Perpetual Contracts

In the crypto market, exchanges play a vital role, supporting the daily operations of the market. Taking the decentralized exchange (DEX) as an example, it has carried out a series of innovations based on the centralized exchange (CEX), aiming to improve the security, transparency and user control of transactions. However, despite their significant advantages in decentralization and security, DEX still faces challenges in transaction speed and liquidity. Especially in the field of perpetual contracts (Perpetual Contracts), these challenges are particularly prominent. This article will deeply explore the application model, current situation and future prospects of perpetual contract DEX.

Basic concepts and advantages of perpetual contracts

A perpetual contract is a derivative commodity that allows traders to hold positions indefinitely, similar to futures contracts in traditional financial markets. Its core advantages include:

• No expiration date: Unlike traditional futures contracts, perpetual contracts have no expiration date, and traders do not need to roll over, avoiding related fees and bid-ask spreads.

• Funding rate mechanism: The Funding Rate is used to balance the gap between the contract price and the spot price to prevent excessive price deviation.

• Instant profit and loss settlement: The funding rate mechanism allows profits and losses to be reflected in the trader's account immediately, improving the efficiency of fund management.

• Smooth price discovery process: The instant settlement and funding rate mechanism ensure the continuity and stability of price changes and avoid price shocks caused by rollover or delivery

Main modes and mechanisms

• Oracle model: For example, GMX uses Chainlink oracles to provide price information. This model can effectively reduce costs, but it relies too much on external sources of data.

• Virtual Automated Market Maker (VAMM): For example, Perpetual Protocol and Drift Protocol use virtual fund pools to simulate trading behavior through mathematical models. Although they face slippage problems, they have the advantages of transparency and decentralization.

• Off-chain order book combined with on-chain settlement: DYDX v3 and Paradex use off-chain order matching and on-chain settlement to improve efficiency while ensuring security.

• Full-chain order book: Projects such as Hyperliquid and DYDX v4 process orders on the entire chain. Although it is the safest, it is limited by the delay and throughput of the chain.

Liquidity acquisition and user experience (UX) improvements

Liquidity acquisition

• Incentives: Traditional DEX attracts LPs through liquidity mining, but the economic model of high APY and airdrop activities is unsustainable.

• Active liquidity vaults supported by the community: such as Hyperliquid’s HLP vault, which provides liquidity through community funds.

• Cross-chain liquidity allocation: Orderly Network and LogX Network integrate liquidity across chains to improve liquidity coverage.

User experience improvements

• Gas-free transactions and session keys: Improve user experience through gas-free transactions and community login.

• DEX aggregator: such as Vooi.io integrates multiple DEX liquidity and price information to simplify the trading process.

• Telegram Trading Bot: Provides instant trading alerts and manages portfolios, but be aware of security risks.

Innovative financial products

• Variance Perpetual Contracts: Trade on the volatility of asset prices, such as Opyn’s Variance Perpetual Contracts.

• Pre-Launch contract: allows speculation on the price of a token before it is launched, similar to the on-chain version of an IPO.

• RWA asset perpetual contract: Put real assets on the chain in the form of perpetual contracts. Projects such as Ostium Labs and Sphinx Protocol are underway.

• ETP Perpetuals: Track the performance of underlying assets or indices, reduce transaction fees and reduce risk.

• Prediction market: Create a prediction market based on perpetual contracts, such as predictions of the results of elections or sports events, providing continuously updated data and trading opportunities.

Market size and current situation

As of July 2024, the market trading volume of perpetual contract DEX has reached US$120 billion, with a compound annual growth rate of approximately 393%. Compared with the spot market, perpetual contract trading still accounts for a smaller share, but its market share is growing rapidly. In the early days, projects like DYDX dominated the perpetual contract market in the Ethereum ecosystem, and now more and more on-chain DEXs are booming. Future perpetual contract DEX may not only replicate the functions of CEX, but also better leverage the advantages of decentralization. The design should focus on the balance between efficiency and security, while improving user experience and community participation. Through a more intuitive user interface, the integration of cross-chain functions and innovative financial products, perpetual contract DEX is expected to become an important part of the crypto market, providing users with more trading opportunities and risk management tools.