The Current Status and Future Outlook of Perpetual Futures DEX Development

In the current cryptocurrency market, Perptual Futures DEX is experiencing rapid development. In terms of efficiency, speed, and scalability, these platforms have made significant progress. Perptual Futures DEX is not limited to trading scenarios but is also expanding the scope of blockchain applications, paving the way for the large-scale adoption of web3.

Exchanges are the core of the crypto market, supporting market operations through trading activities between users. The primary goal of any exchange is to achieve efficient, fast, and secure trade matching. To this end, DEX has made many innovations based on CEX, such as eliminating trust assumptions, avoiding intermediaries and centralized control, allowing users to retain control of their funds, and enabling community participation in product iteration.

However, looking back at the development of DeFi, we can see that while DEX has several advantages, it often comes at the cost of higher latency and lower liquidity, mainly constrained by the throughput and latency of the blockchain. Currently, the spot trading volume of DEX accounts for 15%-20% of the total trading volume in the cryptocurrency market, while Perptual Futures trading only accounts for 5%.

Developing Perptual Futures business on DEX faces many challenges because CEX's Perptual Futures trading has several advantages:

1. Better product experience
2. Efficient control by market makers provides finer spreads.
3. Better liquidity
4. A one-stop combination of multiple functions

The centralization and monopoly of CEX has become an issue that users can no longer ignore, especially as the collapse of FTX further exacerbated the trend of centralization. Today, the CEX field is almost completely dominated by a few giants, and this centralization brings systemic risks to the crypto ecosystem. Increasing the usage and market share of DEX can effectively reduce such risks and promote the sustainable development of the entire crypto ecosystem.

The rise of Ethereum Layer 2 and multi-chain ecosystems has provided innovations for liquidity sources and UX, creating favorable conditions for the development of DEX. This is currently a great opportunity for the development of Perptual Futures DEX.

Perptual Futures in the Product Market Fit of the Crypto Ecosystem

Perptual Futures allow traders to hold positions indefinitely, similar to over-the-counter futures trading in traditional financial markets for many years. The difference is that Perptual Futures popularize this trading method, which in traditional finance is only available to accredited investors, by introducing the concept of funding rates, while also creating a "under-damping effect" to a certain extent to prevent excessive imbalance in long and short structures.

The current monthly trading volume of the Perptual Futures market has exceeded 120 billion USD, a scale made possible by the exchange providing a good user experience, the order book mechanism promoting trading efficiency, and the vertically integrated clearing system ensuring fast and secure settlements.

In addition, projects like Ethena that utilize Perptual Futures as an underlying mechanism bring diversified uses to Perptual Futures beyond speculation. Generally speaking, Perptual Futures have four advantages over traditional futures contracts:

1. Save on rollover fees and other related costs
2. Avoid more expensive forward contracts
3. The funding rate system provides continuous real-time profit and loss, simplifying backend processing.
4. Provide a smoother price discovery process to avoid sharp fluctuations caused by overly coarse price granularity.

Since BitMEX first introduced Perptual Futures in 2016, the development of Perptual Futures DEX has rapidly progressed. Today, there are over 100 DEXs that support Perptual Futures in the market. Early Perptual Futures DEXs were small in scale, and in 2017, dYdX launched on the Ethereum ecosystem, dominating the Perptual Futures market for a long time. Currently, there are active Perptual Futures DEXs on various public chains, and contract trading has become an indispensable part of the crypto ecosystem.

Multiple studies have shown that as the trading volume of Perptual Futures increases, the Perptual Futures market has developed price discovery functions when the spot market is inactive. The trading volume of Perptual Futures on DEX has grown from $1 billion in July 2021 to $120 billion in July 2024, with an annual compound growth rate of approximately 393%.

However, the perpetual futures DEX faces bottlenecks due to blockchain performance limitations. To promote further development of the perpetual futures market, it is essential to address the two core issues of low on-chain liquidity and high latency. High liquidity can reduce slippage and make trading smoother; low latency allows market makers to quote tighter prices, enhancing market fluidity.

Perptual Futures DEX Pricing Model

In the Perptual Futures DEX, the pricing mechanism is key to ensuring that market prices accurately reflect supply and demand dynamics. Different Perptual Futures DEXs have adopted various pricing mechanisms to balance liquidity and reduce volatility. The main models include:

Oracle Mode

The oracle model refers to the way perpetual futures DEX obtains price data from major exchanges with high trading volumes and provides services. Although there is a risk of price manipulation, it can reduce the pricing costs for DEX. For example, the decentralized perpetual futures exchange GMX uses Chainlink oracles to obtain price data, ensuring accuracy and completeness, creating a favorable trading environment for price takers, while providing substantial rewards for price makers. However, such exchanges are highly dependent on the price data sources from major exchanges, and can only act as price takers, unable to actively engage in price discovery.

Virtual Automated Market Maker vAMM

The virtual automated market maker ( vAMM ) model is inspired by Uniswap's AMM model, but the vAMM's liquidity pool is virtual and does not actually hold assets; it only simulates the buying and selling behavior of trading pairs through a mathematical model to achieve pricing.

The vAMM model supports Perpetual Futures trading without the need for substantial capital investment or association with spot markets. Currently, the vAMM model has been adopted by Perpetual Protocol, Drift Protocol, and other Perpetual Futures DEXs. Despite issues such as high slippage and impermanent loss, it remains an excellent on-chain pricing mechanism due to its transparency and decentralization features.

Off-chain order book combined with on-chain settlement

To overcome the performance limitations of on-chain order matching, some DEXs adopt a hybrid model of off-chain order books and on-chain settlement. Trade matching is completed off-chain, while transaction settlement and asset custody are on-chain. User assets are always under their own control, which is referred to as "self-custody." At the same time, since trade matching is done off-chain, risks such as MEV are significantly reduced. This design retains the security and transparency of decentralized finance while addressing issues like MEV, providing users with a safer and more reliable trading environment.

