for mainstream assets, and the ultimate goal of new project parties is to go live on major CEX ).
4. A one-stop combination of multiple functions ( spot trading, derivatives, OTC, and various scenarios can be directly nested together )

The centralization and monopoly of CEX have become issues that users cannot ignore, especially with the collapse of FTX further exacerbating the trend of centralization. Today, the CEX space is almost entirely dominated by a few giants, and this centralization poses systemic risks to the crypto ecosystem. By increasing the usage of DEX and expanding market share, such risks can be effectively reduced, thus promoting the sustainable development of the entire crypto ecosystem.

The rise of Ethereum Layer 2 and multi-chain ecosystems has provided innovations for liquidity sources and UX, creating excellent conditions for the development of DEXs, and now is a great time for the development of Perptual Futures DEXs. This article will conduct an in-depth discussion on the current status of Perptual Futures DEXs and introduce the design concepts of some DEXs.

Perptual Futures in the Crypto Ecosystem: Becoming an Important Tool for Speculation and Hedging

Perptual Futures allow traders to hold positions indefinitely, which is very similar to over-the-counter futures trading in traditional financial markets over the years. The difference is that Perptual Futures popularize this trading method, which traditionally only faced accredited investors in traditional finance, by introducing the concept of funding rates, allowing more retail investors to participate. At the same time, it also constructs the "underdamped effect," which prevents excessive imbalance of long and short structures to a certain extent.

The current monthly trading volume of the Perptual Futures market has exceeded $120 billion. Such a market scale benefits from the exchanges providing a good user experience, the order book mechanism promoting trading efficiency, and the vertically integrated clearing system enabling quick and secure settlements.

In addition, projects like Ethena that use Perptual Futures as an underlying mechanism bring diversified uses to Perptual Futures beyond speculation. Generally speaking, Perptual Futures have four advantages over traditional futures contracts:

1. Traders save on rollover fees and other related costs at each contract expiration.

2. Avoid making the futures contracts more expensive

3. The funding rate system provides continuous real-time profit and loss, simplifying the backend processing flow for contract holders and the clearing system.

4. Perptual Futures provide a smoother price discovery process, avoiding severe fluctuations caused by overly coarse price granularity.

Since BitMEX first introduced Perptual Futures in 2016, the Perptual Futures DEX has begun to develop rapidly, and now there are more than 100 DEXs supporting Perptual Futures on the market. Early Perptual Futures DEXs were small in scale, and in 2017, dYdX launched on the Ethereum ecosystem, dominating the Perptual Futures market for quite a long time. Therefore, decentralized Perptual Futures trading was mainly concentrated on Ethereum, and the contract trading volume was very low at that time. Today, we can see active Perptual Futures DEXs on various chains, and contract trading has become an indispensable part of the crypto ecosystem.

Multiple studies have shown that as the trading volume of Perptual Futures increases, the Perptual Futures market has begun to have price discovery functionality when the spot market is inactive. The trading volume of Perptual Futures on DEX has increased from $1 billion in July 2021 to $120 billion in July 2024, with a compound annual growth rate of approximately 393%.

However, perpetual futures DEX faces bottlenecks due to the performance limitations of blockchain. To promote further development of the perpetual futures market, it is essential to address two core issues: low liquidity and high latency on-chain. High liquidity can reduce slippage, making the trading process smoother and minimizing user losses; low latency allows market makers to quote tighter prices, enabling rapid execution of trades and enhancing market fluidity.

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. Different Perptual Futures DEXs employ various pricing mechanisms to balance liquidity and reduce volatility. Below, we will provide an overview of several main models:

Oracle Mode

The oracle model refers to how perpetual futures DEX obtains price data from major exchanges with high trading volumes and provides services based on that data. Although this method carries the risk of price manipulation, it can reduce the pricing costs for DEX. For example, the decentralized perpetual futures exchange GMX.

By using Chainlink oracles to obtain price data, GMX ensures the accuracy and integrity of prices, creating a friendly trading environment for price takers ( small institutions and individuals ), while providing substantial rewards for price makers ( large institutions and market makers ). However, exchanges that use oracle models to complete pricing generally face a problem: they are heavily reliant on price data sources from top exchanges, can only act as price takers, and cannot actively participate in price discovery.

Virtual Automated Market Maker vAMM

The virtual automated market maker ( vAMM ) model is inspired by Uniswap's AMM model, but the difference between the two is that the AMM model provides liquidity and pricing through actual liquidity pools and corresponding exchange rates, while the vAMM's liquidity pool is virtual and does not actually hold assets. It merely simulates the buying and selling behavior of trading pairs through a mathematical model, thereby achieving pricing.

