Decentralized Perpetual Exchanges Investment Thesis

1. Abstract

This article discusses the investment case for decentralized perpetual protocols. While Cryptocurrency futures volumes historically dwarf spot volumes, on-chain spot volumes currently exceed on-chain future volumes. This was largely due to throughput constraints on the execution layer of L1s, making on-chain order-book exchanges unfeasible. However recent advancements in L1 scaling allow the creation of flexible decentralized perpetual protocols. The article examines the growth and development of new decentralized perpetual exchanges. The architecture of various decentralized perpetual is explained focusing on Hyperliquid, IntentX, Vertex, Injective, DYDX, and GMX. Fees, Growth, and Market Capitalization of decentralized protocols are examined and compared with DEX and CEFI competitors. Finally, the article discusses how Incentive programs, Long-tail asset strategies, and improvements in user experience will act as catalysts for future growth.

2.1 Perpetual Futures:

Perpetual futures are a type of derivative contract that allows traders to speculate on the future price of an asset without an expiration date. These contracts are delta-one products, for each move of the underlying asset, there is an identical move in the price of the derivative.

While the BTC-USD perpetual pair should always mirror the BTC price there exist small differences in demand imbalances between the long and short side of the trade. This is the Perpetual Premium. A higher Premium implies the dominance of long traders, pushing up the perpetual price compared to the spot price. A negative premium implies an imbalance where more short positions exist.

Figure 1.1 BTC perpetual premium Source
Figure 1.1 BTC perpetual premium Source

To reach an equilibrium between contract price and spot price exchanges charge interest rates on borrowed funds - known as the funding rate. These rates are floating and recalculated every 8 hours based on the perpetual premium. When the contract is at a premium - traders taking the long trade pay funding to their counterparties (Shorts). When the contract is at a discount - short traders pay funding to their counterparties (Longs). The funding rate is often used as an indicator of sentiment, when the majority of traders are bullish and the long funding rate is high, during market downturns funding often turns negative. Based on market conditions a trader may end up paying or being paid for the same position.

Binance calculates the funding rate based on a flat interest rate ( 0.03% daily ) + Premium Index. The funding rate is calculated with the formula:

Fundingrate=PremiumIndex+clamp(InterestRate−PremiumIndex,0.05Funding rate = Premium Index + clamp ( Interest Rate - Premium Index, 0.05%, -0.05%)

Perpetual futures are cash-settled and generally require a cash collateral position to open a leveraged perpetual position. Traders provide collateral - either in the form of isolated margin or Cross Margin. In an Isolated margin, traders provide a certain amount of capital to be used as collateral for their leveraged position. In cross-margin, the trader’s entire account is used as collateral for all his positions.

Leverage trading is currently the most popular form of cryptocurrency trading, doing 2 - 3.5x the spot volume on average in 2022.

Figure 1.2 Perpetual trading volume Source: Fundamentals of Perpetual Futures - Scientific Figure on ResearchGate. Available from:
Figure 1.2 Perpetual trading volume Source: Fundamentals of Perpetual Futures - Scientific Figure on ResearchGate. Available from:

With this collateral, a trader opens a futures contract they hold indefinitely provided they maintain a minimum margin balance and pay the funding rate. Liquidation occurs when the loss of the position is greater than the collateral pledged. This results in the trader’s position being automatically closed.

A Trader borrows $10,000 of BTC-USD coin margined positions with collateral of $1k - This is a 10x leveraged position. He pays funding rate on his notional position size of $10k.

  • Outcome A: BTC price rises by 10% - Traders position is worth $11,000 resulting in a 100% PNL on his collateral.

  • Outcome B: BTC Price drops by 10% - Traders position is worth $9,000 resulting in liquidation and -100% PNL.

Open interest refers to the total number of outstanding derivative contracts, such as options or futures, that have not been settled. It expresses how much leverage is currently in the market. in 2021 the Aggregate Open interest on BTC peaked at $20 Billion; meaning 20 billion dollars of assets were borrowed for leveraged BTC positions.

