Original title: "A review of 60 perpetual contract protocols: order books still dominate, oracle reliance increases, and the market begins to saturate"
Original author: Pablo Bartol
Original translation: TechFlow
introduce
In the field of derivatives, perpetual contracts are more popular than options, which has gained wide acceptance in both retail and institutional markets. The total trading volume of BTC perpetual contracts has grown from about $3 billion per day in early 2020 to $13 billion in 2023.
This series of articles aims to provide an overview of the current DeFi perpetual contracts space and compare different protocols, focusing on how they work rather than their potential as investment vehicles.
The following 60+ protocols were included in this analysis:
0x，Alex，Angle，Apollo，Avantis，BlueFin，bZx，Cap，Contango，ConvergenceRFQ，DDEX，DDX，Deri，Derivio，Digitex，Dolomite，Drift，dYdX，Futureswap，Gains Network，Gearbox，GMX，GMX Forks，Good Entry，Hubble，Hyperliquid，IDEX，Increment，InfinityPool，Injective，Kujira，Kwenta，Lendroid，Levana，Level，Lexer，Mango，MarketProtocol，MCDEX，Mux，NFTperp，Numoen，OpenBook，Opyn（Squeeth），Perennial，Perpetual Protocol，Perpy，Pika，Polynomial，Predy，RabbitX，RageTrade，Sentiment，Serum，STFX，Syndr，Synfutures Protocol，Synthetix，Tigris Trade，Tribe3，Unidex，Variabl，Vega，Vela，Vertex，Vyper 和 Zeta Markets。
In this article, we will first briefly review perpetual futures and then broadly categorize the above protocols. Based on this categorization, we will dive deeper into the differences between these protocols and explore the trade-offs they make in providing liquidity and contract pricing methods.
Review of Perpetual Contract Concept
In this section you can find a brief introduction about perpetual contracts.
A futures contract is a legal agreement to buy or sell a specific commodity, asset or security at a predetermined price at a specific time in the future. Unlike options, there is no option in a futures contract, and the agreement is binding.
Perpetual contracts are a type of futures contract that has no expiration date, hence the name. The concept of perpetual contracts was first proposed by Robert Shiller in 1992, and BitMEX first implemented perpetual contracts in 2016.
Perpetual contracts are a Delta-1 product, which means that for every $1 change in the underlying asset, the contract price will also change by $1. For example, let's say Ethereum is trading at $2,000. You open a perpetual long position with a notional value of 1 Ethereum. Over time, if Ethereum reaches $2,200, the profit will be 1 Ethereum * ($2,200 - $2,000) = $200, minus transaction fees and funding rates.
This allows traders to speculate on the movement of asset prices without worrying about time frames. Traders can keep their long or short positions open for as long as they want. For traders, it is important to note that they will need to pay fees and, in the case of using leverage, they will need to keep a close eye on the health of their positions to avoid the risk of forced liquidation.
Liquidation is a critical component in most perpetual swap protocols, as the accumulation of bad debts can bankrupt the protocol and/or liquidity providers (LPs). Funding rates or borrowing rates (the specific terminology depends on the protocol) are implemented to promote market efficiency, provide arbitrage opportunities, and compensate participants for taking less popular positions in order to balance the open interest (OI).
Classification of perpetual contract agreements
A very broad classification can be made based on two main variables.
Does the protocol need to lock liquidity into it? Think of it as: are there liquidity pools, or is it completely peer-to-peer (P2P)?
Does the protocol directly impact the market, thereby causing or influencing price discovery for the underlying asset or contract? Or does the protocol use oracles to obtain a fair price for the asset?
Based on this, we can come up with this basic (and probably overly simplistic) classification:
The classification matrix of perpetual protocols is based on two key criteria: 1) external price discovery vs. internal (oracle s vs. oracle less) and 2) no liquidity lock vs. liquidity pools (P2P vs. P2Pool)
We will use this categorization by liquidity provider and pricing mechanism in the protocol breakdown section of the article to dive deeper into the different ways protocols offer perpetual contracts.
