Deriverse is a comprehensive derivatives DEX on Solana, offering perpetual swaps, options, futures, and spot trading all in one seamless platform. Designed to provide an unparalleled experience for professional crypto asset traders, Deriverse aims to bridge the gap between traditional and on-chain trading by delivering top-tier tools and features. Deriverse also serves as a permissionless launchpad for crypto assets. It stands out as the only platform that empowers users to create both spot and derivatives markets – including futures and options, fostering innovation and expanding the scope of on-chain trading opportunities.

In this article, we will provide a brief overview of the current state of crypto perps on CEXes & DEXes. By crypto perpetual swaps, we mean all perpetual swap instruments with crypto assets as the underlying asset.

What are Perpetual Swaps?

Perpetual swaps are popular with both retail and professional traders. Perpetuals were conceptually introduced in 1992 by Robert Shiller and BitMEX first implemented perpetual contracts in 2016. Perpetual swaps can be best described as futures contracts that never settle. They derive their value from the value of the underlying asset that they track, e.g. the price of Bitcoin. However, Bitcoin prices are different on different exchanges, therefore the perpetual swap needs one single price to track - that’s the index price, usually an average of prices on all spot exchanges. Perpetuals are delta-one products, meaning that for every $1 movement in the underlying, the contract price also changes $1.

The price of the perpetual swap on an exchange is called the mark price. Because there are different supply and demand dynamics in derivatives and spot markets, the mark price often diverges from the index price.

Perpetual swap exchanges want to minimize this divergence, therefore they incentivize traders to come in and long the perpetual swap whenever the mark price is below index price by making short traders pay periodic funding to long traders. They do the same for short traders whenever the mark price is above index price and needs to be pushed down. This mechanism is called funding payments.

Perpetual swaps are futures contracts that constantly settle and have no expiration. They allow users to go long or short on price exposure to the underlying asset with leverage. Their price is kept in line with the index, representing the price of the underlying, by funding payments. Depending on the type of derivative AMM-based DEX, funding payments in perpetual swaps fulfill two primary functions: a) they align the perpetual swap’s price (known as the mark price) with the actual market value of the asset (referred to as the index price) by facilitating periodic financial exchanges between those holding long and short positions; b) they maintain an equilibrium in open interest (OI) between long and short positions. Funding payments are used to keep the long and short open interest (OI) in balance.

Perpetual swaps make it easy to bake in leverage by using margins. Margins are collateral that traders put up if they want to take leveraged positions, i.e. get a price exposure higher than the amount of capital they have. Another way to understand leverage is viewing it as a loan provided by the exchange to traders.

On Deriverse, traders can place bids and asks on the perpetual swap orderbook. When the orderbook matches buyers and sellers, two opposite-sign positions are created. There is no payment in either direction at the point of position creation.

Perpetual Swap Market Overview

Perpetual swaps are traded on centralized exchanges (CEXes) and decentralized exchanges (DEXes). They are the most popular and liquid instruments in crypto space. The crypto perpetual swap landscape continues to show significant activity, with daily trading volumes across centralized and decentralized exchanges (CEX + DEX) reaching approximately $700 billion. Perpetual swaps dominate this market, reflecting a consistent preference among traders for perpetual futures contracts over traditional term-based derivatives.

Perpetual Swap CEX Market

The average daily perpetual swap volume is currently around $700bn. The overall market for perpetual swaps has grown 175x from February 2018 to December 2024. CEX perpetual swap volumes still dominate DEX volumes, the current share of DEX volumes is only ca. 4.1%. According to Coingecko, there are 92 active perpetual swap centralized exchanges. In the last year, the CEX perpetual swap volumes have grown by >2x this year, as per Figure 1.

The current market share breakdown of major perpetual swap CEXes is as follows:

Perpetual Swap DEX Market

The total DEX daily perpetual swap volume is ca. $10bn. According to DeFi Llama, there are 74 active perpetual swap decentralized exchanges. In the last year, the DEX perpetual swap volumes have grown ca. 2x, exhibiting a similar growth rate to CEXes.

Hyperliquid leads decentralized perpetual swaps with $1.2 billion in daily volume. SynFutures records $500 million daily, though this figure is suspected to include a substantial amount of wash trading. Jupiter maintains $400 million in daily volume. dYdX rounds out the leaders with $350 million daily. The current market share breakdown of major perpetual swap DEXes is as follows.

Perpetual Swaps on Ethereum

Ethereum benefits from the best liquidity (counted as TVL). However, this liquidity is passive, which introduces a range of trade-offs. Also, Ethereum L1 is limited by its low speeds and high fees. Ethereum is currently serviced by ApeX, RabbitX, Paradex, Aevo. This is why many Ethereum-based DEXes have migrated to an Ethereum-based L2. Base is serviced by SynFutures, Jojo, BSX Exchange. ZkSync Era is serviced by Satori Finance and Holdstation, Arbitrum by GMX, Orderly, Vertex, HMX and Sui by Bluefin.