The vAMM model can support Perptual Futures trading without the need for significant capital and does not have to be associated with spot trading. Currently, the vAMM model has been adopted by DEXs for Perptual Futures such as Perpetual Protocol and Drift Protocol. Although vAMMs face issues of high slippage and impermanent loss, they remain an excellent on-chain pricing mechanism due to their transparency and decentralization.

off-chain order book combined with on-chain settlement

To overcome the performance limitations of on-chain order matching, some DEXs have adopted a hybrid model of off-chain order books and on-chain settlement. In this model, the order matching process is completed off-chain, while trade settlement and asset custody still occur on-chain. This way, users' assets are always under their control, known as "self-custodial(". At the same time, since trade matching is conducted off-chain, risks such as MEV are greatly reduced. This design retains the security and transparency of decentralized finance while addressing issues like MEV, providing users with a safer and more reliable trading environment.

Some well-known projects, such as dYdX v3, Aevo, and Paradex, have adopted this hybrid model. This approach improves efficiency while also ensuring security, which is in line with the concept of Rollup.

) on-chain order book

The fully on-chain order book, which completely publishes and processes all data and operations related to trading orders on-chain, is the optimal solution among traditional schemes for maintaining trading integrity. The fully on-chain order book is almost the safest option, but its disadvantages are also very apparent, clearly affected by the limitations of blockchain latency and throughput.

In addition, the full-chain order book model also faces risks such as "front-running" and "market manipulation." Front-running refers to the situation where, when someone submits an order, other users ###, often MEV Searcher (, monitor pending transactions and jump in before the target transaction is executed to gain profits. This situation is relatively common in the full-chain order book model because all order data is publicly recorded on-chain, allowing anyone to view and formulate MEV strategies. At the same time, under the full-chain order book model, due to the transparency of all orders, certain participants may exploit this by using large orders and other means to influence market prices, thereby obtaining improper benefits.

Despite the above issues with the full-chain order book, it still has considerable narrative appeal in terms of decentralization and security. Public chains like Solana and Monad are working to improve infrastructure in preparation for full-chain order books. Some projects, such as Hyperliquid, dYdX v4, Zeta Markets, LogX, and Kuru Labs, are also continuously expanding the scope of the full-chain order book model, either innovating on existing public chains or building their own application chains to develop high-performance full-chain order book systems.

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) DEX liquidity acquisition and UX improvements

Liquidity is fundamental to the survival of every exchange, but how to acquire initial liquidity is a tricky problem for exchanges. In the development of DeFi, emerging DEXs generally obtain liquidity through incentives and market forces. Incentives often refer to liquidity mining, while market forces provide traders with arbitrage opportunities between different markets. However, as the number of DEXs increases and the market share of individual DEXs decreases, it becomes difficult to attract enough traders to reach the "critical mass" of liquidity.

The Critical mass here refers to "effective scale", which means that once a certain thing reaches a sufficient scale, it breaks through the minimum cost required to maintain the development of that thing, in order to achieve maximum profit in the long run. If it exceeds or does not reach the effective scale, the product cannot achieve profit maximization; a good product must operate for a long time under effective scale.

In DEX, critical mass refers to the trading volume and liquidity threshold. Only by reaching such thresholds can a stable trading environment be provided, thereby attracting more users. In Perptual Futures DEX, liquidity is voluntarily provided by LPs, so a common method to achieve critical mass is to set up LP pools with economic incentives. In this model, LPs deposit their assets into a pool and receive certain incentives to support trading on the DEX.

Many traditional DEXs offer high annualized returns ### APY ( or airdrop activities to attract LPs, but this method has a downside: in order to meet high APY and airdrop returns, DEXs must use a large portion of the tokens as LP mining rewards. Such an economic model cannot be sustained for long and may fall into the vicious cycle of "mining to withdraw and sell", leading to DEXs potentially collapsing soon and being unable to continue operating.

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

A certain perpetual futures DEX is a typical case of using a community-supported active liquidity pool. The HLP pool is one of the core products of this DEX, utilizing the funds of community users to provide liquidity for the DEX. The HLP pool calculates fair prices by integrating data from this DEX and other exchanges, executing profitable liquidity strategies across multiple assets. The profits and losses generated from these operations )P&L( will be distributed based on the shares of community participants in the pool.

Cross-chain liquidity allocation is proposed by certain networks. These projects allow the creation of a front on any chain.