Order Book
In this section we can find the following protocols:
Alex、Apollo、Blue Fin（前 Firefly Exchange）、DDX、Digitex、dYdX、Hubble、Hyperliquid、IDEX、Injective、Kujira、Lendroid、Mango、Market Protocol、RabbitX、Variabl、Vega 和 Zeta。
Based on AMM
AMM
Leveraged spot: bZx, DDEX, Dolomite, Futureswap, MCDEX
Margin Accounts: Gearbox, Sentiment
Power Perpetuals：Deri、Numoen、Opyn（Squeeth）、Polynomial 和 Predy v2。
Perpetual options: Predy v3.
WOW
Drift、Increment、InfinityPools、NFTperp、Perpetual Protocol、Rage Trade 和 Tribe3。
While both Predy and InfinityPools use the pooled liquidity of AMMs to build “perpetual options” or perpetual contracts, please note that they implement them in different ways, so they belong to different categories. In our previous options series, we introduced some protocols that are built on the same concept, but are more focused on providing an options-like experience, such as Gamma Swap, Panoptic, or Smilee.
Oracle-based
In this section we can find the following protocols:
Synthetic Liquidity
Avantis、Gains Network、Deri、Synthetix（Kwenta、Polynomial etc.）、Tigris Trade、Vela。
A basket of assets
Angle, Apollo V2, Cap, Deri, Derivio, GMX and its forks, Good Entry, Levana, Level, Lexer, Mux, Pika, and Synfutures Protocol.
other
These protocols do not necessarily fit into the above categories, or may be better included in a separate category. Therefore, they are listed here for completeness, but the rest of this article will focus on the above categories.
Aggregator
In this section we can find the following protocols:
UniDEX and MUX.
Similar to spot aggregators like 1inch, Matcha, or DeFillamaSwap, these protocols compare fees and prices across perpetual swap venues to trade on the most favorable venue.
Social Trading<> Copy Trading
In this section we can find the following protocols:
Perpy and SFTX.
They allow users to copy trades on other platforms. For example, a trader would trade on GMX and other users would copy the same trades.
infrastructure
A protocol that allows other protocols to be built on top of it.
0x, Serum, OpenBook allow protocols to launch order book platforms.
Vyper, Derivio, Perennial, and Convergence RFQ have some more use case specific solutions. In general, they can be seen as base layers on which other protocols can build their own marketplaces.
A quick introduction to RFQ. RFQ stands for Request for Quote, typically traders request quotes and market makers respond for a specific instrument/asset/quantity etc.
Maturity Assets
Contango offers expiry assets. These are neither perpetuals - because obviously they expire - nor forward contracts. Contango has no order book or liquidity pool. When a position is opened, Contango borrows in the fixed rate market, swaps in the spot market, and lends out again in the fixed rate market. Trading pairs are based on assets available in the fixed rate money market, such as yield or notional. At expiry, the contract can be settled by cash settlement or physical delivery.
Perpetual Agreement Market Analysis
Market Overview:
It is important to note that our study was subject to survivorship bias. Nevertheless, we focused on including the above protocols, despite their varying degrees of success.
Before we dive into the different types of perpetual protocols, there are two important considerations related to on-chain derivatives, namely regulatory uncertainty and the historical context prior to DeFi.
On-chain derivatives face regulatory uncertainty. They face regulatory challenges that impact the market. Here are two important cases:
Digitex, December 2017. The platform encountered regulatory scrutiny when it was sued by the Commodity Futures Trading Commission (CFTC) for illegally operating a commodity futures trading platform.
bZx or bZeroX (Fulcrum Trade), June 2019. bZx has a more complicated history than Digitex. It has suffered 4 major losses (link). The protocol is managed by Ooki DAO. The CFTC charged the founders and Ooki DAO with illegally offering over-the-counter digital asset trading.
Before the arrival of DeFi Summer in 2020, not much happened on the chain, and some of the projects that had been working previously did not see the light of day.