Open Interest Bitcoin - Source Velodata
Open Interest Bitcoin - Source Velodata

2.2 Centralized exchanges:

Traditionally the trading of derivatives contracts was done on centralized exchanges. They act as intermediaries between buyers and sellers, providing liquidity for supported tokens and executing trades on behalf of users. These exchanges are popular due to their user-friendly interfaces and the convenience they offer, including the ability to conduct trades from fiat to cryptocurrency and vice versa.

The main players are Binance, Coinbase, Upbit, OKX, and Kraken. Together they average >$500 Billion monthly volume for 2023.

Source: The Block
Source: The Block

These are preferred by users over decentralized exchanges and wallets due to:

  1. User UX and UI: Binance and other centralized exchanges have simple-to-use interfaces with tutorials, support, and intuitive trading designs.

  2. Fiat-to-crypto trading: Centralized exchanges can be used to conduct trades from fiat to cryptocurrency (or vice versa) with debit cards or bank transfers, making them a common means for investors to buy and sell cryptocurrency.

  3. Leverage Trading: Access to 100x leverage and 400+ crypto pairs.

However - Centralized accounts have the following drawbacks

  1. Not your keys, not your crypto: After the FTX collapse; traders understand the risks associated with holding funds on exchanges. Funds held by the exchange are often used to earn yield as additional revenue while putting user funds at risk.

  2. KYC strict regulations: Due to strict regulation, centralized exchanges must comply with international and country laws. This means strict KYC for all customers. Centralized exchanges have been seeing stricter regulations, causing Binance to withdraw from Germany, the Netherlands, the UK, and India in 2023.

3.1 Decentralized Spot Exchanges (Uniswap):

In 2020 crypto saw a 0-1 Innovation. The launch of decentralized exchanges built on Ethereum allowed users to swap ERC20 tokens trustlessly with smart contracts. This was achieved with the use of Liquidity pairs. Users could pair two Erc20 tokens in an LP - of which the tokens in the liquidity pool must remain the same value. LPs used an automated market maker function to determine the price of the asset. This solved the problem of requiring centralized Market Makers to provide liquidity.

Order Books Model (Centralized exchange)**: Consists of a centralized database where different buyers and sellers submit their trades. The limit prices of these orders make up the bids (buyers) and ask (sellers) on both sides of the order book. Order book exchanges require users to place an order and wait for it to be filled. Market Makers are usually institutional funds.

Automated Market Makers (Decentralized Exchanges): AMMs operate differently from order books. They do not depend on third-party buy/sell requests. Instead, they use liquidity pools and an algorithm to set token prices based on the changing ratio of tokens supplied. Liquidity providers supply tokens to the pools to create liquidity and are rewarded with trading fees proportional to their contribution.

Uniswap liquidity pools use a constant product sum to determine asset prices. The constant product function ensures that trades must not change the product of a pair's reserve balances.

The formula is: x∗y=k,x * y = k, where xx is the amount of token A in a liquidity pool, yy is the amount of token B in a liquidity pool, kk is a constant number.

Constant Product Formula
Constant Product Formula

As one token is withdrawn from the pool, the price of the other token increases asymptotically. This approach allows for automated market making, ensuring constant liquidity regardless of the presence of a counterparty.

Transaction fees are paid to liquidity providers. Liquidity providers were also incentivized by decentralized exchanges with incentive programs that allocated native token emissions to Liquidity Miners. Liquidity Pairs split these fees on a pro-rata basis based on the percentage of the total LP share they had.

This kickstarted the famous Defi summer; where the total value locked across all EVM-compatible chains increased from $590m in January 2020 to $150 billion in January 2022. At its peak, the spot volume on decentralized exchanges was 20% of all Cryptocurrency spot volume, and Uniswap the market leader reached a 21 Billion dollar market cap.

Source: The Block
Source: The Block

However, Defi had a problem. Ethereum’s gas fees were too high for users. It would cost a user $30+ in gas fees for the average Uniswap transaction. The transaction process was similar to this:

  1. On-ramp cryptocurrency via a centralized exchange (Binance, Coinbase) to Metamask

  2. Grant Uniswap approval to spend ETH (Base token) → Swap Base token into Currency → Grant Uniswap approval to spend currency → Swap back into ETH

Each of these steps required additional gas fees. Users were also only able to buy Erc20 tokens on Ethereum, If a user wanted to purchase BTC he needed to buy WBTC (wrapped version of BTC) causing additional smart contract risk.

