4 major “potential stocks” of the DEX futures agreement, Layer 2 may become a catalyst for the outbreak

dThe biggest business in DeFi today is decentralized transactions. Specifically, when executing on agreements such as Uniswap and Sushiswap, use the tokens you actually own to exchange for another token. In trading terms, this is referred to as trading “spot”.

People tend to believe that the largest business in a decentralized exchange (DEX) will be connected to the largest business in a centralized exchange (CEX). However, in terms of trading volume, CEX’s spot exchange is actually 10% to 20% smaller than its largest business-futures trading.

The trading volume of the CEX spot market in May was US$2.3 trillion, while the trading volume of the spot DEX was US$160 billion. This is equivalent to DEX holding approximately 6.5% of the trading volume market share. The futures market—the most traded product on CEX—behaves differently. The CEX futures trading volume in May was US$2.6 trillion, while the trading volume of the decentralized futures market was only US$10.7 billion. This is equivalent to a 0.4% market share of the trading volume of the decentralized futures platform. CEX’s futures trading volume exceeds 110% of spot trading volume, while DEX’s futures trading volume is only 6% of spot trading volume-why?

Why is there such a difference currently? Which market dynamics are important, and what changes are there in these dynamics? Which agreements are leading and why?

Why is the DeFi spot market larger than the DEX derivatives market?

For three key reasons, spot exchanges in DeFi are in a leading position. First of all, DeFi grew up on Ethereum. On Ethereum, the slow transaction settlement time and high cost make it infeasible to run a decentralized futures market as a basic layer. Second, compared with the tokens simply stored in CEX, DEX is all real tokens, which increases the utility. Tokens on DeFi can be used for many things, including liquidity supply, income farming, governance, mortgage, loan collateral, etc. To get these tokens, you need to exchange them on a decentralized spot exchange. Perpetual contract positions currently do not have the same composability or token utilization as the underlying token in the DeFi ecosystem, so there is almost no advantage compared to similar perpetual markets on CEX.

The third reason is the lack of overall market depth/scale of decentralized sustainable platforms. In the current state, there is only so much liquidity available for trading in these agreements. The agreement itself does not have enough insurance funds to support the large-scale transactions currently seen on centralized platforms. Of course, as liquidity and trading activities enter these markets, these issues will be resolved over time.

The key factors affecting the adoption of the decentralized futures market are faster/cheaper transactions, liquidity composability, and market depth. With the emergence and maturity of Ethereum L2, sidechain and L1 competitors, the expansion problem is being solved, and a wave of perpetual transactions is ushered in on the decentralized platform.

What are the header protocols?


  • Perpetual Protocol (PERP)

Perpetual Protocol is the leading decentralized futures market. At present, the trading market is the largest, accounting for more than 80% of the share of decentralized futures trading volume. Perpetual Protocol is built using Ethereum’s XDAI sidechain for its extension solution. The transaction takes place on the virtual automated market maker (vAMM) of the agreement, which provides guaranteed on-chain liquidity and predictable pricing set by a constant product curve. In fact, vAMM provides agreement price discovery, and the collateral supporting vAMM is stored in the smart contract vault.

  • dYdX

dYdX has just raised a US$65 million Series C financing led by Paradigm. It is the second largest decentralized perpetual market with a market share of over 12% in transaction volume. dYdX uses an order book transaction method and is built on StarkWare’s StarkEx scalability engine, which is Ethereum’s proprietary zero-knowledge rollup (zk-rollup) solution. The solution is a hybrid infrastructure model that utilizes non-custodial, on-chain settlement and off-chain, low-latency matching engines with order books. With the development of the platform, dYdX is currently developing in the direction of decentralization.

  • Futureswap

Before the suspension of trading on its old version of the V2 platform in early June, Futureswap was the third largest decentralized perpetual trading market, with a trading volume share of slightly more than 11%. The protocol was initially deployed on Ethereum layer 1, but recently announced the deployment of V3 version on Arbitrum. The goal of V3 is to release the testnet in late June and early July, and the mainnet will be launched soon. V3 will redesign AMM to improve capital efficiency and simplify the process of providing liquidity.


MCDEX is a perpetual trading platform based on AMM, currently running on Arbitrum’s testnet, because it is about to prepare for public release. Unlike other perpetual trading agreements that provide defined markets, MCDEX enables users to create their own trading markets. Each market defines parameters such as margin rate, oracle used and AMM risk parameters, which are governed and controlled by AMM LP.

Although Perpetual Protocol, dYdX and Futureswap lead the way of decentralized futures trading, with the launch of the second layer of Ethereum solutions such as Arbitrum and Optimism, and the DeFi ecosystem on the faster layer 1 (such as Solana) Development, competition is coming. Arbitrum, launched earlier this month, has the most complete new agreement in MCDEX. DerivaDEX is another agreement that hopes to enter this field as soon as possible.