VariabL, Q4 2017. The last update on the blog was in Q2 2018. VariabL is a derivatives trading platform built on Ethereum by ConsenSys.
Market Protocol. Last updated on Twitter in December 2019.
Order Book
The goal of an order book is to enable fully on-chain peer-to-peer trading. However, the main problem is that most popular blockchains are not suitable for having fully on-chain order books.
Therefore, a different solution was adopted.
1) Move parts of the system off-chain. Primarily the matching engine, as it is the most resource-intensive (computationally expensive) component of the order book.
2) Fully on-chain. Moving to an Alt layer, such as Solana, the underlying blockchain has lower security but higher throughput. Updates in the order book can happen every block or every half a second.
3) Build your own L1. There are two ways to achieve this: one is by building an application chain on the OP stack or Cosmos, and the other is to build an independent L1 from scratch.
Each approach has pros and cons. For example, putting parts of the application off-chain introduces trust assumptions. On-chain transactions trade lower security for faster throughput and less decentralization. Application chains can provide protocols to capture MEV, but at the cost of requiring more permissioned setups and adding layers of friction.
Automated Market Maker (AMM)
Unlike order books, where orders are settled in P2P, AMMs require liquidity to be locked in a liquidity pool. The key difference between AMMs and vAMMs is that AMMs require real liquidity, while vAMMs’ liquidity comes directly from a vault located outside the vAMM, so the presence of LP is not necessarily required.
Spot AMM
In this case, even though AMMs are not perpetual futures, they are included because they allow traders to gain Delta=1 exposure to the underlying asset using leverage via borrowed funds.
However, this type of protocol also has some advantages.
AMMs like Uniswap provide the flexibility to trade a wide range of assets, as long as there is a liquid market available. This gives traders leveraged access to assets that may not be eligible on other perpetual futures protocols. Additionally, using liquidity already included in spot AMMs ensures continuous liquidity to match buy and sell orders, thereby aiding price discovery of assets.
However, there are some trade-offs. In order for traders to gain leverage, borrowers need to be incentivized to make deposits with attractive yields and/or rewards. Additionally, while we mentioned that by using spot markets, potentially all assets can be traded, there also needs to be some level of permissioning to avoid users losing borrowers’ funds through honeypots, heists, etc.
Since LPs are not direct counterparties to traders, they avoid bankruptcy risk. However, this comes at the cost of becoming borrowers from traders and taking on credit risk.
Regarding Power Perpetual Futures, they were introduced by Paradigm in 2021. Opyn (SQUEETH) was the first team to implement such a protocol. In short, they have a return of n^x, like ETH².
WOW
vAMMs provide a decoupled market structure that facilitates independent price discovery from the underlying spot price. This can lead to differences between futures prices and the spot price of the asset, creating arbitrage opportunities. On the other hand, what is the true price of a perpetual contract?
Another challenge facing vAMMs is liquidity. Lack of deep liquidity may cause unexpected or undesirable price fluctuations when opening/closing positions.
The vAMM model relies on liquidating positions and maintaining a balanced balance of open interest to keep the mark price close to the spot price. However, this creates inherent imbalances and deviations over time, especially during market crashes or extreme market volatility.
Oracle-based protocols
Broadly speaking, oracle-based protocols can be defined as protocols with liquidity pools that act as counterparties. Unlike AMMs, the protocol does not have price discovery itself, but uses oracles to get pricing for underlying assets from other venues.
We can find two prototypes of oracle-based perpetual futures.
Synthetic liquidity. A single asset is used as the basis for all trading markets. By using oracles, LPs can become counterparties to all of these markets.
Basket of assets. Use a basket of assets as the counterparty. That is, in a hypothetical BTC/USDC, BTC is used as collateral for long positions and USDC is used as collateral for short positions. More assets can be added, but this is the general basic principle.