The swap fees paid to LPs were 30bps. New v3 updates created liquidity tiers ranging from 5bps to 100bps. Additionally, Uniswap added a 15bps front-end fee. Therefore Uniswap spot fees were significantly higher than Binance's 10bps spot fees.

The problems with Decentralized exchanges at the time could be summarised with the following:

  • Fragmented liquidity: Each DEX had its own liquidity pair which fragmented liquidity across a chain. Liquidity was further fragmented among chains (ETH, ARB, AVAX). Only Erc20 tokens could be added to LPs, which limited flexibility.

  • High Fees: High swap fees, high Ethereum gas fees, and multiple approvals required.

  • High slippage: Low liquidity due to fragmentation and Impermanent loss on low market cap LPs

    Despite this Defi was a 0-1 Innovation in the crypto space allowing for trustless asset swaps.

3.2 Decentralized Perpetual Exchanges (GMX, DYDX):

Decentralized finance primitives were limited to spot exchanges. As outlined previously, Ethereum fees and TPS ( 15 / second) made order book exchanges unviable. This changed with the Introduction of Layer 2 networks and improvement in alt Layer 1 infrastructure.

GMX (GLP based Perpetuals):

The Uniswap spot exchange model was innovated in 2021 with GMX. Unlike traditional spot exchanges, GMX users don't buy or sell tokens directly. They deposit collateral and take long or short positions. Profits are paid in USDC for short positions or in the pair's other token for long positions.

GMX works with a GLP Pool. Liquidity providers add liquidity to the GLP pool by locking any of the index assets in the pool. In return, the protocol mints GLP tokens representing the liquidity provider’s stake. The protocol then automatically stakes the newly minted GLP tokens. Traders use the GLP Pool as their counterparty. They pay USDC collateral to borrow GLP Pool assets - and rent their upside.


For example, a trader pays $10,000 to go 10x leverage and borrow $100,000 BTC from the GLP Pool. In the case that bitcoin doubles he gains the upside the Pool would have normally earned ($100k goes to him, and $100k in BTC is returned to the pool to repay his loan). In the case he is unsuccessful he returns the rented asset and his collateral. Historically the GLP pool averaged 20% yearly returns.


  1. Position Fee: 10 BPS borrowing and Closing Fee

  2. Borrowing Fee: This is a dynamic fee based on utilization rates and the underlying asset you choose to profit in. It's calculated as (assetsborrowed)/(totalassetsinthepool)∗0.01(assets borrowed)/(total assets in the pool) * 0.01% per hour.

  3. Swap Fee: Swap fees are dynamic and based on whether a swap improves the weights of assets in the GMX liquidity provider token (GLP) pool towards or away from the target allocations

Benefits / Disadvantages:

GMX allowed the use of on-chain leverage using the GLP model in ways that weren’t accessible previously. The GLP pool allowed high leverage (50x) since traders had access to large amounts of GLP liquidity. However, the GLP pool had a major drawback. Only assets in the GLP pool were able to be traded, limiting the number of markets GMX offered. GMX currently offers only 9 perpetual markets of BTC, ETH, SOL, ARB, LINK, XRP, DOGE, UNI, and LTC.

DYDX (OrderBook-based Perpetuals)

DYDX utilized another method to bypass the latency and fee issues. They employed an on-chain off-chain orderbook model. In the context of DYDX, the off-chain orderbook operates by hosting the orderbook within the memory of the validators, rather than on the blockchain itself. This approach is taken to overcome the latency issues associated with on-chain order books. When a user places an order, the order details (such as price, volume, expiry date, and whether the order is a buy or sell) are stored in the off-chain order book. If another user submits a matching order, the smart contract checks if the funds are available for the trade. If everything is acceptable, the trade is executed. The actual trade settlement, however, occurs on-chain. The off-chain order book model allows for a significant reduction in gas costs and an increase in speed, as the trading activity happens outside of the blockchain.

