Introduction

Trading is a dynamic and high-stakes activity, where assets worth billions of dollars change hands globally on a daily basis in stock, mercantile, and crypto exchanges (e.g. NASDAQ, CME, Binance). This demanding financial ecosystem requires all participants who want to be successful to understand its functionalities and always remain vigilant!

There are many different asset classes available to trade worldwide, but in this article, we’ll be focused on where Zaros is located: Perpetual Futures! Here, we’ll dive deep into futures trading and showcase why Zaros is the ideal platform for trading such derivatives on the blockchain.

Here’s what we’re addressing today:

• Traditional Futures vs Perpetual Futures

• CEX vs DEX

• Types of Perpetual Futures Traders

Traditional Futures vs Perpetual Futures: what’s the difference?

Futures trading in the US traces its origins back to the 19th century, marked by the inception of central grain markets. These markets provided farmers with a platform to sell their products for either immediate or forward delivery. Over time, the landscape of futures trading has undergone significant evolution. Today, individuals and institutions from across the globe engage in futures contracts, not to acquire physical assets (most of the time), but rather as a means to speculate on price movements. This practice enables them to profit from market fluctuations, and hedge against volatile conditions, safeguarding their portfolios.

Alright, so futures contracts are basically legal agreements to buy or sell an asset on a specific date and people use that as a way to profit or hedge their portfolios.

But this is an old definition because now we also have perpetual futures, which represent the most popular derivative contract that crypto traders use to speculate on digital asset prices. Let’s understand a little bit more about it:

Perpetual Futures

Perpetual contracts are essentially swap agreements that never expire, setting them apart from traditional futures contracts, which come with predetermined expiration dates. This unique feature empowers crypto traders to open highly leveraged positions, benefiting from the increased liquidity resulting from the uniformity of these derivatives – they don't exhibit varying maturity dates. Moreover, traders can steer clear of incurring rollover costs (associated with closing a near-expiry futures contract and acquiring another with a more distant expiration) and bypass the need for direct cryptocurrency ownership.

Due to their absence of a fixed expiration date, perpetual contracts do not come with a guarantee of convergence with the spot price of their underlying asset at any particular moment. Additionally, they do not offer an arbitrage opportunity between spot prices and future prices, since there are no maturity dates. However, in order to maintain futures prices in proximity to spot prices, a mechanism known as the funding rate comes into play, which we’ll explore further in this article.

Curiously, crypto perpetual futures were first introduced by BitMEX in 2016, which gained great popularity in the crypto space since its inception. It initially served as an effective hedging tool for crypto miners and was later adopted by speculators interested in leveraged exposure. Now, it is by far the most popular derivative contract traded in the market.

CEX vs DEX: A massive opportunity for Zaros

When it comes to trading volume and availability of assets in futures markets, it’s undeniable that centralized exchanges still lead the way by far, as we’ve addressed in our previous article.

However, in light of numerous events that unfolded in 2022, which highlighted the issues of transparency plaguing centralized entities such as FTX, Blockfi, and Celsius, we hold the view that the future is decentralized.

In this way, users retain full custody of their assets while trading on a platform that looks just like a centralized exchange in terms of features and user experience. The added benefit? No worries about the exchange's potential mishandling of customer funds or market manipulation. A huge opportunity for us

In the table presented below, we illustrate the market share of the prevailing centralized exchanges and decentralized exchanges within the perps industry.

It's apparent that centralized exchanges continue to exert a big dominance in the perpetual futures market, encompassing both trading volume and open interest. Notably, in the past 24 hours, Binance alone accounted for more than half of the total trading volume across these seven exchanges.

Conversely, decentralized exchanges are currently at a nascent stage of development. A case in point is dYdX and Kwenta, which, when considered together, contribute a mere 0.52% to the overall trading volume, which makes us feel very optimistic about the future.

As previously stated, our conviction is that decentralized exchanges represent the future of trading. With the forthcoming launch of Zaros, traders will gain access to a CEX-like user experience while retaining full custody of their assets and reaping the benefits inherent in a decentralized ecosystem.

Furthermore, we are poised to revolutionize the existing landscape of Perp DEXes by addressing the challenge of liquidity fragmentation through innovative eClusters. Our platform also distinguishes itself as the most capital efficient, capitalizing on the utility of Liquid Staking Tokens (LSTs) to underpin our stablecoin, zrsUSD. This stablecoin serves as a source of liquidity for traders on our platform, enhancing their overall trading experience.

Merging all of these features, we deliver a next-generation Perp DEX to the crypto industry. When we look at the current market landscape, we see a huge opportunity for us to gain market share and lead the way to change the current centralized state of the market to a decentralized one.

Types of perp futures traders

When it comes to trading perpetual futures, there are different types of traders that build their positions based on different strategies. Let’s explore a couple of them:

Speculators

Speculators are essentially traders who place their positions with the goal of buying something they believe will go up or selling what they believe will go down. The key word here is believe, since there’s no way to predict with 100% certainty which way the market is about to go.

Among speculators, there are distinct trader profiles, including the following:

Technical Analysis Trader

Traders who specialize in technical analysis base their trading decisions on patterns observed in an asset's price chart or other technical indicators. Their goal is to anticipate and capitalize on market movements using these methods.