Synthetic assets. Their advantage is that since a single asset is the counterparty, there is no practical limit on which markets can be added. As long as there are sufficiently reliable oracles. This makes the protocol more flexible in terms of adding markets. However, it is more risky for liquidity providers because they take on the risk of certain assets that cannot be hedged on-chain. For example, acting as a counterparty to gold or USD/JPY. On the bright side, assuming the basket of assets maintains a 50% USD balance in the pool, there will be no unexpected temporary losses, similar to the temporary loss situation of Uniswap V2.
Protocols using a basket of assets provide a tighter setup for liquidity providers, which is good for risk management (volatility assets support longs, stability assets support shorts, so even if prices fluctuate wildly, the system is still collateralized). This comes at the expense of traders, who don’t have as many markets to trade. For example, in GMX v1, you could only trade five assets. However, a very reasonable rebuttal or question is whether most traders really want to access markets outside of Bitcoin and Ethereum. Volume data broken down by asset can be found here. A quick look at the data shows that for Gains Network, 50-70% of volume is generated on Bitcoin and Ethereum, while for Kwenta it’s around 40-80%.
Protocol Breakdown
In the market overview in the previous section, we turned to exploring the different parts that the protocol can be broken down into. This article will focus on liquidity provision and pricing.
Liquidity provision
From a protocol perspective, we can broadly divide them into two groups:
P2P trading. Therefore, there is no need to lock liquidity on the platform (TVL=0).
Liquidity pools. Trading via AMM, vAMM or oracles.
Topics covered in this section include:
Liquidity mechanics in decentralized protocols. Who are the trader’s counterparties? - The roles and incentives of liquidity providers - Balancing liquidity across different assets and markets.
Order Book
In simple terms, market makers and market takers trade with each other. The protocol may incentivize liquidity for market makers/takers.
The complex task for the protocol is how to match the orders of market makers and market takers in a timely manner. For example, according to a May 2023 report by Deutsche Börse Group, participants react in less than 2,770 nanoseconds. Can this be handled by a general-purpose chain like Ethereum now? The answer is no.
This forces the protocol to either move off-chain or to a dApp, forcing validators to also run order books. As such, liquidity providers are active agents that interact with other participants. There is no real barrier preventing order books from listing Meme coins such as HarryPotterObamaSonic10Inu, except that market makers may not provide market making for them.
Spot AMMs
Here, the liquidity used to settle trades comes from AMMs such as Uniswap. Still, the protocol itself needs to incentivize borrowers to come, as they are the ones providing leverage to traders. Sentiment and Gearbox also fall into this category, although they allow users to do more. Liquidity providers are relatively passive actors who "just" provide leverage.
Power Perpetuals
Power Perpetuals, such as SQUEETH, consist of two parties. One party is bullish on ETH², and the other party is bearish on ETH². Since each protocol follows a different design, it is impossible to generalize. For example:
In Opyn, shorts mint Power Perpetual using ETH as collateral. Long traders can only buy SQUEETH on the open market, such as in AMMs like Uniswap. Therefore, in order to profit, they also need to be able to sell.
In Numoen, long parties mint tokens, while liquidity providers provide LP tokens as collateral, which they lend to traders.
Deri uses a single liquidity pool as counterparty for all derivatives, including Power Perpetuals. Therefore, while Deri is included here, its liquidity model is essentially the same as oracle-based protocols.
Polynomial has yet to release its model, but the team says it will use liquidity pools differently than its competitors.
vAMMs
When it comes to providing liquidity, vAMMs take a variety of different approaches.
Perpetual Protocol and the protocols that follow its model (like NftPerp). In theory, there is really no need for liquidity providers here, as vAMMs do not require counterparties when minting virtual tokens. What happens if there is no counterparty? This is why in Perp v1, the team was one of the main liquidity providers for a period of time, as they made markets to facilitate trading. Later, liquidity providers were introduced, and while it is still desirable to match longs with shorts, by introducing liquidity providers, continuous liquidity is ensured. Therefore, in this model, liquidity providers can be either passive (providing liquidity and traders settle on their own) or more active (arbitrage prices and collect funding fees).