To encourage market makers dYdX has a Liquidity Provider Rewards program that rewards market makers based on their contribution to the platform's liquidity. The rewards are distributed in $ethDYDX tokens and are based on a formula that takes into account maker volume, two-sided depth, and spread (compared to the mid-market price).

Recently dYdX transitioned from a layer-2 network atop Ethereum to its standalone blockchain, known as the dYdX Chain. This transition was part of the dYdX v4 upgrade and was motivated by the need for greater throughput to support the platform's order book. The dYdX Chain is built with the Cosmos SDK and Tendermint Proof-of-stake consensus protocol, which allows it to handle up to 2,000 transactions per second. The transition to its chain has several impacts:

  1. Full Decentralisation: The dYdX Chain is a fully sovereign open-source blockchain software, meaning it is not reliant on any external blockchain or system.

  2. Community Control: The v4 upgrade made the exchange fully decentralized and community-operated. Changes to the stack are done through governance votes by the community through the dYdX Foundation.

  3. Fee Sharing: When dYdX was a layer-2, it charged maker-taker fees which were not shared with users. With the transition to its chain, trading fees are now shared with stakers on the dYdX chain.

4. Current Decentralized Perpetual Landscape

Infrastructure for derivatives improved greatly since 2021 with the improvement of Ethereum scaling on L2s and Layer 1 platforms. Breakthroughs have occurred in both trading volume and the number of players in the sector. The current on-chain derivatives volume in December was 114 Billion dollars, up from 84 billion dollars in November.

Current Decentralized Derivative exchanges can largely be characterized by their architectural design:

  1. Oracle-based. Synthetic & Basket of Assets: Oracle-based protocols use a liquidity pool as a counterparty for trades. In synthetic liquidity, a single asset serves as the foundation for all trading markets. By using an oracle, liquidity providers (LPs) can become the counterparty to all those markets. In the basket of assets model, a variety of assets are used as a counterparty.

  2. vAMMs: Virtual Automated Market Makers (vAMMs) provide a decoupled market structure, facilitating independent price discovery from the underlying spot price. This can lead to discrepancies between the futures price and the spot price of the asset, which can lead to arbitrage opportunities. However, the lack of deep liquidity can trigger unexpected or undesirable price movements when opening/closing positions.

  3. Spot AMMs: Spot AMMs integrate into spot-AMMs or DEX aggregators, where trades occur on platforms like Uniswap, Curve, etc. The price discovery is bound to the number of venues that are integrated as well as the liquidity within those venues. Oracles are important to Spot AMMs mostly to ensure the best price execution for their buyers and sellers.

  4. Order books: Order books facilitate peer-to-peer trading, where buyers’ bids and sellers’ asks interact, creating a marketplace for price discovery and trade execution. The protocol allows traders to execute trades at any price, eliminating the need for an oracle in this setting.

  5. Hybrid: AMM + Order Book: Hybrid models combine order books and AMMs to ensure continuous liquidity. For example, Drift v2 uses three different liquidity mechanisms: a Just-In-Time (JIT) dutch-auction, a Limit Order Book, and a constant-product AMM. Vertex uses a price/time priority algorithm, so orders will be executed based on the best price regardless of whether it's the AMM or a market maker making the price.

Source: Three Sigma Capital
Source: Three Sigma Capital

Following are the current leaders in decentralized derivatives and their architectural choices.

Hyper Liquid: (L1 OrderBook. Fully on-chain):

  1. Architecture: The Hyperliquid L1 is a custom-built blockchain optimized for a high-performance decentralized derivative exchange. It uses a tuned version of Tendermint for consensus, achieving a median end-to-end latency of 0.2 seconds. It supports 20k operations per second, including orders, cancels, and liquidations. The system is written in Rust, uses an ABCI server, and is secured by proof of stake. This allows significant improvements over default tendermint which is capped at 1k transactions/seconds.

    Hyperliquid uses an order book model which is completely on chain. Hyperliquid has vaults (HLPS) that democratize market-making - users can deposit into the vaults with market-making strategies and earn yields.

  2. Tokenomics: Hyperliquid Has no Token yet. They announced a points campaign for an upcoming airdrop in which 1,000,000 points will be distributed weekly to Hyperliquid users for 6 months. The first distribution took place on November 9. Points are meant to reward users who contribute to the protocol’s success.

