Challenges and Opportunities Facing Perptual Futures Exchanges

Recently, a remarkable event occurred in the cryptocurrency market. An investor went long on ETH with 50x leverage on a certain Perptual Futures trading platform, achieving a peak floating profit of over $2 million. However, instead of following the usual practice of increasing positions or closing them, he adopted an unexpected strategy: withdrawing part of the margin for profit while triggering a system liquidation, ultimately gaining $1.8 million.

This operation had a significant impact on the platform's liquidity pool. The platform employs an active market-making mechanism, maintaining liquidity by charging funding fees and earning from liquidations. Due to excessively high profits for investors, normal closing could lead to insufficient liquidity, but he chose to actively trigger liquidation, resulting in the losses being borne by the liquidity pool. On March 12 alone, the platform's liquidity decreased by approximately $4 million.

This event highlights the severe challenges faced by Perptual Futures exchanges, especially regarding the liquidity pool mechanism. To better understand the current market situation, we will conduct a comparative analysis of the operating mechanisms of three mainstream Perptual Futures exchanges and discuss how to prevent similar attack incidents.

Comparison of the Mechanisms of Three Major Perptual Futures exchanges

The first exchange

Liquidity Provision: Using a community liquidity pool model, users can deposit assets such as USDC to participate in market making. Users are also allowed to create their own funds pool to participate in profit sharing.

Market Making Mode: Utilize a high-performance on-chain order book matching system to provide an experience close to that of a centralized exchange. The liquidity pool acts as a market maker, placing orders on the order book to provide depth.

Clearing Mechanism: Liquidation is triggered when the margin falls below the minimum requirement (usually starting at 20%). Any user with sufficient funds can participate in the liquidation and take over the positions with insufficient margin. The liquidity pool also serves as the clearing insurance.

Risk Management: Using multiple exchange price oracles, updated every 3 seconds, to prevent manipulation of a single market price. For large positions, some minimum margin requirements have been raised to 20%. Anyone is allowed to participate in liquidation to enhance decentralization.

Funding Rate and Position Cost: The long and short funding rates are calculated every hour to keep the contract price close to the spot price. When longs dominate, longs pay funding fees to shorts, and vice versa. For net positions that exceed the capacity of the liquidity pool, the platform may reduce risk by increasing margin requirements and adjusting funding rates.

the second exchange

Liquidity Provision: Utilizing multi-asset liquidity pools that include assets such as SOL, ETH, WBTC, USDC, and USDT. Users mint liquidity tokens by exchanging assets, assuming risks as counterparty.

Market Making Model: An innovative mechanism that uses liquidity pools for traders, pricing through an oracle, allowing traders to trade directly with the liquidity pool for an execution experience close to zero slippage.

Settlement Mechanism: Automated settlement is used. When the margin rate falls below the maintenance requirement (e.g., <6.25%), the smart contract automatically liquidates positions at the oracle price. The liquidity pool acts as the counterparty to absorb profits and losses.

Risk Management: Use oracles to keep contract prices closely aligned with spot prices, avoiding internal price manipulation. High TPS on-chain operations reduce the risk of liquidation delays. Limits can be set on the total position of a single asset, and borrowing rates increase with asset utilization, suppressing extreme biases.

Funding Rate and Position Cost: Instead of using traditional funding rates, we utilize borrowing fees. Interest is accrued hourly based on the proportion of borrowed assets and deducted from the margin. The longer the position is held or the higher the asset utilization rate, the more interest is accrued.

third exchange

Liquidity Provision: Provide liquidity using a multi-asset index pool, including assets such as BTC, ETH, USDC, DAI, etc. Users deposit assets to mint liquidity tokens, becoming counterparties to all trades.

Market Making Mode: No traditional order book, automatically acting as the counterparty through oracle pricing and pool assets. Using decentralized oracles to obtain market prices, achieving "zero slippage" trading.

Settlement Mechanism: Uses automatic liquidation, calculating position value with the index price. Liquidation is triggered when the margin ratio falls below the maintenance level. The contract automatically closes the position, and the margin is used to cover pool losses.

Risk Management: Use multi-source oracles to reduce manipulation risks. Set a maximum opening position limit for easily manipulated assets. Limit leverage risks through position limits and dynamic fee mechanisms. Most trading fee rewards are given to liquidity providers to enhance the motivation to bear losses.

Funding Rate and Position Cost: Instead of traditional funding fees, borrowing costs are charged (calculated hourly based on the proportion of borrowed assets). The fees are directly paid to the liquidity pool, and all position holders must pay interest. The higher the asset utilization rate, the higher the annualized borrowing fee rate, economically penalizing long-term one-sided crowded positions.

Conclusion: The Development Path of Perpetual Futures Exchanges

This incident highlights the transparency and rule-dependent characteristics of decentralized futures trading exchanges. The attacker profited from a large position while impacting the internal liquidity of the exchange.

To prevent similar incidents in the future, it may be necessary to focus on the following aspects:

1. Reduce user position size: Adjust leverage ratios and margin requirements, such as lowering the maximum leverage ratio for major assets and increasing the margin transfer ratio.

2. Introduce an automatic liquidation mechanism: When the risk reserve cannot bear the liquidation loss, initiate automatic liquidation to hedge and close the losing positions with profitable or highly leveraged positions.

3. Strengthen address correlation analysis: By tracking related addresses, prevent witch attacks, but this may conflict with the core principle of permissionless in DeFi.

4. Enhance market liquidity: As the market matures, the liquidity of the exchange gradually thickens, increasing the cost of attacks until there is no profit to be made.

The development of the Perptual Futures exchange faces challenges, but this is also an inevitable path for the industry to mature. With the continuous improvement of mechanisms and the deepening of the market, we have reason to expect sustained innovation and progress in this field.