Increment uses a similar model to Perpetual Protocol, but instead of using the Uniswap v3 model, it pools liquidity by leveraging Curve’s V2 math. Each liquidity pool in the protocol may use different parameterizations depending on the volatility of the assets in the pool.
Rage Trade introduces the concept of "full-chain circular liquidity". What is full-chain circular liquidity? Full-chain circular liquidity is a treasury that divides liquidity into 80-20, where 80% of the liquidity is redeployed to provide liquidity on Curve, and the other 20% of the liquidity provides centralized liquidity on Rage Trade (powered by Uni v3). The virtual liquidity of vAMM is backed by the 80-20 treasury.
InfinityPools achieves its liquidity by building on top of the Uniswap V3 centralized liquidity concept. By rebalancing liquidity positions similar to Uniswap, it can achieve very large leverage without liquidation risk. For example, a liquidity provider deposits $1000 worth of assets in the ETH/USDC pool with a price range of 900-1000. Traders can then borrow against this liquidity provider's position and redeem all liquidity for 1 ETH (1ETH = $1000).
Drift V1. Drift uses a VAMM called Dynamic VAMM (DAMM), where liquidity is sourced from liquidity providers on Drift. The AMM implements a set of parameters to fine-tune market depth, such as price multipliers, fee pools, or segments. The Drift V1 AMM is now part of Drift V2.
Hybrid Model: AMM + Order Book
One problem that order books may face is: what if no market makers appear to post buy and sell orders? Therefore, some protocols introduce a hybrid model between order books and AMMs to ensure continuous liquidity.
Drift v2 uses three different liquidity mechanisms. First, there is a JIT dutch-auction provided by market makers. This process lasts about 5 seconds. Second, there is a limit order book, which only executes limit orders and is run by a network of administrator bots. Third, if there are no market makers involved in the first two steps, a constant product AMM, the Drift V1 AMM, is used to ensure that traders have continuous liquidity.
Vertex uses a price/time priority algorithm so orders are executed based on the best price, whether it is provided by the AMM or a market maker. The AMM quotes prices at discrete price levels on the order book to approximate xy=k.
Syndr combines an off-chain order book with a liquidity pool deployed on Arbitrum. The AMM will aggregate liquidity provided by retail investors, while the order book is designed to be quoted by market makers.
Synthetic assets based on oracles
Liquidity provision is relatively simple. A vault acts as a counterparty to all trades. While the main liquidity providers passively provide liquidity, we can also identify active participants who are interested in obtaining funding rates. In doing so, they balance the interests of the platform being open, thereby enabling more trades to occur.
Liquidity in the vault can be provided in the following ways:
USD-denominated stablecoins such as Avantis, Gains Network, Deri on zkSync, and Tigris Trade, where — depending on the protocol — DAI, USDC, or USDT backs all trades. Another difference between protocols is whether they implement a tiered mechanism like Avantis.
Volatility assets. For example, Kwenta and other protocols are built on top of Synthetix, where SNX stakers are the counterparties to trades.
A basket of assets based on oracles
The main idea is the same as above, but the basis is not a single asset, but a basket or baskets of assets.
Similar to the previous section, protocols can also have a layered mechanism - Level - or none - GMX, Pika, and MUX.
While Angle is here, the functionality has been shut down due to the Euler hack. To give a quick overview, Angle is the issuer of agEUR (Euro stablecoin). The collateral assets used to mint agEUR are used as counterparties to traders. So someone providing 1 ETH can get 1000 agEUR, can go long ETH and short EUR, making the protocol neutral. This also enables Angle to have perpetual contracts on the forex market, such as the agEUR/USDT trading pair.
Special mention here is Lexer Markets, which uses both asset baskets and synthetic liquidity.
Price Discovery
We can broadly categorize protocols based on whether price discovery occurs within the protocol or outside the protocol and subsequently broadcast via an oracle.
Topics covered in this section are:
Price discovery methods - Price slippage - Settlement.