  3. Unique features:

    Custom L1 Uniswap perpetuals: Hyperliquid has Isolated only perpetuals with Uniswap v2/v3 oracles for price. This allows for the listing of Defi-only projects with no Centralized exchange needed for price oracle. This also allows for Pre-futures contracts that act as perpetuals for protocols without tokens.

    Index perpetual contracts: Index contracts track a formula instead of a spot asset price as the underlying index. Instead of tracking the median price across a set of liquid CEXs, index perpetual contracts require the validators to periodically publish the value of the index formula to the Hyperliquid L1. The median of these reported values are then used in place of the spot oracle formula to compute funding rates. Example: NFTI-USD (Index of bluechip NFTs) and FRIEND-USD (index of friend tech shares Hyperps)

    Vaults: Allows for users to create vaults (vault leaders) and other users to deposit into the vaults and copy trade. The vault leaders receive 10% of the profit made. This includes the Market Making HLP vaults.

Hyperliquid User Interface
Hyperliquid User Interface

Aevo Previously Ribbon Finance (On chain Off-chain OrderBook)

  1. Architecture: Aevo is a high-performance decentralized derivatives exchange, focused on options. The exchange runs on a custom EVM roll-up that rolls up to Ethereum. Aevo operates an off-chain orderbook with on-chain settlements. This means that once orders are matched, trades get executed and settled with smart contracts. Aevo is most well known for its option contracts with 77% of the current market share - Aevo has both OTC and structured options. Paradigm, Dragonfly Capital, Ethereal Ventures, Coinbase Ventures, Nascent, Robot Ventures, Scalar Capital, and Alliance are investors of Aevo.

  2. Tokenomics: Aevo employs a Vote escrowed tokenomic system where users can lock $Aevo for voting power and rewards. Aevo staked for 3 months becomes $sAEVO representing a non-transferable version of $AEVO, entitling users to 2x voting power, commission discounts, and early access to new products. Following RGP-33 Aevo voted to rebrand and upgrade to $Aevo from $RBN with a 1-1 token swap which will take place in January 2024.

  3. Unique Features:

    aeUSD: aeUSD is an innovative financial instrument on the Aevo Layer 2 platform, structured as an ERC-4626 asset. It is a hybrid asset, composed of a blend of USDC and sDAI, specifically 5% USDC and 95% sDAI. This asset serves as collateral on the Aevo exchange, which is fully exchange-whitelisted and carries a collateral factor of 100%. This means that users can fully collateralize their positions with aeUSD. Investors, including individual users, market-makers, and various financial strategies, can leverage aeUSD to earn a competitive annual percentage yield (APY) of 4.75% on their exchange margin.

    Options: Aevo options include a robust margin system and hundreds of instruments to trade, including daily, weekly, monthly, and quarterly options. Aevo uses European options, which can only be settled at the expiration date.

  4. Vaults: Aevo has vaults in which users can run automated strategies and earn yield. While Aevo Vaults are currently in early access - previously they had two vaults active: Theta Vaults and Ribbon Earn Vaults. Theta Vaults runs an automated European options selling strategy, which earns yield on a weekly basis through writing out-of-the-money options and collecting the premiums. When a user deposits assets into a Theta Vault, the vault mints and holds custody of the user's shares. The vault then issues out-of-the-money call options on all deposits each week. If the option expires out of the money, the vault reinvests the yield earned back into the strategy, effectively compounding the yields for depositors over time. Ribbon earn vaults are described as an all-weather yield product that offers principal protection and uses a combination of lending and exotic options to enhance yields through exposure to short-term volatility in the market.

Aevo User Interface
Aevo User Interface

IntentX (RFQ Exchange):

  • Architecture: IntentX is a next-generation over-the-counter (OTC) derivatives exchange that offers perpetual futures trading. It operates on an intent-based architecture, which is a departure from traditional order books or automated market maker (AMM) models. Instead of executing orders against committed capital, IntentX allows traders to express their trading intentions. These are then executed by external solvers (market makers), who can plug in centralized exchanges (CEX) liquidity, ensuring competitive quotes and minimal slippage The platform is built on Base and leverages several cutting-edge technologies, including LayerZero, a cross-chain communication protocol, account abstraction, and Request for Quotation (RFQ) architecture.