Market model

In general, trading is carried out through one of two methods: order book or AMM. Each agreement uses one of these trading modes, but is implemented with unique nuances to maximize the trader’s experience or the agreement’s market competitiveness.

  • Perpetual Protocol

Perpetual Protocol trades on virtual AMM or vAMM. “Virtual” means that AMM itself has no actual assets, but stores the collateral in a separate smart contract vault as a cross-platform collateral pool. This enables AMM’s x*y=k pricing curve to act as the price discovery mechanism of the agreement. At the same time, traders can obtain income from a vault with a single source and single asset, and provide collateral for transactions in all 16 markets provided by the Perpetual agreement. .

Compared with the order book, vAMM can trade at a known price, does not require a counterparty (vAMM is the default counterparty), and has no order-taking fees. In addition, there is no need for liquidity providers to directly provide liquidity to the AMM pool, so there is no impermanence loss in the system. The collateral vault will always have enough collateral to repay all traders who use vAMM for transactions (assuming that all under-collateralized assets are successfully liquidated when prices fluctuate sharply). Like many other perpetual trading agreements, USDC acts as a single margin collateral provided by traders and is stored in the collateral vault that protects the agreement.

Financing payment is an indispensable part of a perpetual market, and it is an incentive to mark the price and the index price to converge. Perpetual Protocol uses traditional fund payment methods and implements FTX to calculate financing payments. Payments are paid by the hour and are based on the position size and the relative difference between the TWAP of the perpetual contract and the underlying asset index price. The agreement uses Chainlink to provide an oracle of index prices.

  • dYdX

For traders who like order book trading methods, dYdX is an ideal place for a decentralized world. dYdX is the only perpetual trading agreement that uses a traditional order book. USDC is used as a single margin asset stored in a cross margin account. 15 markets are available for trading, and the markets are added by the core team of the agreement.

Compared with AMM-based platforms, the order book-based dYdX provides traders with more advanced order types. In addition to Good-Till-Date, Fill Or Kill or Post-Only order options, market orders, limit orders, stop loss orders, and trailing stop loss orders are all available. Market makers need to provide liquidity for each market and tend to provide it in an algorithmic manner through dYdX’s API interface.

Like the traditional perpetual market, dYdX charges financing rates to unbalanced parties in the transaction. The financing fee rate is calculated through an algorithm based on the index price and the perpetual mid-market sample price. These payments are facilitated by agreements, but are only exchanged between traders (the exchange neither pays nor accepts them).

  • Futureswap

Futureswap’s upcoming V3 will redesign the previous AMM. The new AMM aims to improve the traditional price curve to provide higher capital efficiency. According to the core team, with a liquidity of US$100 million, the impact of a transaction of US$1 million on the price is only 0.5%. USDC will become the only margin asset, which greatly simplifies the process of providing liquidity to AMM and protects LP from impermanent losses. V3 also aims to provide more advanced trading orders, such as “fill or cancel” or let the trader choose a price range for the order.

The increase in the tradable market will now be determined by governance. The new decentralized oracle network used by the protocol has been upgraded in V3 to improve scalability and the ability to support multiple assets.

Launching a new version of the protocol on Arbitrum not only speeds up the execution, but is also an important part of composability. So far, perpetual transaction agreements have had to adopt a largely isolated scaling solution, which limits the composability of DeFi. Based on Arbitrum will enable other agreements to be built on Futureswap.


Although it is not yet running on Arbitrum’s mainnet, MCDEX has released details of its unique AMM-based perpetual exchange agreement. The AMM design improves the classic x*y=k model by using virtual margin, and provides more liquidity around the index price by using a proprietary price function. By incorporating the index price directly into the AMM price curve, the curve algorithm can follow the index price and gather liquidity around the index price, thereby bringing higher capital efficiency and lower slippage for traders. However, as AMM assumes more risks as a means of mitigating the agreement risk, slippage will be adjusted dynamically.

Similar to Futureswap V3, the virtual margin in AMM means that LP only needs to provide mortgage tokens to increase liquidity. Liquidity is stored in pools specific to each trading market or shared across multiple markets to improve capital efficiency. MCDEX is unique in that every trading market is unlicensed and managed by LP. This means that any user can establish a new trading market and define the parameters of the market, such as the underlying assets, various fees, margin ratios, price oracles used, liquidity pools and insurance funds. At the time of creation, the LP has governance control over most of the market parameters set at the time of creation.