Order Book
Since the order book facilitates P2P transactions between buyers’ bids and sellers’ asks, it creates a market for price discovery and trade execution. In this case, the protocol allows traders to execute trades at any price without the use of an oracle.
Slippage occurs because an order may be too large to be filled at a certain price, or it may be that there is not enough liquidity at that price level, so the order pushes the price to a level that is not conducive to execution.
The settlement process of order book trades involves two participants, market makers and order takers. Market makers place limit orders on the order book, while order takers are traders who accept and execute existing orders on the order book. When a taker's market order matches a market maker's limit order, a trade occurs.
Funding rates exist to balance long and short positions while keeping the price of a derivative contract close to the price of the underlying asset.
Spot AMM
Price discovery happens off-platform. Trading happens on platforms like Uniswap, Curve, etc., as these protocols are integrated into spot AMMs or DEX aggregators. Therefore, price discovery is limited to the number of integrated trading venues and the liquidity within those venues.
Oracles are very important for spot AMMs, primarily to ensure best price execution for buyers and sellers. Oracles are also used to track the health of their positions; more details on this are detailed in the risk section.
Settlements are made against (or with) the liquidity that exists on the AMM where the trade was executed. However, it is important to note that two trades actually need to take place: the purchase/sale of the asset on margin when the position is opened, and the sale/purchase of the asset on the market when the position is closed.
Since there are no derivative prices, there are no funding fees. However, in order to trade on margin, users must pay a borrowing interest rate to lenders.
vAMM
Very broadly speaking, we can put all vAMMs in the same category, excluding InfinityPools. vAMMs will face slippage in their virtual liquidity reserves. Trades are settled against the assets used to mint virtual liquidity.
Perp Protocol, Rage Trade, Drift, and other similar protocols based on Uniswap V3. The index price is tracked via an oracle; for example, Rage Trade uses Chainlink. Each specific perpetual contract independently discovers the mark price through the open market. Each vAMM may implement different variations on how to converge between the virtual (market) price and the index price. For example, Drift updates the quote asset reserve or k-factor (xy=k).
Infinity Pools is built on the concepts of Uniswap V3 and can achieve very large leverage by rebalancing liquidity positions in its vAMM without worrying about liquidation risk.
A liquidity provider deposits $1,000 worth of assets in the ETH/USDC pool, with a price range between 900-1000.
The trader borrowed and redeemed all the liquidity, got 1 ETH (1ETH = $1000), and used $100 as collateral. This will produce the following three scenarios depending on the price of ETH.
If 1 ETH > 1000 USD the trader makes a profit. The profit is the difference between the ETH spot price and 1000 USD.
If $1000 > 1 ETH > $900 The trader's account will be collateral + 1 ETH. At any moment this will be equal to or greater than $1000. The worst case scenario is $901 worth of ETH + $99 in collateral.
If 1 ETH < $900. The trader’s entire capital will be converted to ETH. For liquidity providers, there is no “risk” because if it were on Uniswap, their entire liquidity provision would be in ETH. In this specific example, the trader would have 1.11 ETH as collateral on their 1 ETH position.
Hybrid: AMM + Order Book
Drift V2 has a very clear pricing approach. Trades are first priced through the auction, then through the order book, and finally through the AMM.
Vertex will use an order book or AMM to provide quotes to users. Currently, market makers give closer market quotes in most cases, but if the size of the AMM expands significantly, the AMM may also give closer market quotes.
On Syndr, the AMM portion will work similarly to the GMX/GLP pools, but will include a bid/ask spread.
Based on oracles, synthetic assets and baskets of assets.
These protocols use oracles (hence the name) to determine the price at which contracts trade. In turn, the oracles determine the price of the asset through different methods, such as TWAP which only uses the Uniswap price (which doesn’t work very well) or aggregating the prices on the most liquid CEXs (mainly Binance). To further explain this:
Gains Network prices are relayed through a group of bots, which are semi-permissioned in that the bots need to hold the NFT to do so. The bots use Chainlink asset prices when executing limit, stop limit, take profit, stop loss, and liquidation orders.