  • Unique Features:

    LayerZero omnichain capabilities: IntentX leverages LayerZero, a cross-chain communication protocol, to enable seamless cross-chain expansion and scaling, allowing the platform to deploy across the entire DeFi ecosystem without technical or liquidity barriers

    Competitive offering: IntentX offers over 180 tradable crypto pairs with deep liquidity, up to 60x leverage on perpetuals, "trade to earn" incentives for xINTX rewards, and cross-margin accounts for efficient margin management

    Tokenomic structure: 100% revenue share to XINT holders

IntentX User Interface
IntentX User Interface

Vertex Protocol (Hybrid AMM OrderBook Exchange):

Architecture: Vertex Protocol is designed to optimize capital efficiency, reduce costs for users, and improve the overall user experience. It achieves this through a hybrid orderbook-AMM design, which combines the orderbook model typical to centralized exchanges (CEXs) with an automated market maker (AMM) architecture. In Vertex's hybrid model, the pooled liquidity of the AMM sits alongside the bids and asks on the Vertex orderbook, effectively another market maker contributing to liquidity via smart contracts rather than API. This design allows Vertex to offer extremely low-latency trading and effective liquidity utilization across a broader range of DeFi assets

Unique Features: Vertex Protocol integrates the orderbook model typical to centralized exchanges (CEXs) with an automated market maker (AMM) architecture, a model that has been instrumental in the success of decentralized exchanges (DEXs). This hybrid design aims to provide users with the best price matching, trade execution, and access to opportunities Vertex Protocol is a vertically integrated DEX that provides spot trading, perpetual contracts, and money markets all in one place. This allows users to have a unique and enhanced user experience

Vertex Protocol User Experience
Vertex Protocol User Experience

Injective (Infrastructure & DEX):

Architecture: Injective is a layer one protocol that provides infrastructure for protocols building decentralized exchanges. Injectives block time (10,000+ TPS) and plug-and-play modules allow developers to create orderbook dexes. all DEXs built on Injective leverage the same on-chain order book, enabling seamless sharing of liquidity and user base within the entire ecosystem. Injectives native perpetual exchange is Helix Exchange.

Unique Features:

Shared liquidity: Injective L1 provides infrastructure for Decentralized Perpetual exchanges, among these includes shared liquidity. Each Exchange on Injective shares the same liquidity as Injective provides market makers.

Spot exchange with IBC bridge: Since Injective is built using the Cosmos SDK, It utilizes the IBC protocol to enable cross-chain interaction and interoperability. This means that assets can be transferred between different blockchains, expanding the range of assets that can be traded on the Injective platform. For example, users can purchase native SOL that they can send straight to their phantom wallet.

Trading Bots: Helix exchange offers a Grid trading automated strategy. This involves placing orders above and below a set price, and creating a grid of orders at incrementally increasing and decreasing prices. When the price moves, the orders are executed, and new ones are placed. The bot automates this process, allowing traders to take advantage of market fluctuations without constant monitoring.

Injective Exchange User experience
Injective Exchange User experience

Rage Trade: (Aggregator):

Rage Trade is a multi-chain perpetual aggregator that operates across all compatible chains, including EVM L2s, L1s, AppChains, Cosmos, and others. It is a decentralized derivatives trading platform that allows users to provide liquidity provider (LP) tokens of other protocols as liquidity for perpetual traders. The platform is designed to offer a streamlined trading experience, enabling users to select optimal trade routes to open leverage trades.

Infinity Pools (VAMM):

InfinityPools is a decentralized finance (DeFi) protocol that offers a novel approach to leveraged trading. It allows for unlimited leverage on any asset, with no liquidations, no counterparty risk, and no reliance on oracles. The protocol operates by having decentralized exchange (DEX) liquidity providers (LPs) deposit their LP tokens into the protocol. These tokens are then aggregated and borrowed by traders seeking leverage. Traders seeking leverage borrow these concentrated UNIv3 LPs. An ETH-USD Univ3 LP can provide tight liquidity between a range - at the low price of the range they are completely in ETH and the top of the range completely in USDC. Traders can borrow these LPs provided they pledge the collateral ETH required that the LP would have if the price went to the bottom of the range borrowing all the upside of the position.