Well-known projects like dYdX v3, Aevo, and Paradex adopt this hybrid model. This approach improves efficiency while ensuring security, aligning with the Rollup concept.

Full Chain Order Book

The full-chain order book completely publishes and processes all data and operations related to trading orders on the chain, making it the optimal choice among traditional solutions for maintaining trading integrity. The full-chain order book is almost the safest solution, but it is clearly limited by blockchain latency and throughput.

In addition, the full-chain order book model also faces risks such as "front-running" and "market manipulation." Front-running refers to other users (, typically MEV Searchers ), who profit by monitoring pending transactions and executing trades ahead of the target transaction. This is more common in the full-chain order book model, as all order data is publicly recorded on the chain. At the same time, because all orders are transparent, certain participants may exploit this by using large orders to influence market prices and gain improper benefits.

Despite the aforementioned issues, the full-chain order book remains attractive in terms of decentralization and security. Public chains such as Solana and Monad are working to improve infrastructure in preparation for the realization of a full-chain order book. Projects like Hyperliquid, dYdX v4, Zeta Markets, LogX, and Kuru Labs are also continuously expanding the scope of the full-chain order book model, either innovating on existing public chains or creating their own application chains to develop high-performance full-chain order book systems.

Liquidity Acquisition and UX Improvement of DEX

Liquidity is fundamental to the survival of every exchange, but acquiring initial liquidity is a tricky issue for exchanges. Throughout the development of DeFi, emerging DEXs typically obtain liquidity through incentive measures and market forces. Incentive measures often refer to liquidity mining, while market forces refer to providing arbitrage opportunities between different markets for traders. However, as the number of DEXs increases, the market share of individual DEXs decreases, making it difficult to attract enough traders to reach the "critical mass" of liquidity.

Critical mass refers to "effective scale", which means that a certain entity reaches a sufficient scale to surpass the minimum costs required to sustain its development and achieve maximum long-term profits. If it exceeds or falls short of the effective scale, the product cannot achieve profit maximization; good products must operate for a long time at an effective scale.

In a DEX, critical mass refers to the trading volume and liquidity threshold; only by reaching such a threshold can a stable trading environment be provided to attract more users. In Perptual Futures DEX, liquidity is voluntarily provided by LPs, so a common method to achieve critical mass is to set up LP pools with economic incentives. LPs deposit assets into the pool and receive incentives, supporting trading on the DEX.

Many traditional DEXs offer high annual percentage yields ( APY ) or airdrop activities to attract LPs, but this approach has drawbacks. To meet the high APY and airdrop returns, DEXs must use a large portion of tokens as LP mining rewards, and such an economic model cannot last long, falling into a vicious cycle of "mining, withdrawing, and selling" for LPs. DEXs may also collapse quickly and be unable to operate sustainably.

To address the challenges of acquiring initial liquidity for DEX, two new ideas have recently emerged: community-supported active liquidity pools and cross-chain liquidity acquisition.

The perpetual futures DEX Hyperliquid on Arbitrum is a typical case of using community-supported active liquidity pools. The HLP pool is one of the core products of Hyperliquid, utilizing community user funds to provide liquidity for Hyperliquid. The HLP pool calculates fair prices by integrating data from Hyperliquid and other exchanges, executing profitable liquidity strategies across various assets. The profits and losses generated from these operations (P&L) are distributed based on the share of community participants in the pool.

Cross-chain liquidity allocation is proposed by projects such as Orderly Network and LogX Network. These projects allow the creation of front-ends for perpetual futures trading on any chain, enabling liquidity leveraging across all markets. The so-called "market liquidity leveraging" refers to the integration and utilization of liquidity resources across multiple markets or public chains, allowing trading platforms to access liquidity on different markets or public chains.

By combining on-chain native liquidity, cross-chain aggregated liquidity, and creating AMM pools in discrete asset market neutral (DAMN), LogX can maintain liquidity during periods of extreme market volatility. These pools use stable assets like USDT, USDC, and wUSDM, enabling perpetual futures trading through oracles. Currently, these infrastructures also provide the possibility for developing various applications.

In the current DEX field, competition in user experience (UX) is becoming increasingly fierce. When DEXs first emerged, simple improvements to the user interface could significantly enhance UX. However, as user interfaces have become more similar, DEXs have begun to compete on UX by introducing features such as gas-free transactions, session keys, and social logins.

In fact, CEXs are usually more deeply integrated into the ecosystem, not only providing core trading services but also serving as user gateways and cross-chain bridges, while DEXs are often limited to a single ecosystem. Nowadays, cross-chain DEXs are breaking this limitation; for example, DEX aggregators can consolidate liquidity and price information from multiple DEXs into a single interface, helping users find the optimal trading pairs and slippage, which can be understood as trading routers.

Many DEX aggregators, such as Vooi.io, are developing smart routing systems that integrate multiple DEX and cross-chain bridge functionalities to provide a simple and user-friendly trading experience. Such DEX aggregators can find the most efficient trading paths across multiple chains, making the trading process simpler and more cost-effective. Most importantly, users can manage complex trading paths through a single, straightforward interface.

In addition, Telegram trading bots are continuously optimizing UX. Such bots can provide real-time trading alerts, execute trades, and manage portfolios, all of which can be done directly within the Telegram chat interface. This deep integration enhances trading convenience and engagement, making it easier for traders to access information and seize market opportunities. Of course, there are significant risks associated with Telegram bots: users need to provide their private keys to the bots, which may pose security risks.