GMX. GMX v1 uses a combination of custom price feeds and CEXs like Binance and Chainlink. Only Chainlink prices are considered if the fast price is older than 5 minutes. For GMX v2, a new low-latency Chainlink oracle will be implemented. The oracle maintainer is run by the GMX team.
In terms of price slippage, since trades are made against oracle-based pools, there is effectively no price slippage. This can lead to some special cases where traders can go long or short on low-liquidity assets without any price impact. However, some protocols have introduced some workarounds to this problem, such as introducing synthetic slippage fees or requiring a minimum price deviation to profitably close a position.
Settlements are made against the assets provided by the pool's liquidity providers. Ideally, longs and shorts should be balanced so that the pool has no real delta exposure and liquidity providers only profit from fees. However, this is not always the case and the liquidity in the pool is the counterparty to the trader. This works well in volatile markets as traders lose money over the long term, but in one-way markets (such as the terra luna crash), things become volatile.
Funding fees exist, but they are not for balancing prices, but for balancing positions. This is a typical risk mitigation method implemented by the protocol.
Power Perpetuals
Again, it is difficult to generalize about the design of each Power Perpetual because each implementation is different. Also, some Power Perpetuals can be classified into other categories, such as Deri, or have not yet made their models public, such as Polynomial.
However, we think it is worth highlighting specific aspects of these cases; for example, in Squeeth:
Index Price: The index price of Squeeth is ETH².
Mark Price: The Mark Price is the current trading price of Squeeth.
Power Perpetuals relies on arbitrageurs to keep the index and mark prices close. But it’s not just about price.
Volatility: The market may over-/under-estimate volatility. Funding rates will be too high/too low.
Price: The difference between the index and the mark price.
Slippage occurs when buying on AMMs, which can be problematic since liquidity is generally not very high.
Similar to AMMs, in order to make a profit, traders need to buy and sell in the pool at the same time, which, combined with the above point, may sometimes result in traders not getting the best user experience.
in conclusion
In this article, we provide a broad overview of the perpetual contract market, including liquidity provision and pricing of these contracts. We look at over 60 different protocols in this report.
Just by looking at the number of perpetual swap protocols deployed over the past 4 years, it is clear that the perpetual swap market has achieved substantial product-market fit, which could lead to market saturation to some extent. A simple example of this is the increase in Bitcoin open interest from ~300,000 BTC (valued at ~$3 billion) in 2020 to ~450,000 BTC (valued at ~$13 billion) in 2023.
Order books are likely the most suitable type of trading, which is why dYdX is currently the largest perp-DEX by volume. Order books are probably what most market makers are used to because they give market makers (liquidity providers) flexibility and more granular control over the prices traders buy and sell at. However, the technical limitations of today’s blockchains have led protocols to use other methods for liquidity bootstrapping.
AMMs and vAMMs were very popular early in the DeFi cycle. Most of them ended up taking the Uniswap v3 (pooled liquidity) route. AMMs ensure that participants have continuous access to liquidity if it exists, but may come at the cost of absorbing toxic order flow. InfinityPools and Predy use a new AMM approach where Uniswap LPs are used as a source of liquidity.
In between order books and AMMs, two protocols — Drift and Vertex — take a hybrid approach to providing liquidity and pricing. By combining the two models, they aim to get the best of both worlds, giving users granular control over their trades while using AMMs as a backup to ensure continuous liquidity.
On the other hand, oracle-based protocols rely on third-party infrastructure — oracles — to operate. The ability for users to trade without worrying about the depth of liquidity on a particular trading venue and the ease of providing liquidity (simply adding liquidity to the pool) also contributes to the success of these protocols.
In the future, we plan to delve deeper into the risk management strategies employed by Perpetual Protocol, its fee structure, and their integration within the broader DeFi ecosystem. By studying these aspects, we aim to gain a comprehensive understanding of the evolving landscape of perpetual futures exchanges.
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