Unlimited Leverage: With upfront secured liquidation liquidity, leverage levels can scale nearly infinitely. Unlimited Assets: Any asset can be safely leveraged since the protocol uses existing DEXs, making the protocol entirely permissionless.

No Oracles: Prices are implicit to the borrowed LP positions and with the underlying AMM usage, there is no dependence on external oracles. No Liquidations: Without the cash loan dependency, there is no need for traditional liquidations where leveraged assets are sold on the market.

Scalability: Without liquidation bot or oracle dependencies, the protocol can stand entirely by itself, allowing it to scale into any asset market, only limited by the spot liquidity available. InfinityPools also changes the payoff function for LPs. Normally, LPs would only earn yield if their liquidity is in range and earn fees from swaps. With the InfinityPools loan model, LPs are able to both earn swap fees while capital is in range on the Float Pool as well as when the capital is loaned to traders.

Protocol Comparison

  1. Fee Comparison:
Exchange Taker Fees
Exchange Taker Fees

According to recent exchange data, decentralized exchanges are already able to compete with Binance offering competitive taker fees. Decentralized perpetual exchanges also offer low-cost alternatives compared to the market leader of decentralized spot exchanges with significantly cheaper fees compared to Uniswap default 30 BPS.

While Binance has the lowest Annualized funding fees, Decentralized derivative exchanges remain competitive. Improvements in market-making will lower future costs.

Protocol Growth:

Following is a comparison of the volume growth of the mentioned protocols. Most protocols are growing at a rapid pace - Averaging 400% volume growth since July. Leading growth are Hyperliquid and Vertex. GMX lags due to limitations with fees and limited pairs.

  1. Overall Spike in Derivative Volume Growth: Derivative Volume grew rapidly with average growth of 400%.

  2. Effect of token incentives: Vertex and Hyperliquid both saw spikes in volume. Vertex saw a 753% increase in monthly volume from 1.78 Billion in July to 12.5 Billion in December, and Hyperliquid saw increases from 646 million to 7.1 Billion in the same time frame. Both VRTX and HyperLiquid subsidized trading volume with Token incentives.

  3. DYDX & GMX Facing competition: Giants GMX and DYDX saw reduced growth compared to competitors. While both dominate as first movers, new entrants have the flexibility of deploying aggressive strategies to attract new users.

Market Capitalisation:

Market Capitalisation of Exchanges
Market Capitalisation of Exchanges

The Derivative landscape has a combined valuation of 3.8 Billion dollars with SNX, DYDX, and GMX the top 3 protocols by Market Capitalisation. A significant amount of exchanges are still without tokens. Despite Decentralized derivatives doing approximately the same volume as decentralized exchanges, their market capitalization is 4x less than decentralized exchanges.

In the context of decentralized finance, derivatives are still in their infancy having 4.7% of the total market share.

The Path Forward:

This section highlights the catalysts and roadmap that prime the derivative landscape for wide-scale adoption in 2024.

Expansion of Markets: In 2020, Uniswaps 0-1 Innovation was the permissionless listing of any Er20 pairs. While Centralized exchanges were limited by liquidity, regulatory, and Due Diligence constraints in the listing of assets, Uniswap allowed any Liquidy pair to be created in a matter of seconds. In September 2020, Uniswap saw 300,000 mint events adding liquidity to pools, the majority of which (996782 ETH) were in permissionless smaller pools. Uniswap was the exchange that differentiated itself by allowing trades for all assets regardless of market cap, liquidity, and regulation.

Uniswap Pool Creation
Uniswap Pool Creation

Decentralized Perpetual exchanges are following a similar trajectory. DYDX the market leader, plans to create a decentralized permissionless perpetual protocol allowing all assets with price feeds to be listed on the DYDX platform. DYDX will go beyond crypto assets. In the future, carbon credits, prediction markets, and indexes will be tradable on DYDX. Similarly, InfinityPools Launch in Q1 2024 will allow the leverage of any uniswap v3 token. Just as Uniswap allowed spot exchange for any asset, Infinity Pools enables futures pairs for any assets.