Perpetual Swaps on Solana

Solana is a cheaper and faster L1 blockchain than Ethereum. However, due to its younger age, it has not yet accumulated liquidity on par with Ethereum. On Solana, daily derivatives volume stands at around $600 million, marking it as a growing hub for decentralized derivatives, though it still trails behind the broader DeFi derivatives space, which sees roughly $5 billion in daily volume. However, DeFi derivatives represent a small fraction of the entire derivatives market, underscoring the opportunity for expansion within this sector. Solana is currently serviced by Jupiter, Drift, Zeta, Mango, Flash Trade, GooseFX, HXRO.

Perpetual Swaps on Other Chains

Outside of Solana & Ethereum, perpetual swap DEXes are using their own layer 1 infrastructure. These infrastructures are optimized for high performance, however, there are certain trade-offs, such as the need for bridging from source chains and lower transparency. Hyperliquid is using its own custom-built chain, traders have to bridge their USDC or USDT from Arbitrum. There are concerns about its transparency and decentralization of the network. These concerns seem to be currently addressed by the team. DyDx is using Ethereum and its own chain based on the Cosmos SDK and Tendermint Proof of Stake.

Why Trade Perpetual Swaps?

Perpetual swaps are traded by retail & professional traders. In general, they allow traders to speculate on price movements of assets without a time horizon. As opposed to futures with expiration, perpetual swap traders don’t have to worry about their position expiring. However, traders need to pay funding payments for their open positions.

Based on our conversations with professional traders, there seem to be 4 major popular types of perpetual swap trading strategies:

1. Funding Rate Arbitrage: Traders monitor perpetual swap exchanges for differences in funding rates. If one venue has abnormally high funding rates, traders open a perpetual swap position where they’re getting paid the funding rates, and hedge themselves using spot, or perps on another venue with low funding rates.

2. Directional Trades: Traders speculate on the directional outcomes of the underlying asset. The pros include lower inventory risk, i.e. traders don’t need to own the asset they want to get exposure to & easy way to get leverage.

3. Inter-Exchange Arbitrage: Traders monitor the space for price discrepancies on different venues, go long on the underpriced venue and short on the overpriced venue. In theory the prices will converge and traders make profit.

4. Inter-Exchange Rebates Arbitrage: Traders open market neutral positions, one position on a venue with low taker fees, and another opposite position on a high maker rebate venue.

Categories of DeFi perpetual swaps

As with spot DEXes, the easiest way to categorize perpetual swap DEXes is based on how liquidity is managed and made available to traders. When categorizing perpetual swap DEXes, the most relevant questions to ask are:

1. Does the protocol need passive or locked liquidity?

2. Are there passive liquidity pools, or do traders interact among each other P2P?

3. Does the protocol have a direct impact on the market?

4. Is the protocol using an oracle to fetch the current prices of underlying assets?

As per figure 7, the most straightforward way to categorise perpetual swap DEXes is divide them into:

1. Orderbook-based DEXes

2. AMM-based DEXes

3. Oracle-based DEXes

4. Aggregators

Orderbook-based DEXes

The purpose of orderbooks is to allow for P2P (peer-to-peer) onchain trading. However, many popular layer 1 blockchains (like Ethereum L1) are not suited for a fully onchain orderbook. There are 3 types of orderbook-based perpetual swap DEXes:

1. Partly off-chain: Matching engine is the most resource-intensive component and is therefore delegated off-chain. Pros include higher speed and more efficient liquidations, cons are lower degrees of decentralization & transparency.

2. Fully on-chain: Fast & high-throughput blockchains like Solana allow for deploying the protocol fully onchain. Pros include higher degrees of decentralization & transparecy, cons may include lower execution speeds.

3. Own chain: Building a layer 1 blockchain from scratch or becoming an appchain. Pros include the possibility of building customized infrastructure for perpetual swap trading, the cons include lower levels of liquidity, as liquidity has to be bridged from major chains.

Examples of orderbook-based perpetual swap DEXes include Deriverse, Hyperliquid, Dydx, Zeta, Drift, Paradex & Aevo.

AMM-based DEXes

The purpose of an AMM (automated market maker) is to allow for trading using passive liquidity, i.e. liquidity locked within the protocol in liquidity pools. The liquidity is not priced by individual market makers, it is priced using a constant product formula, e.g. x * y = k. There are 3 types of AMM-based perpetual swap DEXes:

1. Full AMMs: Liquidity comes from LPs depositing funds in a (usually 2-sided) liquidity pool, e.g. Perpetual Protocol v2, Predy, Futureswap.

2. Hybrid AMMs: Liquidity comes from a combination of orderbooks and AMMs, e.g. Drift v2 or Deriverse.

3. vAMMs (virtual AMMs): Liquidity comes only from traders’ margins, e.g. Drift v1 or Perpetual Protocol v1.

Funding payments issues with vAMMs:

In the context of vAMM-based perpetual swap protocols, which employ both index and mark price mechanisms, the funding payment dynamics are as follows: if the perpetual swap's value is higher than the index price, a positive funding rate requires those with long positions to pay those with short positions. Conversely, if the perpetual swap's value falls below the index price, a negative funding rate makes those holding short positions compensate those with long positions. In virtual vAMMs - where liquidity comes not from liquidity providers (LPs) but directly from traders' margin funds - an imbalance in OI is particularly risky. A marked skew towards either long or short positions can drain the margin funds of the opposing side in the event of sudden mark price spikes, potentially leading to the insolvency of the protocol if the profits on one side significantly outweigh the margin on the other.