Technical analysts rely on three fundamental assumptions to support their belief that chart patterns can help predict price changes:

1 - The market discounts everything: They contend that the market takes into account all available information, including fundamentals, market psychology, and broader market factors. Consequently, the only relevant factor left to influence asset prices is the interplay of supply and demand, aligning with the "Efficient Market Hypothesis."

2 - Prices move in trends and countertrends: Technical analysts expect that, regardless of market randomness, prices will exhibit trends and countertrends over various timeframes.

3 - Price action is repetitive: They assert that price patterns tend to repeat themselves over time, finding historical precedent in current market conditions.

With these assumptions in mind, technical analysts identify specific price movement patterns to inform their trading strategies. We’ll take a look at some of them later in the Trading Strategies section.

Momentum Trader

Momentum traders are the ones who believe in the strategy of “buying high and selling higher”. They thrive on market volatility, seeking to capitalize on short-term market positions. Given their preference for assets with high volatility, effective risk management becomes crucial to prevent getting rekt.

Key considerations for these traders encompass:

• Timing: Meticulous selection of entry and exit points is essential to their strategy.

• Risk Management: Prudent risk management strategies are crucial to mitigate potential setbacks.

• Asset Selection: Discerning the right assets to trade is a critical aspect of their approach.

Swing Trader

Swing traders predominantly rely on technical analysis strategies, although a subset may occasionally incorporate fundamental analysis (not so favorable in perps trading). Swing trading constitutes a trading style focused on capitalizing on short to medium-term price fluctuations in an asset, driven by attractive risk/reward ratios.

Typically, swing traders initiate positions with the goal of closing them profitably within a few days or weeks. In perpetual futures, these traders often choose to close in a matter of days driven by the presence of the funding rate, which can charge them a lot if they keep it for too long in the same direction as the market.

Hedgers

Hedgers constitute a group of traders who utilize futures markets as a safeguard for their portfolios. While hedgers are frequently composed of professional entities like mining companies and seasoned investors, many everyday traders also find value in hedging positions to protect their portfolios from adverse price movements and minimize potential losses.

For instance, consider a trader who anticipates a rise in Bitcoin prices for the week and consequently opens a long position. To mitigate the risk of the market moving in an unfavorable direction, this trader might choose to initiate a smaller short position on Bitcoin or a correlated asset. This strategic move serves as a protective measure, helping to offset potential losses in the event of a large market downturn.

Funding Rate Arbitrageurs

An arbitrageur is a trader who seeks to capitalize on price disparities of an asset across various markets. As previously mentioned in this article, perpetual futures do not assure convergence with the spot price of their underlying asset at any given time. Consequently, some traders exploit the funding rate associated with these derivatives to identify discrepancies and extract profit from differing market conditions.

There are two primary strategies to profit from funding rate arbitrage:

• Funding rate arbitrage between spot and perpetual

Funding rate arbitrage between spot and perpetual contracts entails the simultaneous execution of two opposing trades, each with equivalent quantities that result in offsetting profits and losses within both the spot and perpetual contract markets. The primary objective is to secure funding fee income through perpetual contract trading.

Let's illustrate this with an example:

Suppose the BTC price stands at 30,000 zrsUSD, with a funding rate of 0.01% on Zaros. Let's explore an arbitrage strategy using 10,000 zrsUSD, assuming no leverage (1x).

1. Initiate a purchase of 5,000 zrsUSD worth of BTC (spot) while simultaneously shorting 5,000 zrsUSD worth of BTC in the perpetual contract on Zaros.

2. Assuming a consistent funding rate over time, every 8 hours, you'll receive 0.5 zrsUSD (calculated as 5,000 zrsUSD * 0.005%).

3. By accruing 0.5 zrsUSD every 8 hours throughout a year, you would achieve an annualized return of (0.5 * 3) * 365 / 5,000, resulting in a 10.95% with low risk if done correctly.

• Diverse Funding Rates Across Exchanges

This strategy distinguishes itself by exclusively engaging with futures markets across various exchanges, without involvement in spot markets. A prime illustration involves taking a long position on an exchange featuring a low funding rate while simultaneously shorting a position on a separate exchange with a higher funding rate. This approach serves to hedge the position (assuming identical positions) and allows the arbitrageur to capitalize on the disparity in funding rates.

For instance, if exchange A boasts a funding rate of 0.02% while exchange B registers 0.04%, it becomes advantageous for the trader to initiate a long position on A and short an equivalent position on B. In doing so, the arbitrageur can reap profits stemming from the divergence in funding rates across the exchanges, amounting to (0.04 - 0.02) = 0.02% every 8 hours, as long as funding rates remain the same.

Final message: a sneak peek at what's next

In this article, we delved into futures trading and perpetual futures mechanisms. But hold tight, because we're gearing up for part 2, where we'll explore even more exciting trading topics!

And here's the big news: we're on the verge of launching our testnet version, where you'll get an exclusive chance to explore our cutting-edge platform and compete for rewards!

To stay informed and catch every update, be sure to follow us on Twitter and join our Discord server!

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