Most Decentralized exchanges previously worked on infrastructure - creating L1s with the latency to handle 1000+ tps and handle orderbook model. Now that the infrastructure is in place, teams will focus more on creating trading pairs and scaling growth. Hyper Liquid has added an average of 4 pairs a week since September.

     Another key differentiator lies in the focus of the various protocols. Binance dominates large market cap assets, but its strict regulatory requirements give perpetual protocols significant room to grow. On Hyperliquid, Retail volume is 53% “Other”, which are tokens not including BTC, ETH, ARB, AVAX, etc. Along tail strategy of providing a large number of pairs according to retail demand could act as a significant volume catalyst. Hyperliquid and Aevo are currently offering long-tail products such as premarket perps of BLAST and JUP. HyperLiquid lists retail assets such as $HPOS, $SHIA, $UNIBOT, $BANANA, $CANTO, and $WIF which are not listed on Binance. Hyperliquid also aggressively adds Memecoins with 8 Listed perps compared to Binance which has 9. Additionally, these exchanges can compete with unique structured protocols such as copy trading vaults and premarket products.

Long Tail Strategy
Long Tail Strategy

User experience Streamlining: Another main priority of decentralized perpetual exchanges is improving the user experience to replicate the feel of a CEX. While Decentralized Perp exchanges are improvements over DEXes with Native charting, gasless swaps, and MEV protection, they are also coming close to the feel of a CEX. The main benefit Decentralized perps have is no KYC. This allows users to onboard in seconds rather than wait days for KYC approval.

The exchanges will benefit from the various improvements. Native On/Off ramps will allow users to use on ramps to fund their accounts removing the need for CEX to fund a user’s trading account. Spot Exchanges with IBC bridge allow users to purchase and hold tokens from various blockchains.

Incentive Program and Community Governance: While Decentralized perpetual protocols already offer similar fees to CEFI counterparts, the protocols further subsidize trading with token incentives. This aggressive growth strategy follows the 2020 Liquidity mining playbook which saw huge inflows of TVL for DEX spot exchanges.

  1. Hyperliquid: 6 Month Points Program.

  2. Intent X: 26% of INTX tokens are distributed for trade to earn.

  3. Vertex: 44% of VRTX tokens are distributed for trade to earn.

  4. DYDX: 50,000 $DYDX per day is available to be earned by traders on the dYdX Chain.

These incentives bootstrap users and market makers to provide initial volume and liquidity on the platform. However, interesting tokenomics increase the stickiness of rewards by offering revenue sharing and Ve-Lock mechanisms to promote real yield through revenue sharing.

  1. IntentX: 100% of fees go to INTENTX holders.

  2. Vertex: 50% of fees go to vertex stakers.

  3. GMX: 30% of fees go to $GMX stakers.

  4. DYDX: Fees go to staked DYDX Another benefit of Decentralized perpetuals is the value accrual of the token.


     Decentralized derivative volume has grown 400% since July 2023. Despite this, the sector is still in its infancy, capturing only 2% of the total cryptocurrency futures volume. Compared with on-chain spot DEXes, on-chain decentralized derivatives’ monthly volumes are similar (114b perp vs 135b DEX), despite historically Futures having 2-3.5x more volume than spot. Perpetual exchanges faced bottlenecks of high fees and latency issues, but recent innovations in infrastructure and protocol architecture allow perp dexes to compete with centralized giants such as Binance. Among the various approaches GLP, synthetic assets, and order book model exchanges were most successful - with big players in each. Among the designs, the order book model appears most suitable to achieve composability and low latency. Both DYDX and Hyperliquid successfully implemented this model on a custom Cosmos SDK chain. Decentralized perpetual protocols employ aggressive growth strategies such as incentive programs and fee discounts. Decentralized protocols benefit from the lack of regulatory requirements, allowing for non-KYC and flexibility for token pair listing. These strategies, coupled with community governance, and token value accrual, are expected to drive growth in the sector.

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