Oracle-based DEXes

They are usually based on a single liquidity pool acting as a counterparty for all trades. If traders make a profit, the liquidity providers make a loss, and vice versa. Oracles provide the true price for a derivative asset, which means the protocol needs far less liquidity to function properly. Advantages include zero slippage and protection against impermanent loss. There are 2 types of oracle-based perpetual swap DEXes:

1. Synthetic Liquidity: Perpetual swaps are minted as synthetic assets using overcollateralization, the pros include zero slippage and zero IL, the cons include inefficient margins, e.g. Synthetix.

2. Basket of Assets: Perpetual swaps are synthetic positions, with traders on one side, and the basket of assets on the other, e.g. Jupiter and GMX.

Funding Payment Issues with Basket of Assets:

For oracle-based perpetual swap protocols, like GMX, the primary objective of funding payments is to incentivize a return to a balanced open interest (OI). Significant and sustained imbalances in OI present a heightened risk for these protocols. In oracle-based perpetual swap protocols, traders interact with a singular liquidity pool, borrowing against assets provided by LPs, who invariably assume the opposite side of trades. Here, the risk associated with OI imbalances is acute as it collectively subjects LPs to directional market risk. While standard DeFi derivative decentralized exchanges (DEXs) typically adjust funding rates based on the difference between index and mark prices, this method is not always effective in preventing OI imbalances.

GMX's approach presents an example of the OI imbalance issue. GMX aims for an equilibrium in its GLP pool between volatile and stable assets. However, the stablecoins in the pool are often underutilized. GMX's structure ensures that borrowing fees are always paid to the pool, irrespective of the position skew, but this doesn't rectify the OI imbalance or directional risk for GLP holders. GMX frequently encountered large open interests dominated by either long or short positions. In instances where traders profited significantly from major market fluctuations, the liquidity providers bore the losses. Consider a scenario where traders heavily leverage long positions. The GLP might struggle to maintain its target asset composition, increasingly consisting of stablecoins, thereby depriving GLP liquidity providers of the benefits from price rises in volatile assets like Ether or Bitcoin, leading to substantial losses.

Aggregators

These protocols compare the fees and prices across perpetual swap venues to help traders open a position in the most optimal way. Examples of perpetual swap aggregators include Ranger Finance, UniDEX and MUX.

Challenges of DeFi Perpetual Swaps

Despite the growing popularity of perpetual swap DEXes, there are still major challenges to be solved in order to bring DEX perpetual swap trading into the mainstream. These challenges include:

1. Cross-Margining: In traditional finance, it is common practice to use one margin account to open multiple positions in different instruments, i.e. options & futures. Due to limitations in blockchain infrastructure, that is not yet fully possible on DEXes.

2. OI-Imbalance: Significant and sustained imbalances in OI present a heightened risk for these protocols. In virtual Automated Market Makers (AMMs) - where liquidity comes not from liquidity providers (LPs) but directly from traders' margin funds - an imbalance in OI is particularly risky. A marked skew towards either long or short positions can drain the margin funds of the opposing side in the event of sudden mark price spikes, potentially leading to the insolvency of the protocol if the profits on one side significantly outweigh the margin on the other.

3. Low Execution Speeds: DeFi perpetual DEXes are too slow, exposing its traders to implicit costs, for example in the form of adverse selection. DeFi perpetual DEX traders are not able to execute arbitrage transactions as efficiently as they’d need.

   “Conducting perpetual swap arbitrage using maker orders on DEXes often doesn’t make sense for me. Why should I trade at 400 milliseconds on DEXes, if I can do it under 5 milliseconds on Binance, greatly increasing the chance that my trade will be profitable?”

   Algorithmic Trader

4. High Transaction Fees: Explicit costs are too high for DeFi institutional traders. DeFi algorithmic traders have small profit margins, often as low as 5 bps. If DeFi protocols charge 3 to 7.5 bps per transaction as a protocol fee, these traders are not profitable. Even if these protocol fees went down to 2 bps, DeFi algorithmic traders’ annual compounded returns would be lower by a factor of 3-5.

   I have an algorithm that makes 0.06% per trade. In a one year backtest it can make 1,500% return (15x) with no fees. With 0.02% fee that goes down to 500% return, meaning 3x reduction. This absolutely kills compounding.”

   Algorithmic Trader

5. Inefficient Liquidation Mechanisms: Perpetual swap DEXes have to make a number of design choices when it comes to liquidation mechanisms, each with its own set of trade-offs. DEXes have to grapple with questions like what happens when there is not enough liquidity in the orderbook for liquidations, and whether the oracle price or mark price should be used as the trigger for liquidations.

In future posts, we will explain how Deriverse is tackling these challenges, focusing on our perpetual swap design choices.

Thank you for shaping the future of decentralized derivatives trading with us! Stay tuned for our next article!

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