The financing fee rate applies to the imbalance aspect of the transaction. Since AMM is on the other side of all transactions, the financing rate is always in favor of AMM. This is one of the key parts of LP’s return. LP also profited from transaction fees and spreads. Due to the spread between the best bid and best selling price of AMM, when traders and arbitrageurs trade with AMM, the spread will bring profits to AMM. Spreads are dynamically adjusted according to the risk taken by AMM-the higher the risk position, the larger the spread, the higher the profit of AMM.


risk control

In view of the leveraged nature of perpetual trading, agreements and liquidity providers face capital risks. Especially in the case of rapid price fluctuations. There are some options for the agreement to request to minimize the risk to the agreement, and to support the agreement when necessary. Having a fully funded insurance fund covered by the agreement is the final key. Before a last resort, the agreement can implement different forms of risk control through fees, margin requirements, liquidation ratios, and unfavorable prices/spreads. A form of risk control adopted by almost all perpetual trading markets is financing costs, which incentivize traders to stand on the unbalanced side of the transaction.

  • Perpetual Protocol

The risk is ultimately controlled through the liquidation enforced by the agreement. 10 times leverage is the maximum margin available in Perpetual Protocol, so all positions require 6.25% of maintenance margin. As long as the margin ratio is above 2.5%, only 25% of the positions will be closed. This partial liquidation method is beneficial to traders. In order to enforce and monitor the liquidation, liquidation robots are used. As an incentive, the liquidator will receive a reward of 1.25% of the nominal value.

In addition to trader-specific trading caps, the agreement also uses an open interest cap for the agreement. The upper limit of open interest is monitored by the core team and adjusted as needed.

As the failure insurance of the agreement, the insurance fund is funded by 50% of all transaction fees charged by the agreement. The insurance fund acts as a guarantor for the transaction losses arising from the agreement.

  • dYdX

dYdX manages liquidation by monitoring the maintenance ratio and liquidating positions that are below the market’s minimum margin requirements. The liquidation proceeds are returned directly to the insurance fund. The insurance fund is currently funded and controlled by the core team.

Since dYdX runs on the order book, AMM without protocol control stands on the other side of the transaction. This alleviates some of the risk issues of the agreement, where AMM-based agreements must introduce spreads, fees or other mechanisms to compensate for additional risks.

The expansion solution based on zk-rollup finalizes the transaction as the first layer. Therefore, if a long tail event occurs, traders will be able to claim funds on L1 and are not bound by the additional security assumptions inherited in the sidechain solution.

  • Futureswap

Futureswap’s V2 relies heavily on dynamic financing rates and clearing incentives to protect the agreement. The liquidator will alert the agreement of the settlement event (the transaction will not be taken over, the transaction has just ended) and will receive a 30% compensation fee for the collateral. An additional 5% fee will also be assessed to compensate for the risks borne by the agreement. Like most perpetual swap platforms, dynamic financing rates will increase as the risk of LP increases. Prior to the release of V3 details, the risk mechanism of the upcoming version has not been confirmed.


MCDEX also controls risk by liquidating positions that exceed market risk parameters. Keepers observe the margin ratio and can liquidate or assume positions in the LP pool. When the custodian enters the warehouse, he bears the risk of the position and also accepts a fine for closing the position. When liquidated to the LP pool, the position is technically borne by AMM, and the LP will receive a liquidation fine. In this case, the custodian will receive the “custodian gas reward”.

Since each market in MCDEX can be created and managed by users of the agreement, each market has specific risk parameters and independent insurance funds. Operators (initial market creators) are encouraged to initially fund the insurance fund, but anyone can contribute to the fund. When liquidation occurs, a certain percentage of the liquidation penalty collected (based on AMM parameters) will go to the insurance fund. The rest is given to the liquidator (AMM or custodian). Every insurance fund has a maximum fund size. When this maximum size is reached, the new funds will enter AMM’s liquidity pool. LP can increase this upper limit through governance, but it cannot be reduced.

MCDEX operates on the AMM model, which means that when a trader submits an order, AMM will accept the other side of the transaction. Therefore, the liquidity provider in the AMM market bears the risk of the position. MCDEX aims to compensate for this positional risk of the pricing model itself. In the model, slippage is dynamically adjusted according to the risk of AMM positions. The higher the risk, the greater the slippage. As the risk decreases, the slippage decreases, and the same applies to the other direction. In addition, the spread or the best price will be dynamically adjusted as the risk increases. This can bring additional revenue to LPs in the market.

LPs will charge withdrawal penalties for LPs that remove funds from the market. Fees are dynamic and depend on the size of AMM’s positions. The removal of liquidity leads to more slippage and risks for the remaining LP. This fee compensates for the additional risk imposed by AMM and inhibits LP from putting the market at risk.

business model

Perpetual protocol charges a fixed fee of 0.10% on all transactions. This is a simple and transparent business model. The earned expenses are 50/50 shared between the insurance fund and the PERP token collateral. This resulted in the allocation of more than $4.3 million to mortgagers in May, making the agreement a top-level agreement to return revenue to users.

dYdX is not yet decentralized, so it retains all transaction fees charged on its platform. Like the centralized trading platform, dYdX provides traders with a hierarchical fee structure based on the reduction of transaction volume. In addition, if the transaction is carried out as a market maker, the fees will be different, and the market maker can benefit from lower fees to incentivize healthy market makers. Looking back at the transactions in the past 8 weeks, dYdX received an average fee income of 0.11% based on its transaction volume.

Futureswap has not released any changes to its fee model in V3. Starting from V2, the protocol charges a fixed transaction fee of 0.10% in closing transactions, and a variable opening fee is charged based on the transaction balance. Part of all fees incurred by Futureswap will be used in the vaults managed by FST token holders. Futureswap uses its token reserves to incentivize traders to use its platform and will continue to do so in V3.

MCDX has the most complex business model. This is not a knock on the agreement. MCDEX DAO charges a daily transaction volume fee of 0.015% as its main source of income. In addition, DAO has the ability to operate the market as an operator and earn related fees managed by each market (the default is 0.005%). The agreement aims to provide traders with lower per transaction fees and earn more income through various risk control mechanisms (such as expanding slippage and price spreads to benefit AMM).



Perpetual Protocol currently dominates the share of decentralized perpetual transaction volume. 76% of decentralized perpetual transactions were completed on this agreement, with a transaction volume exceeding $8.6 billion. dYdX is the next leading agreement with a transaction volume of more than $1.4 billion. This represents a market share of 12%. Futureswap accounted for the remaining 12% of the market share of US$1.3 billion in trading volume in May. In the case of Futureswap, it should be noted that the agreement began to communicate with traders in late May, suspending incentive measures and trading on the platform in preparation for V3.


Please note that Perpetual Protocol charged more than $8.6 million in fees in May. This will make the agreement the top ten agreements with the highest revenue in DeFi. It also returns 50% of the income to the PERP pledger, making the agreement the third most profitable agreement in DeFi, in terms of income earned by the agreement (excluding supplier income). dYdX came in ninth. This should not be surprising, because DeFi’s leading business is currently DEX spot exchanges such as Uniswap and Sushiswap-this is a profitable business model.

However, the interesting point comes from capital efficiency or profit efficiency. Perpetual Protocol, dYdX and other companies earn fee income based on the notional value of the transaction. Since all perpetual markets can use leverage, the nominal value can be up to 10 to 25 times the margin required for trading. This means that perpetual swap agreements need to attract less capital than traditional spot exchanges in order to earn a considerable amount of fees even if the fees are lower.

This can be clearly seen by comparing the fee income of the futures exchange to TVL and spot exchanges such as Uniswap and Sushi. Calculating May’s data on an annual basis, Perpetual Protocol, which has a TVL of more than US$60 million, has an annualized revenue of US$1.51 per US$1 of TVL. Since the transaction volume on each platform is relatively low compared to TVL, dYdX and Futureswap earn $0.44 and $0.38 for every dollar of TVL, respectively. In comparison, Uniswap’s annual revenue per TVL is US$0.72, while Sushi’s annual revenue is US$0.36. Even if they charge a rate of nearly one-third, compared with strict spot exchanges, futures exchanges can obtain returns equal to or even higher than the capital locked in the agreement.

From the perspective of valuation, the valuations of the public agreements Perpetual Protocol and Futureswap are consistent with the current DEX spot exchanges Sushiswap and Uniswap. Insist on May transaction volume to maintain fairness. Perpetual’s CMC is 1.9 / May annualized revenue, and its transaction multiples are equivalent to Uniswap and Sushiswap, respectively, at 2.3 and 1.5. But please note that on the basis of FDV, the current transaction multiples of Perpetual Protocol and Futureswap are 2-5 times that of Sushiswap and Uniswap.

Look to the future

At present, the decentralized perpetual contract is only 0.42% of the market share of the transaction volume of the centralized perpetual contract, so there is definitely room for growth. Transaction execution speed and cost have always been the main obstacles to the adoption of Ethereum, but the Layer 2 landscape is changing rapidly. MCDEX is about to be launched on Arbitrum, Futureswap is turning to L2, and Perpetual Protocol is open to adopting other L2 solutions. The barriers to execution speed are quickly disappearing.

The crypto market is notorious for traders who like leverage, and a decentralized platform is a market that traders can enter. Especially considering the regulatory uncertainty of the leveraged trading market. There is increasing regulatory pressure to assess platforms that provide up to 100 times and 150 times aggressive leveraged positions. If regulatory pressure is imposed on these markets, decentralized alternatives may become beneficiaries, because considering the layer 2 prospects of transaction execution gains, traders seek platforms that can accommodate leveraged perpetual products.

Once the adoption of Layer 2 gains traction in the next 3 to 6 months, it will be beneficial to reassess the current state of the decentralized perpetual trading market. The current TAM is larger than the spot market, providing a huge value capture opportunity for agreements that can attract capital and users.

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